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The Oakajee port and rail project (OPR) in the State's Mid West has been put on hold, after its Japanese owner Mitsubishi moved to slash costs and staff at the faltering $6 billion venture.

Volatile iron ore prices, an uncertain global economic outlook and ballooning costs as well as recent diplomatic tensions between China and Japan — which have scuttled efforts to bring Chinese mining companies on board as equity partners — are behind the move.

Sources close to the project confirmed that OPR boss John Langoulant met Premier Colin Barnett last night to inform him of the move. Mitsubishi will retain a presence in Geraldton but about 70 of 110 staff across OPR and subsidiary Crosslands Resources, which owns the Jack Hills project, will go.

Crosslands chief executive Andrew Caruso will be among the casualties with Mr Langoulant to head up both OPR and Crosslands.

Long touted by Mr Barnett as the project he most wanted to see developed, the decision by Mitsubishi to move to a skeleton staff at OPR given no prospect of a breakthrough on talks with the Chinese were likely in the short term, will deal a big wildcard into the March State election.

The Barnett and Gillard governments have pledged $680 million in total to support common-user facilities at the proposed port north of Geraldton.

Despite the setback, Mr Barnett insisted the deepwater point would eventually be built, though he could not put a time frame on it.

“There is 13 billion tonnes of magnetite iron ore in the Midwest. Chinese, Japanese, Australian interests have already invested $3 billion in that province. It’s going to happen, although it’s obviously not going to happen in the near future.”

He compared Oakajee’s difficult path with the North West Shelf gas project, which was built more than 20 years after gas was first discovered, and the Ord stage 2 expansion.

“I’m not embarrassed, I’m disappointed,” Mr Barnett said.

“This is a setback. It’s not the first setback Oakajee has had. And any major project in this State takes many years to develop.”

“Big projects, visionary, nation-building projects are difficult and complex. And we’re talking about over $7 billion investment in this project by various interests.

“That’s a lot of money in a difficult international environment.”

Mr Barnett said he was surprised at the “total breakdown” of communications between Mitsubishi and the Chinese as a result of the fallout of the political dispute.

“Communications between the Chinese interests and the Japancese interests just simply haven’t taken place over recent months. The feeling is that’s primarily due to the political dispute over islands in that area,” he said.

Mitsubishi will now focus on work needed on its associated $6 billion Jack Hills magnetite iron ore mine, to hopefully get it ready should Oakajee be revived.

It comes as Japan’s largest trading house said it was retreating from investments in natural resources, after having spent more than $12.5 billion on copper, gas and coal assets in the past three years, according to its president.

"We have done what (we're) going to do for now as far as investment in natural resources is concerned," Ken Kobayashi, president and CEO of Mitsubishi, said at a media briefing on its first-half result.

"While a fall in the cost of assets is attractive, we won't find easy coal, easy gas, easy copper projects any more."

Mr Kobayashi also admitted that recent political tension between China and Japan over disputed islands in the South China Sea had moulded its thinking on Oakajee.

"Recent tension between Japan and China have slowed talks with potential Chinese partners. But we believe this is a vital project as demand will remain tight in the long term," he said.

Mitsubishi took control of the project from Murchison Metals last year, just as iron ore prices began to fall.

Mr Barnett said a Chinese buyout of Mitsubishi was a "possibility".

“I get the sense Mitsubishi wants to concentrate on its Jack Hills mine, which is a massive project in its own right," he said.

“So one possible scenario is that China may ultimately take the lead on the infrastructure, particularly the railway, and maybe the Japanese interests will concentrate on their mine, because of all the mines, Jack Hills is the biggest.”

However he said he had not suggested the deal to participants.

“Obviously the world changed a little bit for Oakajee today," he said.

Opposition leader Mark McGowan claimed Mr Barnett’s “intervention” in the project had harmed its chances of getting off the ground.

“I think there is a significant failure here by the Government and the Premier needs to take responsibility. Because this is the project he put his fingerprints on,” Mr McGowan said.

“The Premier intervened extensively in this project, he adopted the role of businessman rather than the role of a Premier of WA.

“The Premier needs to take responsibility for what he said was his no.1 project and one in which he interfered in the commercial processes which were already in train.”