221 Memorandum by Mr J. McEwen, Minister for External Affairs

10 May 1940

[On 3 May 1940 the Prime Minister (R. G. Menzies) asked the Treasurer (P. C. Spender) and the Ministers for Trade and Customs (Senator G. McLeay), Supply and Development (Sir Frederick Stewart) and External Affairs (J. McEwen) to consider a report on Australia's iron ore resources made by the Commonwealth Geological Adviser (W. G. Woolnough) on 18 April 1940. (See file AA: A1608, C47/1/4, vii and Cabinet Agendum 383A of 10 June 1940 and attachments in series AA: A2697, vol. 4, 13 June 1940.) The following memorandum was circulated to the other Ministers listed above and also to the Minister for the Interior (Senator H. S.

Foll).]

EXPORT OF IRON ORE

I. In 1938 the Commonwealth Government placed an embargo upon the export of iron ore from Australia because of reports received from its Geological Advisers which raised serious doubts as to the adequacy of Australian iron ore resources for Australia's own need. In announcing this decision, the Commonwealth Government stated that a complete investigation into the iron ore resources of Australia would be made and at the same time indicated that if this survey should disclose that the fears in respect to adequacy expressed in the first report were not confirmed the question of the embargo would be reconsidered.

2. The Japanese Consul-General [1], acting on direct instructions from his Government, protested against the decision, mainly on the ground that the embargo was directed principally against Japan. In rejecting the protest, the Commonwealth Government pointed out that the embargo applied not only to all foreign countries, but also to the rest of the British Empire. The Japanese Consul- General subsequently put forward a compromise proposal concerning the Yampi Sound leases for permission to be granted for the export of one million tons of ore per annum for 10 to 15 years, pending completion of a thorough survey of iron ore deposits. This proposal was rejected, one of the main reasons being that it was proposed to extract ore from the most accessible deposits, thus leaving the more costly mining operations to Australian industry.

3. The question of compensation will present major difficulties.

As an example of the extensive claims which will probably be put forward, the following indication of damage which would be suffered through the embargo by the Nippon Mining Company Ltd., which financed the leaseholding company at Yampi Sound, was submitted by the Consul-General of Japan on 5th April, 1938:

'The Nippon Mining Co. Ltd. has spent about 260,000, and also undertaken inescapable commitments amounting approximately to 300,000.

In addition, the Nippon Mining Co. Ltd. not only proceeded with the construction of blast furnaces (now nearing completion) at Osaka, in co-operation with another company, but also induced the Yawata Iron Works to make elaborate preparations in their blast furnaces to receive ore from Koolan Island in large quantifies (based on the tonnages set out in the Memorandum of Proposals):

further, additional furnaces are now in course of construction at Yawata for the receipt of Koolan ore.

Apart from the smelting programme, the Nippon Mining Co. Ltd. has entered into a contract with its sister Company, the Nippon Industrial Shipping Co. Ltd., to make all necessary preparations for the transport of Koolan iron ore to Japan. In pursuance of this contract considerable expenditure has been incurred, which must be borne by the Nippon Mining Co. Ltd. should the leaseholders be rendered incapable of providing the ore for shipment from Koolan.' On 18th May, 1938, the Consul-General was informed that the Commonwealth Government would be prepared to 'examine and consider equitable claims for reimbursement of expenditure which has up to this date actually taken place in connection with development operations directed towards the exploitation of our iron ore resources for export.' In a further letter of 1st June, 1938, to the Consul-General, the Prime Minister [2] made the following statement-'I may add that to the extent to which any individual Japanese interests are affected by the decision an offer of compensation has been made and is repeated.' The Consul-General [3] notified the Commonwealth Government in a letter dated 19th December, 1939, that if the Commonwealth Government decided not to lift the embargo, the Japanese Government must take up the question of compensation for the loss sustained by Japanese interests.

4. Meanwhile, a detailed survey of Australian iron ore resources has been practically completed, and the Minister for the Interior has now submitted the report of the Commonwealth Geological Adviser, the main points of which are as follows:-

(a) Only two main deposits of iron ore can be regarded as commercially workable, namely, the Iron Knob Group (South Australia) and the Yampi Sound Group (Western Australia).

(b) The maximum estimates of the extent of these deposits are 350 million tons, but for various reasons Dr. Woolnough considers that 200 million tons is nearer the truth.

(c) In the near future Australian demands for iron ore win be at least 5 million tons a year and may rise to 10 million tons.

