The resilience of Australia’s energy and resources sectors in challenging times
16 February 2016
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It’s a great pleasure to be here at the National Press Club, the home of the Fourth Estate, to talk about the Australian resources and energy sector at a time of significant change.
Ever since Edmund Burke coined the phrase “Fourth Estate” in the 18th century, the politician and the journalist have had an interdependent relationship, not always agreeing, but hopefully respecting one another.
But it won’t surprise you to hear me say as a politician that the media is always in search of a good headline.
And that reminds me of the story of the newsboy standing on the corner selling a stack of papers. “Read all about it, read all about it, 50 people swindled, 50 people swindled”, he said. A curious man walked over, bought a paper, checked out the front page, flicked his way through the pages and finding nothing, the man said to the boy, “There’s nothing in here about 50 people being swindled.” The newsboy, who ignored him, held up a paper and went on calling out, “Read all about it, read all about it, 51 people swindled, 51 people swindled!”
Hopefully today you will faithfully report what I have to say!
Today, I will seek to make three points. First I will outline the essential role resources and energy plays in our domestic economy.
Secondly I will point to growing sources of demand, explain their relevance to Australia and why it gives us optimism for the future.
Thirdly I will highlight areas in need of attention, in particular the application of geoscience technology to exploration and development and the need for greater labour market flexibility. These government-led reforms together with the industry’s own efforts will ensure the resources sector remains a stable and reliable supplier of high quality resources extracted at the low end of the global cost curve.
A proud history
Resources is to the Australian economy what the baggy green is to Australian sport. Totemic. Iconic. Indispensable to our national story and synonymous with our national identity.
But frankly it goes beyond that. The Australian resources sector has helped lift millions of people out of poverty and improved the lives of many more. It is essential for infrastructure and economic development and enhances Australia's strategic importance throughout the world. This is not lofty rhetoric but observable facts over a long period of time. The case for maintaining a strong and vibrant resources sector is as compelling today as it has ever been.
By tracing the history of mining and energy development in this country one can see how we turned from a series of struggling, underpopulated colonies in the early 19th century to a prosperous, cohesive Commonwealth that has continued to successfully navigate its way through choppy international economic waters in this century and the last.
For Australia, it all started with gold. Discovered in Bathurst New South Wales in 1851, the Gold Rush precipitated a doubling of Australia’s population to 1.1 million by 1860 and a fivefold increase of Victoria’s population over the same period.
On a GDP per capita basis, Australians were the richest people in the world, with Melbourne by 1852 the busiest port in the world.
But Victoria was not the only colony to prosper from the mineral wealth under the ground. Copper was discovered in South Australia in the 1840s, gold in Queensland in the 1860s, tin in Tasmania in the 1870s and gold again, this time in Western Australia, in the 1890s which at the time had a smaller population than Tasmania’s.
As Geoffrey Blainey has pointed out, not surprisingly the career paths of our early prime ministers were all inextricably linked to the resources sector. Among them, Andrew Fisher was a coal miner, Joseph Cook, a coal weigher, Alfred Deakin represented the gold district of Ballarat and Stanley Melbourne Bruce’s business prospered, catering to the needs of those on the gold fields.
Later, leaders state and federal, like Charles Court and Robert Menzies made their mark encouraging the development of the Pilbara, reaching out to Japanese investors and in the case of the Menzies Government lifting in 1960 the embargo on iron ore exports which had been a pre-war legacy of Joseph Lyons.
But the success of the Australian resources sector must not be seen simply as a historical footnote in a day long past, rather it is a living, breathing modern success story driving the Australian economy forward, even at times of market turmoil and lower commodity prices.
Never was this better illustrated than during the Global Financial Crisis. Business investment in Australia grew by five per cent between 2007 and 2009 as the GFC unfolded. This compares to a fall of almost 17 per cent in the United Kingdom and a fall of over 11 per cent in the United States as both countries plunged into deep recessions. The growth in Australian business investment was largely fuelled by a lower exchange rate and demand from China. Preparedness met opportunity at this critical juncture.
Today, the resources sector, in which I include energy as well as minerals, represents more than 10 per cent of GDP and employs over 300,000 Australians.
