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BRISBANE • PERTH • MELBOURNE • SYDNEY • ADELAIDE

DIGGING&DRILLING AUSTRALASIA

SEPTEMBER 2012 • Issue 2

AustralaSIA’s Monthly Oil, Gas & Mining Magazine

Prelude – Benefit to Australia Shell is committed to having a positive impact in the countries in which we operate

CHINESE ECONOMIC GROWTH AND IMPLICATIONS FOR THE AUSTRALIAN ECONOMY The Hon. Kevin Rudd addresses Africa Down Under Conference Perth


2窶ク DIGGING DRILLING JULY SA F R A N C I&S C O P A RMAGAZINE IS S H A| N G H2012 AI

SINGAPORE

J A K A R TA

SYDNEY

DELHI

OVER 60 MAJOR CITIES


To Our Readers Welcome to the second edition of Digging & Drilling Australasia print and on-line magazine. They say that every cloud has a silver lining. After a volatile period and changing industry regulations, the recent record one day gain and rising spot iron ore prices and the China steel futures recent spike, the horizon is looking positive. The US$157 billion injection for new PR China infrastructure projects will also drive stronger steel demand. Let’s hope this adage is correct. This news definitely got Australasian miners to take some quick action and some were more successful than others.

Len Fretwell Managing Editor and Co-Founder Digging & Drilling Australasia

Our team at Digging & Drilling Australasia have a lot to be thankful for after our launch in July, 2012. On behalf of our team, I would like to thank our new friends at www.goldenlanterns.com in PR China for posting our D&D Australasia website link on their on-line ‘mining and petroleum database’. We appreciate the support of all of the Energy, Resources, Metal, Business and Engineering Associations that forwarded our on-line version of D&D Australasia (issuu.com) to their organisation members. Thanks to all for your positive feedback after our launch. We also thank the major CBD Hotels for offering print copies of D&D Australasia to their FIFO guests. We are very grateful to our advertisers and content contributors for supporting our magazine by distributing print and on-line copies of D&D Australasia to their clients, employees and contacts. Congratulations to Ms Nerissa Mollett, Business Development Manager at Hertz Australia Pty. Limited for winning our ‘Subscribe & Win’ promotion prize-draw. D&D Australasia and Singapore Airlines wish Ms Mollett and her Fiancé a wonderful return trip to the USA. Bon voyage! We are always looking for interesting ‘Energy & Resource Sector’ innovation and news content so, please feel free to contact me direct with any content that may be of interest to our readers. I hope you enjoy reading our second edition and I look forward to your feedback. I dedicate this edition of D&D Australasia to Lena and Maxim.

Best Regards

SEPTEMBER 2012  DIGGING & DRILLING MAGAZINE  3


WHAT’S IN THIS 06» ISSUE

IN THIS ISSUE 03 TO OUR READERS 06 MOMENTS IN PICS: Mine Expo 2012 Las Vegas 08 In Brief: MINING News highlights for the month 10 In Brief: Oil & Gas News highlights for the month 12 FEATURE ARTICLE: PRELUDE – A Growth Centre 18 Project PostCard: bulk carrier Camellia 21 Feature Article: ANZ Launches China Commodity Index 24 Feature ARTICLE: ZIMBABWE GEARED FOR FRESH WAVE 28 Feature ARTICLE: CHINESE ECONOMIC GROWTH AND IMPLICATIONS FOR THE AUSTRALIAN ECONOMY

Digging & Drilling c/o The Afriqan Times, Level 28 AMP Tower Australasia 140 St Georges Terrace Perth WA 6000 P. O. Box 445, South Perth 6951 Tel: 1300 A TIMES (1300 2 84637) Fax: +61 8 94636232 Feedback info@diggingdrilling.com News inquiries editor@diggingdrilling.com Advertising inquiries len.fretwell@diggingdrilling.com • Mobile: 0417 001 080 Editor Writers Guest Writers Special Features by

