Transcript www.minerals.org.au

Regaining our competitive edge in
minerals resources
Minerals Council of Australia
Minerals Week presentation
30 May 2012
Port Jackson Partners
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Without action to restore competiveness, a huge opportunity will be lost
SUMMARY
•
Developing world transformation continues to deliver sustained demand growth
•
Capturing this means growing volumes – the ‘free kick’ from price is over
•
As competitors multiply, our declining competitiveness means we will not
capture our fair share of these volumes
•
Regaining our competitive edge will require immediate and coordinated effort:
– This begins by recognising our ‘burning platform’
– We must then rapidly address our current competitive position
– Finally, we need to secure long term competitiveness
30 May 2012
Port Jackson Partners
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Developing world transformation offers sustained revenue growth
MINERALS RESOURCE DEMAND GROWTH
Demand elasticity for iron ore
Australia’s revenue potential
Change in consumption / change in GDP per capita
China
3.0
2010
2030
India
2.5 2010 2030
Real 2010 A$ Billion per annum**
309
$119B
278
$1B
244
2.0
188
1.5
190
$93B
1.0
95
0.5
0
0
10
20
30
40
50
2006
2011F 2016F 2021F 2026F 2031F
* Recognising that overall demand is driven by energy demand
** Includes: iron ore, metallurgical coal, thermal coal, alumina, aluminium, nickel, copper, gold, uranium and other hard commodities
Source:
ANZ Insight, Issue 1; PJPL analysis
30 May 2012
Port Jackson Partners
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Capturing this means growing volumes – the ‘free kick’ from price is over
DRIVERS OF REVENUE CHANGE – 2006 TO 2030
2010 A$ Billions; bubbles indicate total revenue change
2006-2011
2016-2031
2011-2016
$93B
$1B
$119B
109
44
49
Revenue
Extra revenue
benefit of
through volume
increased price
growth**
assuming no
volume growth*
Revenue
decline through
lower prices
assuming no
volume growth
53
10
Extra revenue
through volume
growth
(52)
Revenue
Extra revenue
benefit of
through volume
increased price
growth
assuming no
volume growth
* Calculated by multiplying 2006 volumes by the change in prices between 2006 and 2011
** Difference of total revenue increase between 2006-2011 ($93B) and revenue benefit of increased prices assuming no volume growth ($44B)
Source:
PJPL team analysis
30 May 2012
Port Jackson Partners
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Stagnant or declining shares reflect Australia’s current competitive position
AUSTRALIA’S MARKET SHARE OF GLOBAL PRODUCTION
Change in market share, percent of world production
1960-2000 - substantial share gains
Bauxite
38%
Uranium
15%
Iron ore
15%
Nickel
13%
Gold
Coal*
Copper
*
8%
5%
4%
2000 to 2010 – share loss or stagnation
(7%)
(8%)
1%
(3%)
(1%)
(1%)
(1%)
Includes bituminous and anthracite, lignite and brown coal
Source:
US Geological Survey Minerals Yearbook; British Geological Survey World Minerals Statistics; BP Statistical Review of World Energy; ABARE
30 May 2012
Port Jackson Partners
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Our current projects have become high cost
COMPETITIVENESS OF AUSTRALIAN MINES – CASH OPERATING COSTS
Percent of production by cost curve quartile, totals in Mt of production; coal delivered to China; metals costs net of by-product revenue
Thermal Coal
152
Quartile 4 3%
Hard Coking Coal
206
89
120
Copper
1.76
Nickel
2.14
0.47
0.48
6%
25%
20%
31%
37%
Quartile 3 34%
42%
48%
31%
66%
32%
45%
23%
Quartile 2 58%
47%
21%
39%
6%
Quartile 1 5%
2006
*
28%
29%
2012
2006
38%
25%
2012
11%
6%
2005
25%
2012
19%
0%
2008
2012
Q1, Q2, Q3, and Q4 represent the percentage of total Australian production within the first, second, third, and fourth quartiles of the global cost curve. Copper and nickel costs based on C1
cost ranking
Source:
AME; Brook Hunt
30 May 2012
Port Jackson Partners
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Even in iron ore, we have lost our operating cost advantage for all but established
Pilbara projects
COMPETITIVENESS OF AUSTRALIAN IRON ORE MINES – DELIVERED COST INTO CHINA
Percent of production by cost curve quartile, totals in Mt of production
Established Pilbara
Emerging Pilbara
190Mt
254
Quartile 3 2%
Quartile 2 10%
Non Pilbara
152Mt
410
600
74
8%
9%
12%
122Mt
226
15
44
167
24%
52%
62%
74% Quartile 4
Quartile 1 89%
92%
91%
88%
76%
11%
48%
23%
26%
N/A
2006
Source:
CRU
2012
2020
2006
2012
2020
2006
2012
2%
2020
30 May 2012
Port Jackson Partners
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Rising costs to install new capacity mean our new projects are also less competitive
CAPITAL SPEND TO BUILD A TONNE OF NEW CAPACITY
2011 US$ per tonne of capacity
Thermal coal
Iron ore
2007
2011/12
2007
2011/12
195
176
150
106
96
100
ROW
Australia
73
61
ROW
Source:
Australia
ROW
Australia
Merrill Lynch BoAML; JP Morgan; company announcements; press reports
ROW
Australia
30 May 2012
Port Jackson Partners
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High costs and growing delays mean the entire thermal coal pipeline is at risk
COMPETITIVE POSITION OF AUSTRALIAN THERMAL COAL PROJECTS
Quality of projects measured by breakeven
price
Share of proposed capacity, percent
50%
Delays to Australian thermal coal projects
Additional years of delay incurred per annum
0.8
50%
5%
0.7
GFC effect – one off
increase in delays
of ~6 months
0.6
32%
Australia
0.5
Project delays have
been increasing over
the past decade
0.4
45%
0.3
0.2
18%
Top half of projects
ranked by price
needed for
investment
Source:
RoW
Bottom half of
projects ranked by
price needed for
investment
Wood Mackenzie; ABARE; PJPL analysis
0.1
0.0
2002 2003 2004 2005 2006 2007 2008 2009 2010
30 May 2012
Port Jackson Partners
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In aluminium, we are missing our chance to replace uncompetitive processing with
bauxite exports
ALUMINIUM AND BAUXITE OPPORTUNITIES
Aluminium production growth and capital intensity
Supply of Chinese bauxite imports
Capital spend for one
tonne of new capacity
2000-2010
production growth
US$/t of capacity
CAGR, percent p.a.
