02 December 2010
The Australian mining industry in the early 21st century
Speaker: Sam Walsh - chief executive, Iron Ore
Location: Melbourne Mining Club - Melbourne, Australia
Introduction
It gives me great pleasure to address you today and I thank the Melbourne Mining Club for this opportunity.
We are arguably in an era in which the mining industry's importance to the continuing economic growth and competitiveness of Australia has never been stronger.
As many of you know, it is an industry that is both immensely challenging and laden with opportunity.
It is also highly topical and in recent times has been the subject of some of the most robust debates in this country's history. Sometimes of course, we'd all like a little less debate and a lot more agreement.
I find that one of the most stimulating aspects of working in mining is the feeling of constant flux and motion. What applied yesterday might not apply today, and may not be very relevant tomorrow.
There are seemingly endless opportunities and ways to do things better, faster, more productively; to grow the business, grow our people, and grow the communities close to where we operate.
Growth is a key theme of my talk today.
Like each of you, I was distressed to hear the reports of the Pike River tragedy and the resulting 29 fatalities and the terrible consequences for the families, groups and communities in and around Greymouth.
Our prayers and thoughts are with the families and friends of our lost colleagues, and as a mark of respect and sympathy, I would like us to pause for a moment's silence.
Nothing is more important than the safety of our people. Each injury or fatality is one too many.
Today I offer an early 21st century vista, using Rio Tinto to illustrate the journey that many of us are familiar with.
I will track then describe five key factors - the five "C"s - that I believe will be fundamental to the future growth and prosperity of the industry: courage, certainty, competitiveness, collaboration and contribution.
Our strategy is consistent and unchanged
Most of you would be familiar with the global nature of our business. We find, mine and process mineral resources the world over, producing aluminium, copper, diamonds, energy products, gold, industrial minerals and salt and iron ore.
Our established strategy is to invest in and operate large, long term, low cost mines and businesses, driven not by choice of commodity but by the quality of each opportunity.
In this regard, we have some of the world's best assets and have a proven track record in executing projects.
And, as an organisation with global reach, the Group is able to respond to rising demand for metals and minerals from both developed and developing countries.
Our operating heartland is in the OECD
We have a strong investment within OECD countries, which traditionally have offered a stable environment, in which the opportunity for mineral development can occur in a culture of trust and transparency..
In this context, Australia is important for Rio Tinto, representing over 40 per cent of worldwide gross assets. It is home to the majority of our iron ore and coal businesses, which were Australia's two top exports in the last financial year, with export values at $36 and $35 billion respectively.
In Australia, Rio Tinto also produces bauxite, alumina, diamonds, uranium, copper, talc and salt.
And my own portfolio includes executive leadership for Australia, the global iron ore business and Rio Tinto Marine.
Let me use iron ore as an example of our overall progress.
Rio Tinto's global iron ore group is headquartered in Perth, with operations and projects in the Pilbara and in Canada, Guinea and India. We are Australia's largest exporter of iron ore and second largest globally.
Tom Price - the start of an iron ore precinct and a global business
As Hamersley Iron, we started exporting iron ore to Japan from one mine, Tom Price, in 1966.
By 2000, we were operating six mines, a rail line and two ports. Back then, we had about 4500 employees and produced 72 million tonnes of ore a year - it seemed like a lot at the time.
Rio Tinto had recently completed acquisition of North Ltd, which added Robe River and Iron Ore Company of Canada to our portfolio.
We remain proud of being one of the first major companies to embark on a formal engagement strategy with Aboriginal communities, breaking new ground in the Pilbara in terms of Aboriginal training, employment and cross-cultural awareness.
Our biggest market for iron ore was Japan, although we were working hard on growing our relationships with Chinese customers, since we made the first shipment of imported iron ore to Chian in 1973.
We started to better understand the richness of our ore bodies and the vast mine life capacity that we had.
But did we know just how big demand would get? Did we understand the nature of the demand that lay ahead? Did we predict just how rapidly the economy of China, for example, would grow? The extent of its urbanisation and industrialisation?
I suspect not. I'm not sure that anyone had a crystal ball powerful enough to see into a future that catered for this pace of demand.
Fast forward to today.
At a major investor seminar this week, I gave some guidance on my global production this year - 234 million tonnes. Said quickly it doesn't sound like much, but believe me it is.