Len Fretwell Stephen Dawson Dominic Piper Emmanuel K Solomon

Graphics Elvin Wong Photography Emily Dimozantos, Andrea Klarin, Ben Scott, Priscilla Appiah Subscription www.diggingdrilling.com Publishing Digging & Drilling is published by The Afriqan Times Information and is Australian owned and operated. ABN: 521 386 161 09 / ACN: 138 616 109 VISIT US AT www.diggingdrilling.com COVER bulk carrier Camellia Digging & Drilling Australasia welcomes comments and suggestions, as well as information about errors that call for corrections. We are committed to presenting information fairly and accurately. Disclaimer: Reasonable care is taken to ensure that Digging & Drilling Magazine articles and other information are up-to-date and accurate as possible, as of the time of publication, but no responsibility can be taken for any errors or omissions contained herein. The opinions expressed are those of the authors and do not necessarily reflect the views of Digging & Drilling Magazine. The publisher, editors, contributors and related parties shall have no responsibility for any action or omission by any other contributor, consultant, editor or related party.

4  DIGGING & DRILLING MAGAZINE  SEPTEMBER 2012


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Moments

MOMENTS IN PICs »

Event: Mine Expo 2012 Las Vegas

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SEPTEMBER 2012  DIGGING & DRILLING MAGAZINE  7


IN BRIEF » Mining News highlights for the month:

Xstrata given extension for merger response

Fortescue locks in US$4.5Bn debt

LONDON - Xstrata Plc said an extension has been granted by the Takeover Panel for Xstrata’s non-executive directors to respond to a revised merger proposal from Glencore International plc. Xstrata’s non-executive directors were due to give their response on September 24, but this deadline has now been extended to 7am BST on October 1. “The extension was requested to enable Xstrata’s independent non-executive directors to take full account of feedback from consultation with key Xstrata shareholders,” Xstrata said. Glencore made a final revised merger proposal to Xstrata on September 7, increasing its bid to 3.05 Glencore shares for every one Xstrata share after its original offer of 2.8 shares looked set to be voted down.

Fortescue Metals Group Ltd said it had secured a US$4.5 billion debt facility, which would be used to refinance its existing bank covenants and provide additional liquidity for the company. Australia’s third-largest iron-ore producer said it had signed the underwritten commitment with Credit Suisse and JP Morgan, which would extend the repayment date of the company’s debts to at least November 2015. The facility, which matures in 5 years, is secured over Fortescue’s assets including its core mining operations as well as non-core assets such as rail line, rolling stock and housing accommodation. Fortescue shares on the Australian Securities Exchange jumped 17% on Sept 18 after the company lifted a trading halt, which was imposed late last week, in response to “rumors and speculation” that it may not be able to meet its bank covenants in December.

Venezuela, China sign deal to develop gold mine

Philippine mining at policy crossroads as investment sputters

CARACAS - Chinese and Venezuelan officials have signed an agreement to jointly develop one of the world’s largest gold mines. The agreement to develop Las Cristinas gold mine was signed by officials of the Venezuelan government and the Chinese company China International Trust and Investment Corp., or Citic.The mine in southern Bolivar state has been estimated to hold about 17 million ounces of gold. President Hugo Chavez called it an agreement to begin exploiting both gold and copper deposits at the mine.

MANILA - Conflicting regulations and a freeze on new mine deals in the Philippines are strangling development of its rich mineral resources, with mining investment over the next four years at risk of being less than half the $12 billion touted by the government.The Southeast Asian nation has huge mineral reserves, estimated to be worth $850 billion, ranking third in the world in gold, fourth in copper and fifth in nickel, according to the Philippine Mines and Geosciences Bureau agency. But conflict between national and local rules, a strong antimining lobby and a recent bid to raise mining royalties are scaring off foreign investors, mining officials say.

Copper Falls Ahead of Chinese Holiday

BHP Shaves Millions off Inner Harbour Contract

SHANGHAI - Copper eased on Monday but remained near 4-1/2 month highs, pressured by a strengthening U.S. dollar, while profit-taking by Chinese investors ahead of a week-long national holiday sent Shanghai prices lower over one percent. Prices are also weighed down by weak demand from top consumer China, where manufacturers are still waiting to see orders from Beijing’s infrastructure expansion schemes.

MELBOURNE - BHP Billiton has sliced about $80 million worth of works from one contract for its Inner Harbour Project in Port Hedland. The move comes after a volatile couple of months in iron ore, which have seen some iron ore miners, including Andrew Forrest’s Fortescue Metals Group pull back on expansion plans in the Pilbara. However, analysts believe the move was in line with BHP reorganizing its stock yards.


