115 Lt Col W. R. Hodgson, Secretary of Department of External Affairs, to Mr W. M. Hughes, Minister for External Affairs
Memorandum 13 December 1937,
SECRET THE MINISTER
YAMPI SOUND IRON ORE
The late Minister in charge of Development  requested the view of this Department on Yampi Sound.
As it is understood that this question will come before Cabinet this week I am submitting herewith, for your information, a copy of the note sent to the Minister. 
A copy of Defence Dept. viewpoint is also attached. 
This has not been before Cabinet previously.
W. R. HODGSON
1 Senator A. J. McLachlan.
2 Enclosure to this Document. The new Minister was R. G. Casey.
3 Already printed as Document 114.
Memorandum by Lt Col W. R. Hodgson, Secretary of Department of External Affairs, for Mr R. G. Casey, Minister in Charge of Development
13 December 1937
YAMPI SOUND-DEVELOPMENT OF IRON ORE DEPOSITS
The arrangement for the working of these deposits is a mining lease granted by the Government of Western Australia which is held by an English company (Brasserts) which assigned rights to develop the lease to an Australian company (Yampi Sound Mining Company) which is bound to sell the whole output to an Anglo-Japanese company, with head offices in Tokyo, controlled by a purely Japanese company, the Nippon Mining Company which supplies the capital.
Brasserts are to be paid annual sums for the lease and for its activities in inaugurating the local company to mine the ore in Japanese interests.
2. Public attention has been focused on the exploitation of this Australian resource for three main reasons:-
(a) There is a belief in many quarters that existing known bodies of iron ore are insufficient for future Australian requirements, and that exclusive rights should not be granted to any foreign company over a commodity which is so vital to national interests, especially those of defence.
(b) That this exploitation is a part of the 'Southward advance' policy of Japan, which manifests itself at the moment in economic penetration, by the acquisition of leases and holdings in iron, tin, cotton, rubber and copra products in the Philippines, Netherlands East Indies, Malaya and Dutch New Guinea.
Any foothold, therefore, in Australia by Japanese interests will give rise to future political difficulties with Japan, and possible interference by that country on the grounds of 'protection of national interests', which has been the basis and justification for her action in Korea, Manchuria, Jehol and China in recent years.
(c) There is also the more or less temporary view, illustrated by innumerable resolutions and letters of protest to the Government, that the Commonwealth Government should not allow the export to an aggressive nation of a commodity which is used for war purposes.
3. As to (a), there would be justification for the prohibition of the export of iron ore from Australia if it were established that Australian resources are in danger of depletion. At the present time, approximately 500,000 tons of iron ore are being exported annually from Australia. These particular leases have been 'hawked' for years throughout Australia, the United Kingdom and in various foreign countries, including Japan and the United States, without success, mainly for the reason that the exploitation of the ore would be an uneconomic proposition.
The Australian Iron and Steel Company has had leases at Cockatoo Island, Yampi Sound, for many years, but has practically done nothing with them.
Recent advice from the United Kingdom is to the effect that ore reserves throughout the Empire are ample and that those of Yampi Sound do not affect the general position to any extent.
4. As to (b), there is no doubt that the southward advance policy of Japan is being actively pursued, and is causing serious misgiving to all countries bordering on the Pacific. Political difficulties have already arisen in the case of the Philippines and Netherlands Indies over the commercial exploitation of plantations and fisheries.
As against this, there are few general restrictions operating against sales of products by any country. The present difficulty is rather to find buyers. British Malaya places no difficulties in the way of Japanese exploitation of iron ore, and a large proportion of Japan's requirements are obtained from this source.
Japanese interests are also actively acquiring and exploiting iron ore, copper, and paper pulp interests in Canada, and so far as can be ascertained Canada is not restricting such activities.
It is felt that the dangers of penetration by Japan into Australia by the operation of the Yampi leases are somewhat exaggerated. The Defence authorities, in their latest review of the problem, December 6th, 1937, feel that there is little danger of Yampi Sound becoming a potential naval base.
If the Department of the Interior strictly limits the number of Japanese allowed on the leases for technical purposes and exercises some supervision over their movements, and if the Defence Department appoints a Harbour Master to control strictly the resultant shipping, most dangers of racial penetration could be avoided.
Moreover, experience in China shows that if Japan desires to create incidents in order to force a quarrel, mere correctness of conduct by the other party will not prevent a dispute arising.
5. Generally speaking, the question of 'access to raw materials' is today assuming great significance, and a special Committee of the League of Nations is now working on this problem. Australia would be gravely criticised if she prohibited a nation deficient in raw materials from acquiring by legitimate means a raw material which she did not need herself, and which would otherwise never be exploited.
The Japanese Company has already incurred substantial expenditure, and a notification of prohibition at this stage would probably be regarded as a serious affront by the Japanese Government. The Foreign Office point of view on the question is one of great significance and should be borne in mind:-
'The Russians are not very happy about supplying the Japanese, and the Japanese are frankly nervous of being in any way dependent on the Russians. Accordingly the Japanese are seeking to tap another source of supply for the raw material for their steel industry, i.e. Yampi Sound. The comment then concludes that if this enterprise succeeds it will mean that Japan will be more and more dependent on British sources for the raw material of one of its most important basic industries, and it is hard to believe that Japan would make these plans and be prepared to incur this very considerable capital expenditure if there were any danger of a serious quarrel with the United Kingdom which would cut them off from their source of supply of an essential raw material.' 
6. On the whole this Department inclines to the view previously expressed, that it would be inadvisable and unnecessary to take steps to prohibit the exploitation of these leases.
Should it be found, however, that there are adequate economic reasons for imposing a ban on exports of iron ore, then it should be done as part of a general prohibition and not on lines which would make it be regarded as discriminatory action against any one Power.
Should it be decided not to prohibit the export of iron ore from Yampi Sound at the present time, it might be considered advisable to include in any public statement upon the matter, a paragraph to the effect that the sufficiency of iron ore deposits in Australia to meet Australian needs would receive the close attention of the Commonwealth Government in the future, and should detailed surveys of these resources disclose a serious danger that these deposits might speedily be exhausted, the Commonwealth Government would of course have to take any necessary action to conserve Australian interests.
A statement of this kind would assist in meeting any future objection on the part of Japanese interests that by permitting the export of ore from Yampi to proceed and thus inviting Japan to spend additional money upon the development of the Yampi leases an implied promise was given not to interfere with such development at any later stage.
[AA : A981, AUSTRALIA 90B, i]
1 The origin of this quotation is not known.