As a sector it has the largest proportion of indigenous employees in the nation, pays the highest wages and employs large numbers of skilled workers such as engineers, geologists and surveyors and young apprentices.
While historically it was a male-dominated industry that too has changed. The number of women at managerial level has increased by 40 per cent over the last eight years and industry leaders, like Gina Rinehart and Catherine Tanna are leading important companies. I know there are many others like them rising through the ranks.
The taxes and royalties that have subsequently been paid by the resources industry are simply enormous. In the decade to 2014-15, the Minerals Council estimates that the sector paid approximately $165 billion in taxes. This is more than the public health spending in 2014-15 and more than what was spent on education, including schools and universities.
In the years ahead to 2040, the LNG projects in Western Australia alone – Wheatstone, Pluto, Gorgon and North West Shelf – are expected to contribute a further $160 billion in taxes and royalties. This revenue flow is just part of the economic dividend that comes from being the number one exporter of iron ore in the world, the number one exporter of coal in the world, the number one exporter by 2020 of LNG in the world, having the largest known reserves of uranium in the world and being in the world’s top five for deposits of copper, gold, bauxite, lead, zinc, nickel and lithium.
We are truly a global powerhouse when it comes to the resources sector.
Australia is among the greatest beneficiaries of Chinese growth and the continuing demand from our major and long standing customers in Japan, Korea and ASEAN countries.
In September 2011 our terms of trade reached its highest level in 140 years and the prices of iron ore and coal, our two largest exports, more than doubled in the decade to 2014. In the same period, investment in the resources sector topped $400 billion and the contribution of the sector to the Australian economy jumped from eight to 13 per cent of GDP.
While the impact of this growth was most notable in the resource states of Western Australia and Queensland, the whole of the country did benefit. The Reserve Bank of Australia said that as a result of the mining boom, which they describe as one of the largest economic shocks in Australia’s history, by 2013 wages grew by six per cent more than they otherwise would have done, while household spending was 11 per cent higher – equal to over $100 per week for the average household.
A bright future
But now we have reached the end of a decade long super cycle, which saw record prices fuelled by a record ramp up in demand.
We are now seeing more normalised, cyclical patterns of demand, particularly in China, as its economic growth moves from double digits to settle around six to seven per cent and its economy transitions from investment to consumption and a greater focus on services.
China remains central to the global resources story. It is the world’s largest producer and consumer of coal, the largest consumer of iron ore and producer of steel, the second largest consumer of oil, and the third largest consumer of gas.
China importantly is also increasing its reliance on renewables, becoming the largest investor in renewables in the world, bigger according to the IEA than the EU and the US combined.
But today I want to dispel the fallacy that because the Chinese economy is transitioning that suddenly the demand for our hard commodities and the subsequent export income we earn from their sale will dry up.
To paraphrase Mark Twain: the rumours of the death of Australia's resource sector are greatly exaggerated.
International demand for Australian resources remains strong, our companies remain resilient and the depreciation of our dollar has acted as “an automatic stabiliser”, increasing our competitiveness.
The reality is that over the decades ahead hundreds of billions of dollars will flow to Australia as both demand and supply increases.
A good illustration of this dynamic is Australia’s export earnings from coal and iron ore between 2011-12 and 2014-15. Despite price falls of between 43 per cent and 57 per cent, export earnings from these commodities fell only 16 per cent. This reflects the lower Australian Dollar and a 30 per cent increase in coal export volumes and a 60 per cent increase in iron ore export volumes.
Every one cent movement of the Australian Dollar against the US Dollar changes our export income from energy and resources by $2 billion.
When it comes to LNG, there is an even more powerful story to tell. Export earnings between 2011-12 and 2014-15 have increased by more than 40 per cent and driven by increased volumes and a lower Australian Dollar, export earnings are expected by 2019-20 to almost triple to $49 billion.
Indeed by 2019-20, My Department’s Chief Economist expects resources and energy export earnings to total $235 billion compared to $172 billion today.
So where is this demand coming from and why is the Australian sector so resilient?