Millions of tonnes per annum
45
Other
suppliers
China
1,700
18%
30
Middle East
5,800
27
11%
23
20
India
3,100
9%
Indonesian
supply
Canada
Australia*
7,800
7,0009,000
2%
1%
8
1
1
1
2
2
3
2000 2002 2004 2006 2008 2010
*
PJPL estimates; no expansions are currently planned for Australasia. Efficiency gains at existing facilities is expected to deliver small production increases over the next 10 years
Source:
World Mineral Statistics; CRU; PJPL analysis
30 May 2012
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Even in iron ore, we are losing both our operating and capital cost advantage for all
but the best Pilbara developments
COMPETITIVE POSITION OF AUSTRALIAN IRON ORE PROJECTS
Delivered cost advantage vs Brazil by 2020*
Regional average capital spend for one
tonne of iron ore capacity
2020 US cents per dmtu, CIF to China
US$ per tonne of capacity
235
25
Emerging
Pilbara
Established
Pilbara
135
(7)
(58)
*
165
Non Pilbara
West African
projects
Pilbara
expansions
Non Pilbara
Australia
Growth volume only. For expansions at existing operations, growth volume is assumed to have the same cost structure as existing volume
Source:
CRU; JP Morgan; Company announcements
30 May 2012
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Competitor countries are ‘switching on’, backed by new technologies and new
investors
PROLIFERATION OF COMPETITORS
Improving investment attractiveness…
…is combining with new technologies and investors
Copper production index, 1960 = 100
Share of global uranium production, percent
In situ
JV’s with Russia,
leaching
China and Japan
35%
1,200
Beginning of
key reforms*
Chile
1,000
30%
800
25%
Peru
Kazakhstan
20%
600
15%
400
World
10%
200
Zaire/DRC
0
1960
*
5%
Australia
0%
1975
1990
2005
1990
1995
2000
2005
2010
DRC revised their mining code in 2002; Chile reformed mining laws in 1983; Peru privatised the copper industry and lifted FDI restrictions from 1991
Source:
World Minerals Statistics; Press search; Kazatomprom
30 May 2012
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Port Jackson Partners
We need a co-ordinated approach to regain our competitive edge
POLICY CONSIDERATIONS
Recognise our
‘burning platform’
Rapidly address
our current
competitive
position
Secure long term
competitiveness
What?
How?
• Acknowledge our loss
of competitiveness and
its implications
• More openly disclose the magnitude of risks to the current project pipeline
• Translate pipeline risk into standard of living impact
– This includes describing the broad-based contribution mining has already made
• Alleviate exchange rate
pressures
• Maintain meaningful federal and state fiscal surpluses for the foreseeable future
• Resolve infrastructure bottlenecks that are driving inflation
• Rebalance capital flows through an offshore focussed, ‘tamper proof’ sovereign
wealth fund
• Address labour and
skills shortages
• Get more tonnes per person by focussing IR regulations on pay and work practices,
not management’s commercial decisions
• Ease labour and skills shortages by increasing internal mobility and 457 visa-style
migration arrangements
• Resist the current drift
back to protectionism
• Avoid 1970’s-80’s style local content policies and piecemeal protection of already
lagging industries
• Revive the national
productivity agenda
• Refocus workplace relations on ongoing productivity gains and acceptance of the
need for change
• Better match education and skills training, not just at universities, to emerging
capability gaps
• Foster the development of an innovation cluster; over time, this can become a
growth engine itself
• Incentivise research and commercialisation through R&D tax concessions
• Eliminate sovereign risk
concerns
• Stabilise taxation at predictable, internationally competitive levels
• Streamline and simplify review processes to ensure transparent, predictable and
timely approvals, including FDI and land use
30 May 2012
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Port Jackson Partners
Without action to restore competiveness, a huge opportunity will be lost
CONCLUSIONS
•
Australia’s minerals resources remain fundamentally attractive – if we get
their development right they will deliver enormous benefits to Australia
•
Getting this right means delivering new volume from projects that are more
attractive to investors than those of our rapidly multiplying competitors
•
Right now, we are not well positioned to attract investment. Without change,
we will be left behind as others grow
30 May 2012
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