Government of Western Australia Department of Mines and Petroleum

Environment reforms in focus

Government of Western Australia

Department of Mines and Petroleum Environment

The Department of Mines and Petroleum (DMP) is looking to attract additional environmental staff to significantly enhance its regulatory services. DMP Environment Division Executive Director Dr Phil Gorey said a number of positions would be advertised during the coming months. “The department is recruiting senior staff to the Environment Division,” Dr Gorey said. “We will also be introducing new competency requirements, and training and development programs.”

“The State, industry and the community will directly benefit from these reforms through more effective application of environmental standards within the industry, and a more responsive regulatory agency.”

Dr Gorey said the recruitment campaign was part of the State Government’s commitment to reforming environmental regulation in the resources industry. “These are challenging positions and present an exciting opportunity for people to get involved in these vital reforms,” he said.

An important aspect of the reform program has been consultation with stakeholders. “We already have formal consultation structures as a part of the reform program, such as the Ministerial Advisory Panel, but it is important this is augmented with less formal consultation like regional visits,” he said.

The department launched the Reforming Environmental Regulation (RER) program in May this year. “The RER program will help deliver greater certainty, confidence and clarity surrounding the department’s environmental regulatory system,” Dr Gorey said.

“We want to make sure we use multiple forms of consultation to really test what we are doing and make sure it is going to meet the objective of ensuring a healthy regulatory system. “We don’t want to rely on one single channel of feedback.”

Dr Gorey said it was important to see how the department’s decisions are perceived amongst stakeholders. “Formal and informal consultation really allows you to gain a perspective of how decisions are received, how engaged people feel when the department is developing policies and how well communicated the department has made those decisions,” he said. “It gives us feedback on how the department’s transparency is being perceived by our stakeholders from a practical sense.” For more information about the department’s RER program go to www.dmp.wa.gov.au/rer If you would like to find out about the department’s current job opportunities, go the employment section of the DMP website.

www.dmp.wa.gov.au


IN BRIEF » Oil & Gas News highlights for the month:

State Tightens Petroleum Regulations Perth, August 29 - The State Government will introduce new petroleum environment regulations which mandate public disclosure of any chemicals introduced into a well or formation. Mines and Petroleum Minister Norman Moore said the Petroleum Environment Regulations, gazetted yesterday, would be introduced under the Petroleum and Geothermal Energy Resources Act 1967. “The regulations aim to ensure petroleum and geothermal operations are conducted in accordance with best industry practice and ecologically sustainable development,” Mr Moore said. “A key element of the regulations is to mandate public disclosure of any chemicals introduced into a well or formation, which will be made

available on the Department of Mines and Petroleum (DMP) website.“The public disclosure of this information means Western Australia has the greatest level of chemical disclosure of any jurisdiction in Australia.

The Hunter Review concluded that current regulatory processes were stringent but required further strengthening to improve legal enforceability.” Western Australia has no known potentially commercial coal seam gas resources, because of the State’s geology and character of its coals, however, public concerns raised in response to activities in Queensland prompted the Liberal-National Government to ensure WA’s regulatory framework became stringent enough to ensure community confidence,” the Minister said.

“The regulations also increase reporting requirements, with monthly reporting against performance objectives within Environment Plans which are a key approval document for the oil and gas industry. “In addition, Environment Plans are required to be revised by the operator every five years.” The changes are complementary to recommendations “Potential commercial developments from a DMP-initiated independent for tight and shale gas in WA are a review of WA’s regulatory framework number of years away which provides for unconventional gas activities in the State with an opportunity to WA, conducted in 2011 by petroleum better understand the resource and law expert Dr Tina Hunter. ensure we have robust, world best practice industry regulation in place.”

