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Speech to the 4th Citi Australian Investment and Asian G10 Rate Conference, Sydney



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Fourth Citi Australian Investment and Asian G10 Rate

Conference

The Hon Martin Ferguson AM MP

Minister for Resources and Energy

Minister for Tourism

Sheraton on the Park, Sydney

Wednesday, 24 October 2012

* Check against delivery

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Introduction

It is a pleasure to be here today to speak to you about

Australia’s resources and energy industries.

Our resources industries are a very significant part of our

economy.

In 2012-13, Australia’s total mineral and energy export

earnings accounted for 60.5 per cent of all goods and

services exported.

Over the next 12-months, even with volumes increasing

as expected, Australia’s export earnings are expected to

decrease due to lower commodity prices.

As I have recently said, we have seen the end of the

current cycle of high commodity prices.

However, this is not cause for pessimism about our

economy.

Australia has captured the benefit of the boom in

commodity prices by securing investment that will see

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more production come on line and commodities exported

in higher quantities.

There are certainly many years of impressive resources

activity to come, particularly in offshore LNG which is an

industry on the edge of an incredible boom.

And there is currently $270 billion of committed investment

in the pipeline, which will create immense opportunities for

our resources industry.

Even with such a pipeline of investment there is no doubt

that we are entering a challenging phase.

Our future is contingent on keeping production costs

down, providing access to skilled labour and increasing

our productivity and efficiency.

Commodity price volatility

Generally speaking, the prices of resources commodities

are noted for their volatility rather than their stability.

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Historically this price volatility imposed a level of discipline

on decision-making and forced companies to innovate and

seek efficiencies.

In the last decade, as commodity prices went skywards

the focus on controlling costs lessened.

By mid-2012, iron ore was 10 times its 2002 price, copper

was five times its 2002 price, and thermal coal was four

times its 2002 price.

Each of these commodities has peaked even higher than

this in recent years.

Then, in July of this year, their prices fell significantly.

There had been an unrealistic expectation that these

higher prices would continue—recent market trends

indicate that the reality will prove to be much different.

The September edition of the Bureau of Resources and

Energy Economics (BREE) Resources and Energy

Quarterly confirmed that the time of high commodity prices

is over.

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This is why the next few years will be the most challenging

for Australia’s resources sector.

Australia’s export earnings

Over the next 12-months, Australia’s export earnings are

expected to decrease due to lower commodity prices.

Preliminary estimates from the Reserve Bank of

Australia’s September Commodity Price Index show the

index fell by 1.3 per cent on a monthly average basis in

Special Drawing Right terms, after falling by 2.8 per cent

in August.

Over the past year, the commodities index has fallen by

14.9 per cent in Special Drawing Right terms, and 18.5

per cent in Australian dollar terms.

The largest contributors to this fall were, not surprisingly,

declines in the prices of iron ore and coal.

The Bureau of Resources and Energy Economics expects

a rebound in some commodity prices in 2013, should

global growth pick up.

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However it must be acknowledged that prices are

expected to remain well below the highs of recent years.

This will in turn affect Australia’s export earnings.

Australia’s total mineral and energy export earnings are

forecast to total $189 billion for 2012-13, accounting for

60.5 per cent of all goods and services exported.

While still a very impressive contribution to our national

income, it is two per cent less than last year’s record high

of $193 billion.

Recent data suggests the industry will continue to perform

strongly with increased volumes flowing from recent and

planned capital investments.

Export volumes of iron ore alone are forecast to increase

at an annual rate of 11 per cent, while earnings are

expected to reach $77 billion within four years.

Importantly, the decline in non-energy resources

commodities earnings have been offset to some extent by

positive energy commodity earnings.

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Earning from natural gas and thermal coal are forecast to

grow by four per cent to total $81 billion.

Opportunities

The drop in commodity prices is not good news, but

neither does it mean the end of Australia’s resources

industry - the future is looking positive if we play our cards

right.

Australia continues to benefit from the increased

urbanisation, industrialisation and population growth that

is driving unprecedented levels of energy demand across

the world.

Asia alone needs about US$15 trillion worth of new

infrastructure up to 2030, which is about 40 per cent of the

global total.

A significant amount of this expenditure will go towards

creating new capacity for natural gas, with demand

expected to increase by more than 40 per cent.

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Australia is well placed to respond to this demand - with

our small population and massive resources base, we are

one of just three net energy exporters in the OECD.

At present Australia is experiencing record levels of capital

expenditure with more than 60 million tonnes of additional

LNG export capacity under construction, through 13

projects worth a total of about $176 billion.