Let’s look at the Chinese economy first. At 11.4 trillion USD, it’s two and a half times bigger than it was in 2008. As the Minerals Council has pointed out, this means that a 6.8 per cent annualised growth in 2015 is equivalent to 14.2 per cent growth in 2007. It emphasises how important it is to avoid drawing conclusions from simplistic comparisons of annualised growth rates.
Remarkably, each year the Chinese are adding an economy the size of Turkey.
So for example, in December 2015 China imported more iron ore than ever before. Some is used for the production of steel for export, the rest for domestic use.
Chinese steel exports to the emerging economies are growing, with steel exports in 2015 increasing by 26 per cent to India and 55 per cent to Vietnam.
And while China has seen rapid rates of industrialisation in recent years leading to more than 200 million people moving to the cities, 37 thousand kilometres of rail track and 63 million flats completed in the last decade, there is still a long way to go.
For a country with such a large land mass and population, its rail system is one third of the size of that in the US and one sixth of that in the EU. That seems to provide a lot of scope for Australia's iron ore and metallurgical coal.
When it comes to energy demand, China’s per capita consumption is still a third of that in the United States, an equation that the International Energy Agency (IEA) predicts will change dramatically as Chinese per capita energy use increases in the years ahead.
But I want to emphasise that the China story is not the only game in town.
Economic growth in India as well as that in South-East Asia is driving increased demand for Australia’s resource exports.
In 2015, India’s economy grew by 7.4 per cent and there is an expectation of growth of 6.5 per cent a year from now to 2020.
On the numbers the Indian economy will be five times bigger in 2040 than it is today and as a result, demand for coal, gas, iron ore and renewables is taking off.
Consider this: today India has 18 per cent of the world’s population but represents only six per cent of global energy use. Astonishingly, on a per capita basis, it is lower than that in Africa.
Around 300 million Indians have little access to electricity or no access at all. But by 2022 Prime Minister Modi wants every Indian to be connected to the grid.
India’s consumption of steel is also comparatively low. On a per capita basis it’s a quarter of the global average and around one eighth of that in China. With over 300 million Indians expected to move to the cities by 2040, demand is soon to escalate.
All this is good news for Australia. Contracts for our LNG from our Gorgon project to Petronet LNG have been signed and are soon to flow and our coal exports to India, already worth $5 billion a year, are set to increase.
As India’s Minister for Power, Coal and New and Renewable Energy, Piyush Goyal, said in Australia last week: “We will be expanding our coal based thermal power. That is our base load power.”
By 2020, India overtakes China, Japan and the EU to become the largest coal importer in the world as it seeks to almost treble coal fired power generation between now and 2040.
Goyal again, “the people of India want a certain way of life. They want jobs for their children, schools and colleges, hospitals with uninterrupted power. This needs a very large amount of base load power and this can only come from coal.”
Notwithstanding this, it is important to note that global demand for coal is falling as a percentage of the overall energy mix from 40 per cent today to 30 per cent in 2040. This is on the back of a significant decline in OECD countries that is not fully offset by what is happening in Asia.
While absolute demand for energy in the OECD is declining due in large part to greater energy efficiency, demand for energy in Asia is rising notwithstanding the utilisation of greater energy efficiency there as well. This is because of the dramatic increases in population, urbanisation and a rising middle class in our region. The global demand for gas will increase by 50 per cent between now and 2040 and as we are soon to be the largest exporter of LNG in the world, this makes us the principal beneficiary.
I can hear the questions from the audience already. Isn’t India focusing more on renewables, making coal the energy of yesterday and solar the energy of tomorrow? The answer is more complex than that.
India is making huge investments in renewables, aiming to double its capacity between 2014 and 2022 and China has, according to the IEA, invested more in renewables than the US and the EU combined. Indeed half of all new capital invested in the energy sector in 2014 was in renewables.
But even with these investments, by 2040 the IEA still expects that renewables will only constitute the source for 34 per cent of global energy requirements. Of course new innovative technologies such as battery storage could enhance these ratios and we as a government support such efforts. But given the cost of capital and the long term planning required for energy projects we also have to work on the energy mix assumptions we have today. This means there will be a significant role for fossil fuels even post the historic and important agreement adopted by more than 180 nations in Paris late last year.