Boost for Exploration a Highlight at Key Perth, September 4 - Mines and “The program has been hugely the long term outlook for Western Petroleum Minister Norman Moore popular because it offers co-funding Australia’s resources industry remains announced a new round of grants of up 50 per cent of direct drilling strong,” he said. to boost Western Australia’s mining costs. For example, funding for a exploration investment today during single hole application is capped at “WA is uniquely placed to continue the opening of the Association of a maximum of $200,000. “But that’s to attract investment, with our close Mining and Exploration Companies’ just the tip of the iceberg, considering proximity to Asia, strong regulations (AMEC) Convention 2012. the State Government will have and an abundance of natural provided around $138million to resources. This State will continue Mr Moore said the Round 6 funding explorers as part of the program, to be the engine room to the rest of would be offered to drilling come 2016.” the nation - you only have to look operations set for 2013, under the at the $107billion generated by our Exploration Incentive Scheme’s Co- The Minister said it was schemes like resources industry in 2011 to realise Funded Drilling Program, funded this that would help find tomorrow’s that.” by Royalties for Regions. “The mines today to ensure the State’s Mr Moore delivered the welcoming program encourages exploration in resources industry maintained its underexplored areas and since its strong growth for years to come. address to 800 local and international inception in 2009, it has funded over “There has been much speculation resource and exploration specialists $27million in grants to more than about the mining ‘boom’ ending. attending the three-day AMEC 250 exploration drilling projects,” While I recognise that investment convention. he said. cycles aren’t always smooth sailing,


‘Subscribe & Win’ Draw Prize Winner! The Digging & Drilling Australasia ‘Subscribe & Win’ prize draw was conducted on the 3rd of September, 2012. Digging & Drilling Australasia and Singapore Airlines would like to congratulate Ms Nerissa Mollett from Perth in Western Australia for winning two return tickets to the USA. Ms Mollett is the Business Development Manager for Hertz Australia Pty. Limited in Perth, Western Australia and subscribed to Digging & Drilling Australasia magazine on the 24th of August, 2012. When asked how she came across our magazine, Ms Mollett said, “I originally came across Digging & Drilling Australasia magazine when it was left behind in a returned Hertz Australia rental vehicle. The staff cleaning the vehicle thought that I would be interested in it.“ (Pictured left to right) - Mr Len Fretwell, General Manager of D&D Australasia; prize draw winner, Ms Nerissa Mollett, Business Development Manager for Hertz Australia Pty. Limited and Ms Jacki D’Antonio, Sales Manager Western Australia for Singapore Airlines

Ms Mollett went on to say “After reading through the magazine, I noticed that many of our clients as well as potential clients were featured in the magazine. Hertz Australia specialises in the supply of commercial vehicles to comply with mine site specifications throughout Australia. This is when I decided to subscribe.” Ms Mollett also said “I have always wanted to go to America and I did see the competition being advertised but thought to myself that I would never win a prize like that.” Ms Mollett said a big thank you to D&D Australasia and Singapore Airlines and mentioned that she and her Fiance were already planning for the trip. Bon voyage!

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FEATURE ARTICLE»

PRELUDE – A Growth Centre Shell has given the go ahead to develop its Prelude and Concerto gas fields off the northwest coast of Western Australia using its innovative Floating Liquefied Natural Gas (FLNG) technology.


Artistic impression of Shell floating platform


FEATURE ARTICLE»

FLNG Prelude

A

ustralia is a growth centre for Shell globally. We are developing large gas resources and maintain a substantial exploration portfolio off the coasts of Western Australia and Northern Territory, as well as having interests in coal seam gas opportunities in Queensland.

gas. The relatively small size of the gas fields and the remote location make them an ideal candidate for development via Shell’s FLNG technology, as it would not be economic to develop the gas via a conventional onshore LNG processing plant.

and environmental footprint of an LNG development, because there is no need for long pipelines to shore; compression platforms to push the gas to shore; nearshore works such as dredging and jetty construction; and onshore development such as building roads, laydown areas and accommodation facilities.

After processing at the site of the Shell is the main equity holder gas field, ocean-going LNG carriers There are currently no FLNG facilities and Operator of the WA-44-L, an will offload liquefied gas, chilled to deployed anywhere in the world, area which covers around 1,000 -162 Celsius and shrunk in volume so Shell’s Prelude FLNG Project sq km in the remote Browse Basin, by 600 times, and other products, is likely to be the world’s first. 475km north-northeast of Broome, directly from the facility out at sea For Australia, the Prelude FLNG Western Australia. During 2007, for delivery to markets worldwide. project will demonstrate a means Shell discovered the ‘Prelude’ gas Until now, the liquefaction of of developing some of Australia’s field and in March 2009 discovered offshore gas has always involved “stranded” offshore gas reserves the ‘Concerto’ gas field in the permit piping the gas to a land-based plant. those considered uneconomic for area. development via an onshore plant FLNG technology is an important because they are too small or remote. Prelude and Concerto have around development for the LNG industry The CSIRO estimates Australia has 3 trillion cubic feet of liquids-rich as it reduces both the project costs