(d) Taking the maximum estimate of deposits (350 million tons) and the minimum estimate of Australian demand (5 million tons), Australian commercially workable iron ore resources will last only 70 years. If, however, Dr. Woolnough's estimate of deposits (200 million tons) is taken, then on the basis of a minimum Australian demand, the resources will last only 40 years.

(e) These facts suggest the necessity for prohibiting the export not only of iron ore, but of 'scrap', pigiron and steel in an unfabricated condition.

5. Two questions now arise for decision, namely, (a) whether the embargo should be continued, and (b) whether an embargo should be placed upon the export of scrap, pigiron and steel in an unfabricated condition. These questions have been considered by a Committee consisting of the Minister for Trade and Customs, the Treasurer, the Minister for the Interior, the Minister for Supply and Development and myself.

Embargo of Iron Ore In view of the abovementioned report, it is recommended that as the detailed survey of Australian iron ore resources has confirmed earlier doubts as to the adequacy of these resources, the embargo upon the export of iron ore be continued. A public announcement to this effect should be made and at the same time advice as to the decision of the Government should be communicated to the Consul- General.

Export of Scrap etc.

In view of the many considerations involved in the question of the prohibition of export of scrap, pigiron and steel in an unfabricated condition, the Committee found itself in some difficulty in submitting a firm recommendation to Cabinet. The main reasons for favour of prohibition appear to be:

(a) The strong recommendation along these lines made by the Commonwealth Geological Adviser and the fact that it is in general only logical and reasonable that if the export of iron ore is prohibited in order to conserve resources, the export of scrap should also be prohibited.

(b) Certain important Australian iron and steel interests, among which might be mentioned Hadfield's, rely to a large extent on scrap for their furnaces. Foreign competition for scrap forces up prices to levels which render difficult the holding of the Australian and export market for fabricated iron manufactured from scrap. These industries strongly favour an embargo.

(c) The main purchaser is Japan, and Australia is morally bound under League of Nations resolutions not to supply material which will assist Japanese aggression in China.

The main reasons against prohibition are:-

(i) From a political point of view, it may cause further resentment in Japan and be regarded as discriminatory.

(ii) The export of any commodity is of particular value at the present time in order to build up overseas credits.

(iii) Several investigations into this question have indicated that export of scrap is not at the moment generally prejudicial to Australian industrial interests. The quantities of scrap iron ore are in excess of current requirements. Prohibition of export would lead to elimination of competition and serious depreciation in price, thus affecting other interests than (b) above.

In the opinion of the Committee, the reasons against any prohibition outweigh those in favour, and hence its view is that an embargo should not be imposed at the present time. It is felt, however, that this aspect should be subject to careful and constant scrutiny by the Minister for Trade and Customs, and that he should resubmit the question to Cabinet for review in the event of present circumstances altering materially.

6. As to the extent of compensation, the Committee feels it can at present do little more than invite the attention of Cabinet to the facts indicated in Paragraph 3. It is not practicable to set out any limits for compensation which the Commonwealth Government is prepared to pay until specific claims are received. Such claims can be expected after the decision of the Government has been communicated to the Consul-General. A narrow limit has already been communicated to him, and the next move would more appropriately be made by him than by the Commonwealth Government.

It is possible that the question might in the last resort be submitted to international arbitration by agreement. [4]

1 Torao, Wakamatsu. See Documents on Australian Foreign Policy 1937-49, vol. I, for 1938 documents on the question of iron ore exports.

2 J. A. Lyons.

3 Masatoshi Akiyama. See Documents on Australian Foreign Policy 1937-49, vol. II, Document 422.

4 Foll replied to McEwen on 14 May 1940: '. . . I agree generally with the observations and proposals made in paragraphs 1 to 5 on pages 1 and 2 and with the recommendation in regard to the continuance of the embargo on the export of iron ore.

With regard to the question of the prohibition of the export of scrap iron, pig iron and steel in unfabricated condition, I feel that in view of the international situation, this matter should be carefully discussed by the Cabinet sub-committee.' (See letter on file AA: A981, Australia 90B, ii.) No further documentation of the sub-committee's deliberations has been found, but it is clear that it recommended against imposing an embargo on the export of scrap iron (see McEwen's cablegram 166 to Casey of 14 September 1940 on file AA: A3300, 45). On 13 June Cabinet decided to retain the embargo on the export of iron ore (see Document 352, note 5) and on 17 June decided in regard to scrap iron: 'Export to continue and Minister to confer with Sir Keith Murdoch [Director-General of Information] to keep this matter out of the press. No approach to be made to organised labour.' (See AA: A2697, vol. 4, 17 June 1940, Minute 276.)

[AA: A981, AUSTRALIA 90B, ii]