The reality is that there will be significant demand for our energy and minerals going forward and this forms the basis for long term optimism for these sectors of Australian industry.
It’s the consequence of simple arithmetic. Between 2010 and 2030 there will be major increases in the world’s population by 23 per cent, the world’s urban population by 42 per cent and the world’s middle class by more than 100 per cent, all of which fuels demand for hard commodities.
The biggest movements are occurring in emerging economies right on our doorstep, putting us in an ideal position to capitalise.
But we can’t be complacent.
A commitment to reform
We must continue with our reform program and build on our reputation as a reliable, efficient supplier of high-quality product. A key to our future success will be science and innovation.
Already, companies like BHP, Rio and Fortescue have taken the lead in automation, operating drilling equipment, trucks and trains at their mines in the Pilbara remotely from their Perth headquarters some 1,500 kilometres away.
These steps have delivered productivity gains to the companies in the order of 10 per cent and help ensure that three quarters of Australia's iron ore production is in the bottom half of the global cost curve.
In addition to these private sector-led initiatives, there is much the Government can do to leverage off its existing scientific expertise and databases to enhance the productivity of exploration activity.
For example, Geoscience Australia has the technical capacity to undertake geological mapping of mineral deposits both near the surface and to depths down hundreds of metres. This can be of great assistance to companies who cannot afford mapping on such a large scale in search of the next tier one deposit.
I’m currently consulting with the industry on a range of new measures that could help de-risk exploration in Australia and enhance our competitiveness.
With pressures on company balance sheets leading to a significant decline in exploration activity, there is no better time for the Government to undertake such a program.
Previously, government assistance in these areas has had a major multiplier effect. For example, in 1996 Geoscience Australia undertook $3 million worth of work in the Browse Basin, the information from which facilitated the discovery of the Ichthys field which will lead to more than $70 billion in export earnings over the next forty years.
Similar success has been achieved by federal and state agencies with their work at the Olympic Dam site and in the Bight Basin.
Indeed it’s been estimated by an independent Western Australian study that the rate of return for every dollar invested in pre-competitive programs has a multiplier of more than 20 times.
Another area where there is both an opportunity and need for reform is in the industrial relations space.
Now, more than ever, Australian projects need to deliver productivity gains if they are to remain competitive. We need to leave the mindset of capital versus labour behind as both the worker and the investor stand to gain from better productivity encouraging greater investment.
As a West Australian and the minister responsible for employment, my colleague and friend, Michaelia Cash, knows this firsthand.
The reestablishment of the Australian Building and Construction Commission is vitally important to the resources sector and so too are reforms to union right of entry rules and Greenfield agreements.
With regard to right of entry, it is our policy to restore some balance to a process which has seen unions exploit the law to make in some cases hundreds of site visits over a short period of time. Reducing the frequency of visits by union officials to premises where they have no members or they are not invited to send a representative would be a positive step forward.
With regard to Greenfield sites, the Parliament, with the assistance of the members of the crossbench, passed important legislation last November which allowed employers to go to the Fair Work Commission after a six month negotiation period had passed without agreement between them and the union. This was an important amendment that will prevent negotiating tactics dragging out indefinitely.
A further matter important to the resources sector which has been raised with me relates to extending the duration of the Greenfield agreements to the duration of the construction period of the particular project. Otherwise you have a situation like we’ve seen at the $70 billion Gorgon LNG project where the completion of billions of dollars’ worth of investment can be delayed while protracted and difficult negotiations take place.
This is an additional and unnecessary risk that companies have to factor in to their investment decisions which deserve further consideration.
The resources and energy sector has been here before.
Peaks and troughs are part of a cycle reflecting complex supply and demand dynamics. This is a long term business and Australians should be proud of the role we play.
The good news for the sector is that Australia has the economies of scale, innovative practices, highly skilled workforce, and proximity and access to markets that give us the resilience we need at this time.
There is no room, however, for complacency. We are operating in a fiercely competitive global market.
We need the right domestic policy settings if we are going to seize the investment needed to meet the next wave of demand which is coming out of our region.
For these reasons and more, there’s never been a more exciting time to be the Minister for Resources, Energy and Northern Australia!