14  DIGGING & DRILLING MAGAZINE  JULY 2012 2012 SEPTEMBER


In July 2009, Shell awarded a consortium of Technip and Samsung Heavy Industries the contract for the design, construction and installation of multiple FLNG facilities over a period of up to 15 years, based upon Shell’s proprietary design. In May 2011, the Board of Royal Dutch Shell plc made the decision to proceed with the Prelude FLNG Project and start construction of its pioneering FLNG facility, to be the largest floating structure ever built. The FLNG facility itself will be 488m long and 74m wide, and when fully loaded will weigh around 600,000 tonnes - roughly six times as much as the largest aircraft carrier. Some 260,000 tonnes of that weight will

consist of steel - around five times more than was used to build the Sydney Harbour Bridge. Once constructed the facility will be towed to location where it will be permanently moored by 4 groups of massive mooring chains in 250m-deep water. Each mooring chain held to the sea floor by suction piles the size of small houses, and the FLNG facility has been designed to withstand severe weather, even a Category 5 cyclone. Safety of the FLNG facility has been paramount during its design, and its safety is on a par with modern offshore oil and gas facilities.

years, and is expected to produce at least 3.6 million tonnes of LNG per years as well as Liquid Petroleum Gas and condensate for export. The Project will contribute to the Western Australian and Australian economies through tax revenues, creating hundreds of jobs and providing opportunities for Australian businesses.

The Prelude FLNG facility is expected to stay moored at location for 25

PRELUDE BENEFITS FOR AUSTRALIA Shell is committed to having a positive impact in the countries in which we operate. As part of Shell’s commitment to sustainable development, Shell looks to help meet the world’s growing need for energy in economically, socially and environmentally responsible ways. In practice, this involves working to deliver benefits and reduce impacts, as well as creating employment and supply chain opportunities in the countries in which we operate. In Australia, Shell seeks to provide full, fair and reasonable opportunity for Australian industries to participate in Shell operations. As the Prelude FLNG Project progresses, Shell will ensure Australian contractors and suppliers are aware of opportunities by working with Industry Capability Network WA and the Project Connect website. At the ProjectConnect web site details the current list of project packages,

which call for expressions of interest from Australian companies that consider they have the capability to deliver to the Project. Although not a large LNG development, the wider benefits of the Prelude FLNG Project are not insubstantial. The economic benefits for Australia include: • Develops gas that otherwise would stay in the ground because of lower development costs • Creates around 350 direct jobs and 650 indirect jobs • Provides billions in tax revenues • Billions will be spent in Australia in capital and operating expenditure • Opportunities for Australian businesses - Shell is working with Industry Capability Network to maximise local content

• Onshore support services spread between Broome, Darwin and Perth • Shell will invest in training in WA - Perth will be established a centre for operational excellence in FLNG Successfully deploying FLNG at Prelude will be important for the Australian gas industry - Australia has a lot of stranded gas and this provides a means of developing it. Although the Prelude FLNG project is over 200km from shore, Shell is continuing its relationships with the Kimberley and Darwin communities. In addition to a comprehensive stakeholder engagement program, Shell is working with local social investment partners in Broome, East and West Kimberley and the Northern Territory. Our social investment partnerships are focused on education, including projects, which encourage an interest in science and technology.

SEPTEMBER 2012  DIGGING & DRILLING MAGAZINE  15


r My Africa: Kenya POSTCARD PROJECT»

bulk carrier Camellia

Project: Pilbara Region: North West (Port Hedland) Operator: BHP Billiton

The bulk carrier Camellia is loaded with iron ore 18  DIGGING & DRILLING MAGAZINE  JULY 2012


JULY 2012  DIGGING & DRILLING MAGAZINE  19


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2 Compass Road, Jandakot Airport Western Australia


FEATURE ARTICLEÂť

A worker shovels iron ore on a hopper car at Yingkou port, one of China’s biggest ports for importing the commodity, in Liaoning province.