An extensive mining precinct to deliver 333mt/a and beyond
The majority of this, close to our nameplate capacity of 220mtpa, will come from the Pilbara. Here we now have 10,500 direct employees and contractors and operate a vast integrated network of 14 mines, 1400 kilometres of rail and three ports.
We have announced plans to grow production in the Pilbara to 283mtpa by 2013, and a pathway to 333mtpa by 2015 - an ambitious 50% increase with a cost approaching US$15 billion.
It is Australia's largest integrated mining project and will require a further 6000 people working for us.
China, continuing its urbanisation and industrialisation drive, is the world's No.1 country in traded iron ore, accounting for some 68% of seaborne iron ore.
One of the biggest changes over the past decade has been not what we do, but how we do it. Today we are as much a technology company, a human resource company, an environmental company, an integrated logistics company as we are a mining company.
The changing faces of a company
We are an organisation that has embraced the "new competencies" of mining: technology that is changing the face of resource development; Indigenous Land Use Agreements that are setting new standards in Aboriginal interaction and engagement; and new ways of partnering supporting communities and other key stakeholders.
We have developed a "one workforce" philosophy, where we are all treated equally on a contractual basis and a "one mine" philosophy - shamelessly pilfered from my previous experience in the car industry - where my 14 mines, rail and ports are operated as one fully integrated system.
And, over and above the direct contribution of mining through profits, royalties, taxes and employment, and flow-on effects to service and supply industries, we have a host of community-giving programs across many sectors.
We don't need too much of an imagination to know that mining in 2020 will be different.
At Rio Tinto we have our own "sneak preview" of the years to come with our "Mine of the Future" initiative, which is revolutionising mining with the creation of next-generation technologies. Our one-year-old Operations Centre is integral to this program, but more on that later.
Our core market will remain in Asia - China, India, and other countries like Indonesia and Vietnam. Urbanisation and industrialisation will continue to drive demand, as will greater per capita wealth to purchase cars, white goods and other steel-based products.
Many large provinces are just beginning to climb the steel intensity curve
Some are saying that Chinese steel consumption has perhaps already peaked having reached levels of demand commonly seen in OECD countries. However, China is not one homogenous region.
Steel use in the highly vertical, export-dominated cities of Beijing, Shanghai and Tianjin is already at around the same level as the likes of South Korea. But steel consumption in China's interior and more distant provinces, some with populations of 90 to 100 million apiece, is still some way behind.
Differences in income are similarly stark.
The central government is now focusing efforts in these less developed parts of China and business is looking to those areas as well to provide new sources of low cost labour to service production for internal markets.
A future supply strategy that is truly global
Our supply portfolio will open up, with new operations in Simandou in Guinea and Orissa, India.
Requirements for people and roles within mining companies will change as we seek new and different competencies to support the global and technological changes. Increasingly, we'll be looking beyond the engineering and geology faculties for graduates; we'll be seeking IT specialists, businesspeople, systems and logistics graduates and so on.
Yes 2020 is a decade away, but my mine plan is presently to 2067. I am not game to predict what things will look like by then.
It is worth reflecting that it took 25 years for the first billion tonnes in 1991, 12 years for the second in 2003 and six years for the third in 2009. We are shaping for our four billionth tonne in 2013 and our fifth in 2016, which will coincide with our 50th anniversary of commencing operations.
We've been planning for the long term for quite a long time.
As leaders, preparing the mining sector for the future is a great challenge?
I believe there are five key factors that will shape the industry over the next decade, and leadership will entail recognition and adoption of these.
The first is courage.
In a mining company, courage comes in many guises.
It can be the shift supervisor who orders her crew to stop work - despite production schedules, deadlines or her manager's expectations - because she believes there is a safety issue.
It can be the community officer who fronts a hostile local crowd to address environmental concerns because he knows the myths and rumours must be replaced by fact.
From an organisational point of view, courage means not being afraid of the hard, bold decisions and of tackling the tough issues head on.
Acting on Aboriginal education, employment and training
On the back of a landmark speech by Leon Davis in 1996, Rio Tinto stepped into a space that the industry had long feared, embarking on a strategy of Aboriginal engagement and employment. It is a space in which we have an enviable track record- one of actions, rather than words.
Fundamentally, this continues to be about recognition and respect, but it is also about the sound strategy of providing local people with local jobs, which also means eliminating disadvantages in education, health and standard of living.