We are the only country in the world with three modes of

LNG under development: conventional offshore gas with

onshore LNG production; floating LNG; and onshore coal

seam gas to LNG.

And there is significant potential to develop further

projects utilising all three technologies.

Australia has demonstrated reserves of about 160 trillion

cubic feet of economic and sub-economic conventional

offshore gas.

While reserves of shale and tight gas are growing, coal

seam gas is the dominant unconventional resource, with

economic and sub-economic reserves of about 190 trillion

cubic feet so far identified.

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Our burgeoning conventional and unconventional gas

sector has consequently become a key factor in

maintaining a very healthy national trade ledger.

Australia exported 20 million tonnes of LNG worth $10.4

billion in 2010-11.

We are now the third largest LNG exporter in the Asia-Pacific region and the fourth largest in the world.

Our exports are forecast to grow by a further 19 per cent

in 2012-13 as production from Western Australia’s Pluto

facility ramps up.

Following the commencement Pluto’s first production train

in May this year, Australia now has more than 24 million

tonnes of LNG export capacity.

Our LNG exports are forecast to approach 80 million

tonnes once all the projects in construction commence

operation.

Based on the proposed and committed projects,

Australia’s capacity could quadruple by 2017, potentially

making us the world’s largest LNG producer.

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We are poised to provide our Asian neighbours with long-term security of supply.

Global outlook

We are all well aware of the economic uncertainty in

Europe and continued warnings about a slowdown in

China.

The Reserve Bank of Australia recently painted a bleak

outlook for growth in the world economy.

The RBA indicated that contracting economic activity in

Europe and moderate Chinese expansion are dampening

growth around Asia more generally.

Of course, it is the marginal producers that feel the effects

of lower prices first.

This presents our efficient miners with the opportunity to

maintain or perhaps even expand volumes, in a declining

market.

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We must remain at the top of our game, delivering the

high-quality goods and services our export markets want,

when they want them.

In this environment all participants in Australia’s resources

sector will need to sharpen their focus on reducing costs

and improving productivity.

Projects and investment activity

Even in these challenging economic times, resources

companies continue to consider new minerals and gas

projects.

Australia’s challenge is to convert these into firm

proposals, then into fully sanctioned projects and finally

into production.

If we can’t achieve this, we will see a dramatic decline in

investment activity.

The result will be a large fall in construction jobs and in

complementary fields such as mining technology services

and equipment.

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I know the resources industry in Australia faces high

development costs; there are good reasons for this.

We are conscious of our responsibility to reduce our

environmental footprint.

Miners are required to undertake all activities in a

sustainable manner.

This includes rehabilitation efforts to ensure mine sites are

returned to a healthy, stable state.

The government also encourages industry to conduct

proper consultation with local communities including

Indigenous Traditional Owners.

Capacity

Our job right now is to consolidate and expand our

capacity, and therefore make up the drop in commodity

prices to ensure we have a bright economic future.

Australian resources tend to be of a high quality and, as is

the case with iron ore, at the lower end of the cost curve,

with production costs well under US$60 a tonne.

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In comparison, production costs for a lot of Chinese

production is well above US$100 a tonne and accordingly

current iron ore prices have a mixed impact on the

Chinese economy.

On 10 October this year, Tom Albanese from Rio Tinto

estimated that around 100 million tonnes of production -

mainly in China - had become unprofitable due to volatile

prices and a large proportion of production had already

been curtailed as a result.

Just last month, the Metallurgical Mines’ Association of

China said that 40 per cent of their country’s iron ore

mines had to suspend production as a result of falling

prices.

The director of the China Iron and Steel Association also

disclosed that total net income generated by its members

in the first half of 2012 fell 96 per cent to less than $400

million.

These are crippling figures for an industry that last year

reported a total debt burden of $400 billion, which is

around the size of the South Africa’s economy.

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I believe the Australian resources industry is able to

compete strongly under these conditions.

A large number of Australian projects across a range of

commodities are opening new production facilities,

adopting world’s best practice, and providing further

markets for our mining industries.

In summery if we properly manage the cost pressures in

our economy associated with the investment boom in

resources then Australia is in a very strong position to

remain competitive and gain market share as marginal

suppliers exit the market.

We are also investing heavily in much needed

infrastructure, and this investment must be encouraged as

part of our strategy.

The Bureau of Resources and Energy Economics (BREE)

found that Australia will become increasingly reliant on the

current generation of infrastructure projects to provide the

capacity required to meet projected export volumes.

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It also highlighted the risks in both cost structure and

schedule that must be effectively managed to minimise

delays to the delivery of new developments.

Industry and government must work together to ensure

this infrastructure is built and adequate capacity provided

for.