ANZ launches demand-driven China commodity index

Australia and New Zealand Banking Group has launched an index for clients to track Chinese commodities demand


ANZ launches demand-driven China commodity index

Australia and New Zealand Banking Group has launched an index for clients to track Chinese commodities demand

A

ustralia and New Zealand Banking Group has launched an index for clients to track Chinese commodities demand, which it said was a better gauge of global commodity markets than other indices that were too focused on Western markets

years, but traditional indices haven’t, so we wanted to get ahead of that,” Pervan said on Thursday. ANZ said its index so far appeared to be a good predictor of China’s Producer Price Index and industrial production, leading those by one to two months, and was the only global commodity index to correctly track a fall in China’s Purchasing Manager’s Index in the fourth quarter of 2011.

The ANZ index tracks Chinese domestic prices of 22 commodities, including iron ore, coal and rice, which are not included in other international commodities indices, and are weighted on consumption “We’re finding that the index, not surprisingly, tracks nicely rather than production. the inflation-based indicators ANZ’s head of global head of in China, particularly the commodity research, Mark Producer Price Index,” Pervan Pervan, said other indices told reporters on a conference failed to reflect the fact that call. China now makes up about half of global consumption of The widely followed Thomson key products and left out key Reuters-Jefferies CRB index commodities such as iron ore, <.CRB> is skewed towards U.S. which now have market-based markets, driven by energy and soft commodities with no iron prices. ore and coal. In contrast, ANZ’s “The commodities market has China Commodity Index gives changed so much in the last 10 thermal coal a 16.6 percent

22  DIGGING & DRILLING MAGAZINE  SEPTEMBER 2012

weighting, iron ore 11.2 percent and coking coal a 9.8 percent weighting. The index was possible now that iron ore and coal were traded more on market-based pricing, rather than annual pricing, Pervan said, adding it was unlikely that iron ore producers would revert to annual pricing, as urged by some steel mills. “They’re not prepared to move back,” Pervan said. He said he expected iron ore prices to remain around $135 to $140 a metric ton (1.1023 ton) in the short term, then move into the $140 to $150 range in the fourth quarter, based on a pick-up in Chinese demand, assuming lower interest rates and cuts in bank reserve requirements started to boost the economy.

Courtesy: Sonali Paul


ZIMBABWE GEARED FOR FRESH WAVE OF AUSTRALIAN MINING INVESTMENT

One of Africa’s most promising mineral states – Zimbabwe has urged Australian resources houses to lift their exposure to the southern African province where only 40 of its known 60 mineral commodities have been commercially exploited.

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ZIMBABWE GEARED FOR FRESH WAVE

O

ne of Africa’s most promising mineral states “Yet despite our huge mineral endowment, upstream – Zimbabwe - has urged Australian resources and downstream exploitation has been limited,” he houses to lift their exposure to the southern said. African province where only 40 of its known 60 mineral commodities have been commercially “Of our more than 4,000 recorded gold deposits, nearly all of them are located on ancient workings, exploited. revealing inherent investment opportunities The opportunity for Australia also rests with their in vastly under-explored areas away from the potential to add to the upstream and downstream ancient workings – even though more than 90% processing sectors in Zimbabwe – and in key areas of Zimbabwe’s gold deposits are in greenstone belts for which Australian miners and resource investors associated with some of the richest gold mines in are renowned - such as coal, gold, iron ore and the world. uranium. “If I look at Australia-Zimbabwe commodity Speaking in Perth today on the second day of comparisons, Zimbabwe hosts large reserves of the three day 2012 Paydirt Africa Downunder thermal and coking coal with some 29 locations conference, Zimbabwe’s Deputy Mines and hosting estimated resources of more than 12 billion Development Minister, the Hon. Gift Chimanikire, tonnes of coal – yet more require capitalisation and said the Zimbabwean economy was now recovering therefore need a partner. from its eight year slump to 2008 and mining was now a key plank in driving the country’s 9.3% “We also have huge iron ore deposits, like Australia, with the lead deposits estimated to host more than growth last year. 30 billion tonnes of iron reserves – yet most await Mining contributed 13% in 2011 to Zimbabwe’s GDP full exploitation. and more than 60% of its total earnings. “And in uranium, we have done some minor work in “For Australian investors, they need only look at the Zambezi Valley and that at a time of low prices mining’s 25.8% growth in 2011 and an anticipated so the global market presents good opportunity for growth in the sector this calendar year of 16.7%,” uranium upside.” Mr Chimanikire said.