Across Rio Tinto's Australian operations we are closing in on 10% of our total workforce being aboriginal people. For the record, we currently have 1540 Aboriginal people participating in our workforce, 840 of which work in my iron ore business.
But beyond the statistics, it is the individual self-esteem and the flow-on effects of employment to each family and community that are paramount.
Courage often entails a high degree of patience and perseverance and staying true to our values
The second factor I'd like to recognise is certainty.
A world of certainty...or is it?
It goes without saying that an environment in which the goal posts are fixed will always be the most conducive for the prosperity of the industry.
We seek certainty because there is so much about our industry that is uncertain - global financial markets are still fragile; there is the risk of continuing economic woes in countries such as Portugal, Greece, Spain and Ireland; ethnic and ideological tensions worsening throughout many regions; and there is competition for sources of funds.
It is indeed a world of complexity.
Uncertainty, it is said, is at the heart of creativity, but I think we would all opt for a little less creativity in favour of more certainty.
This is a position that applies to the Mining Resources Rent Tax, or MRRT, and the deal that was struck with Government, for example. While it is not a perfect outcome, it was negotiated and agreed; it is manageable and I would like to think that our agreement will remain robust.
It will also apply to Australia's response to climate change and expectations of the mining industry. Robust debate on the form and quantum of carbon pricing has began- its application to our globally competitive mining industry again requires careful engagement, study and management.
This highlights a related point, which is this: in spite of the absolute importance of our industry, we can not let our local state and national contributions, our opinions and our breakthrough initiatives hide beneath a bushel.
We do matter, and it is important for our industry to be heard at the right time.
That was what the MRRT debate taught us.
The third feature I want to talk about today is competitiveness.
While I circumnavigate the world to run my business on the global stage, I am fiercely Australian. I am always looking for ways for our Australian industry to stay ahead of the pack.
Yes, I continue to compete locally with BHP Billiton for example - indeed, I believe we do that well.
But our real competitors are those in places such as Brazil, which obtained a massive leg-up with our union troubles in the early 1990s and quickly developed its vast and rich long-life iron ore provinces.
We are fortunate that our Asian proximity ensures a freight advantage that will be difficult for the Brazilians to completely overcome.
New advantages
One of our most significant competitive advantages is our Mine of the Future programme, utilising next generation technologies to allow for smarter mining, with greater efficiency and lower production costs as well as improved health, safety and environmental performance.
The largest contribution has come from the commissioning of the Operations Centre- or OC- located at Perth airport, some 1500 kilometres from the Pilbara and our mines, rail and ports network.
It is at the OC that more than 400 employees have full end to end visibility of our value chain, all in real time. Synchronising each and every element is critical.
With giant screens showing instant activity and a complex array of custom-built technological infrastructure, the centre could be NASA's control room.
After only 12 months of operation, the benefits of the OC can already be quantified: increased efficiency, improved reliability, decreased variability and better identification of performance issues.
With it we will also attract and retain more of the people we need to build the future.
Collaboration is the fourth imperative for our future.
Joint ventures
Increasingly, being competitive will mean building our share of the Chinese and other developing markets; how we respond to the needs of countries and jurisdictions will be critical to future wealth - for our company and indeed Australia.
To this end, forming and maintaining strategic relationships is vital.
In a formal sense, our joint venture arrangements with Japanese, Chinese and other organisations are great examples of collaboration.
Robe River Iron Associates, which in October exported its billionth tonne of iron ore, is a Joint Venture between Rio Tinto, Mitsui, Nippon Steel and Sumitomo Metal Industries.
The historic Channar Joint Venture back in 1987 - the first Chinese agreement in Australia -and this year's Joint Venture with Chalco for the Simandou project are iconic and benchmark arrangements.
And one of our newest mine developments is Hope Downs, a joint venture with Hancock Prospecting.
There are other strong local relationships.
Indigenous Land Use Agreements
Historically Rio Tinto has led the way in the development of land use agreements with Aboriginal people.
Continuing new standards in land use and community involvement and interaction have been set with the Yandi Land Use Agreement in the Pilbara in 1997, the Western Cape Communities Co-Existence Agreement in Cape York in 2001, the Eastern Guruma Agreement in 2003 and the Argyle Participation Agreement in the East Kimberley in 2005.