This includes working through programs like the Regional

Infrastructure Fund, National Ports Strategy, and the

National Land Freight Strategy.

Productivity and efficiency

A focus on improved productivity and efficiency is key to

making sure our resources industry continues to thrive in

the face of low commodity prices.

In his speech to the Brisbane Mining Club on 17 October,

BHP CEO Marius Kloppers emphasised this point, saying:

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“BHP Billiton’s analysis shows that the next round of

minerals investments in Australia will, almost without

exception, be captured only if costs are decreased and

productivity is improved. Companies and governments

need to work in partnership towards attracting the next

rounds of investment.”

The Australian government recognises this, and is working

on improving investor confidence in the pace and outcome

of Government decision making, without compromising

our highly important environmental protection standards.

The Government is working with the States and Territories

though COAG to streamline environmental approvals;

reduce the complexity of regulation; and increase

accountability and transparency in decision making.

Industry’s contribution to improving productivity will be

through innovation, adoption of new technologies and

efficient labour practices.

Australia is a world leader in innovation and developing

new techniques for extraction - particularly by enabling

previously uneconomic resources to be profitably

extracted.

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For example commercial shale gas production began in

Australia last week with Santos announcing that its

Moomba-191 shale gas well in the Cooper Basin had

been connected to the eastern state’s gas grid.

The Government also believes there is significant potential

to export not only our resources, but our expertise and

technology.

In order to help link suppliers to business opportunities,

the Government has created the Resource Sector

Supplier Advisory Forum.

If commodity prices continue to fall, increasing productivity

through innovation will be the only way the industry will

continue to prosper.

Access to labour

Increased capacity and efficiency requires access to

skilled labour.

Skills Australia estimated mining operations in 2016 will

need 89,000 more workers than in 2010.

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This figure does not include the demand for short-term

construction workers, which is expected to peak at 49,000

workers in 2014.

The government has responded to the need to increase

our skilled workforce through the National Resources

Sector Workforce Strategy.

The Strategy includes a range of activities including

training more tradespeople and university graduates,

linking education with industry and information sharing.

Where peak workforce needs cannot be met from the

Australian labour market, skilled migration may be

necessary to ease capacity constraints and ensure

economic benefits can be realised.

Part of the Strategy includes providing industry with

access to workers through Enterprise Migration

Agreements and SkillSelect skilled migration initiatives.

Enterprise Migration Agreements have been introduced to

facilitate skilled migration for major resource projects.

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The first was announced in May this year for the Roy Hill

Project.

The EMA system is designed to ensure overseas workers

meet workforce needs only when the Australian market

cannot.

Some commentators have incorrectly suggested that

giving the industry access to EMAs takes jobs away from

Australian workers.

This is misleading and completely wrong.

As part of such an agreement, project owners are required

to implement training commitments to address future

Australian worker’s skills needs.

In the case of Roy Hill, migrant workers will be working

during the construction phase of the project- creating more

jobs for Australians once construction is complete.

I must emphasise that without access to skilled labour,

mining companies will not invest in Australia.

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We must also ensure we have access to affordable

labour. Australia is in the enviable position of having

excellent wages and conditions for workers.

This however makes us a very expensive place to invest,

compared to other countries.

I am not suggesting that we lower our expectations of

conditions or wages, what I am suggesting is that we must

make sure we are not pricing ourselves out of the market.

The community has a responsibility to ensure wages and

conditions are sustainable into the future. If we do not,

investing in Australia will become too expensive; meaning

the jobs we’ve taken for granted will not be available in the

future.

Conclusion

Australia’s resources industry has many years of

impressive activity to come.

With $270 billion of committed investment in the pipeline,

we will see continuing opportunities for our resources

industry.

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This is not a green light to be complacent. We must

remain competitive and continue to set the standard by

which all others are judged.

We need to be able to match world’s best prices, maintain

our reputation for reliability, and meet volume

requirements.

Chinese per capita consumption of raw steel, copper,

aluminium and zinc, when compared with the much of the

developed world, is still low; so demand will remain strong.

Of course, Australia’s future is not just dependent

economic progress in just one country. Indonesia and

India to name two others provide considerable growth

prospects for Australia.

And let’s not forget our traditional markets of Japan and

South Korea, which continue to provide a strong

foundation for activity in the resources and energy sectors.

We have an impressive pipeline of projects, and continued

investment in infrastructure projects will provide the

capacity required to meet projected export volumes.

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We must make work towards keeping our production costs

down, providing access to skilled labour and increasing

our productivity and efficiency.

There are no sure bets in life, and investment always

carries uncertainty and risk.

But, there are few places better prepared for the Asian

Century than Australia.

Thank you.