Activity in this area has been at a peak during 2010 in our iron ore business. We expect that by the end of this month we will have signed five of the intended nine new Commercial partnership agreements.
Participation in projects such as these is just one part of our contribution to creating stronger communities and robust regional economies.
And contribution is the fifth and final factor I would like to highlight as crucial.
Early commitment to growth
Collaboration and contribution are vital ingredients in propelling Australia's regional and remote growth. I firmly believe that the mining industry has a responsibility to contribute to the development of a socially and economically robust Australia.
The majority of our Australian operations- indeed, of most mining operations- are north of the 26th parallel. Draw a line from between Shark Bay and Carnarvon in the west to Rockhampton in the east. This is where a considerable part of Australia's wealth is generated and where significant contribution needs to occur.
In much of our development in early decades, many companies did it pretty much on our own. We created townships, mines, railways, ports, water and electricity infrastructure. We built schools, hospitals, shopping centres.
We brought people to regions.
Making Pilbara towns into Pilbara cities
We now share our responsibility for fostering educated, healthy and prosperous communities with the tiers of governments, community groups, NGOs and others in the private sector.
The Pilbara Cities framework is an excellent example, driven by the Western Australian government, local governments in the Pilbara, all in collaboration with the private sector. It aims to revitalise the Pilbara region and enhance liveability.
We need to ensure that our people are encouraged to participate in the opportunity, but this is not without difficulty.
When you consider that the average 4 bedroom/2 bathroom house in the Pilbara costs one million dollars and the average weekly rent for that house in Karratha is presently more than $2000/week, the need to balance residential Pilbara living with fly in/fly out options is a key consideration for us.
A more healthy and vibrant community
When I talk of contribution I don't just mean contributing to economic prosperity through employment, investment in skills and training and payment of taxes and royalties, although naturally these are sizeable inputs.
We contribute a vast range of services that most Australians expect to receive direct from their governments: power, water and sewage, to name just a few. The few hundred beneficiaries of this commitment now extends to tens of thousands of people, many of whom do not work for Rio Tinto.
We also contribute significantly directly within the community, to genuinely make a difference. In Western Australia alone, we spend some $28 million directly into community health, education, cultural and environmental programs.
Many countries set to follow China
As we take a broad look ahead, it is clear that many other countries are set to follow China's development path- for example India, Brazil and Indonesia.
We are not suggesting that all or even any of these countries will match the consumption levels of metals and minerals that we are witnessing in coastal China. And it is fair to say that their various growth paths will come with their own set of distinct challenges.
Indeed, there are a number of major barriers that that could prevent a seamless supply response to this growth. For example, the location and quality of new resources may be challenging, as may project approval delays and costs overruns.
We are poised to capture growth associated with high standards of living
What is clear is that as prosperity rises, per capita consumption of metals and minerals increases. Countries continue to urbanise and industrialise, with corresponding movements further up the metals intensity curves.
Rio Tinto has a clear view that over the next 15 - 20 years, consumption trends will lead to a doubling in demand for iron ore, copper and aluminium.
And in this regard, we are well positioned to meet the opportunities.
The challenge then is to ensure our land of opportunity does not become the land of missed opportunity for the mining industry and Australia.
Yes, there are some big issues apparent now and perhaps far more perceptible going forward.
Conclusion
In the stampede to meet global demand for commodities, will our political and regulatory environments support Australian producers to move swiftly and decisively? With certainty?
Will we have the population and labour availability to support our project and economic growth?
The mining industry has a task ahead of it to convince the Australian public that we need a skills immigration policy change to provide the resources we need to build and run our expanding operations.
Furthermore, will our visions and expansions be supported by adequate services and infrastructure development? And if so, who will drive the initiative?
How can it be ensured that all Australians derive some benefit from the rapid progress of our industry? And is it really the industry's fault if successful times are not shared more broadly?
While these types of subjects are often complex and difficult, we need to have the courage of our convictions; to promote an environment of certainty; to focus on remaining globally competitive; to collaborate widely; and to contribute to the communities in which we all do business.
This will ensure that in 10 years time we will look back at 2010 as being a formative period for growth and prosperity.
[end]
The Australian mining industry in the early 21st century - presentation [PDF: 2.27 MB]
The Australian mining industry in the early 21st century - speech [PDF: 37 KB]