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OF AUSTRALIAN MINING INVESTMENT The Minister said the Government was prepared to enter into joint venture partnerships with Australian investors and had an open door policy to such investment. â&#x20AC;&#x153;While the Government has provisions for local empowerment as part of any new investment deals struck, it is in an environment of ensuring community participation in the exploitation of our natural resources. We provide for mining companions to have the right to market their mineral directly, and there is no restriction on the amount of foreign

currency that can be brought into Zimbabwe to crystallise new resources investment.â&#x20AC;? Investments of more than US$100 million would qualify for special mining leases. Of particular need for Australian investment were the mining operations in Zimbabwe suffering from under-capitalisation, with most mines in need of such financial injection operating only slightly above 50% capacity.


FEATURE ARTICLE »

The Hon. Kevin Rudd

CHINESE ECONOMIC GROWTH

AND IMPLICATIONS FOR THE AUSTRALIAN ECONOMY


FEATURE ARTICLE» Brenthurst Foundation entitled over 80% of the increase in global

Address to the Africa Down Under Conference “Fuelling the Dragon” is a timely demand for nearly all metal and and substantive contribution to energy products” Perth 30 August 2012 The core question confronting treasuries and finance ministries around the world at present is what is the near, medium and long term prospects for the Chinese economy. This has profound implications for Australia. It has profound implications for Africa and for Asia. And in the midst of a continuing global financial and economic crisis, it has profound implications for the world. The problem we all face, including those of us who have studied China closely for most of our professional lives, is that making robust predictions about the Chinese economy is difficult at the best of times. When we add to that the complexity arising from this year being a year of significant political change in the Chinese leadership – by convention now a once every decade event. And on top of that, the further complexity arising from the recognition by the Chinese themselves in the most recent five year plan (the 12th five year plan released in 2010) that the Chinese growth model must change. For these reasons the release yesterday of the joint publication by the Australian Strategic Policy Institute and South Africa’s

a critical global debate.

Furthermore quoting professor Garnaut, the paper notes:

And in my remarks today I intend to draw extensively from this paper before offering some “In the absence in prodigious tentative conclusions of my own. growth in Chinese demand for most energy and metallic mineral commodities, reasonable growth China’s economic in the developing world beyond development so far China would have merely offset the weakness in growth in We are all familiar with China’s developed countries and prices economic record so far. would have languished below trend”. In the decades since China undertook fundamental market reforms in its economy, it has Significance for transformed itself from being Australia a backward economy closed off from the rest of the world to The paper also draws our attention an increasingly open economy, to the fact that Australia’s terms fully integrated with the global of trade have not been as high for economy and now the world’s more than a century – 65 per cent second largest after the United above the 20th century average States. level and 85 per cent above the 20th century trend level. By any historical measure, this has been an extraordinary Quoting Findlay, the paper states achievement. that Australian GDP in nominal terms is about 13 per cent higher China is not only the world’s than it would have been without second largest economy, but is these relative price changes. on track to become the world’s largest economy either in this Resources currently make up 57 decade or the next. per cent of exports, rising from 41 per cent in 2005. China is now the third largest economy in terms of international And this in turn has been driven trade. by iron ore and metallurgical coal – a 500 per cent increase in iron China’s per capita income in PPP ore export volume since 2005 as terms has now risen to $7,640 US. well as significant recent growth in coal exports. As of 2010 in Shanghai double that at $13,000 US. Of course this is not the total Between 2005 and 2010, as the paper notes “China accounted for

picture of the Australia-China resources trade, but it is a significant part of it.

SEPTEMBER JULY 2012  DIGGING & DRILLING MAGAZINE  29


FEATURE ARTICLE »

CHINESE ECONOMIC GROWTH AND... Address to the Africa Down Under Conference Perth 30 August 2012

And that part of it is primarily driven by the demands of China’s steel industry.

advantaged by geographical proximity relative to both Latin America and Africa.

But the core question for both the The Importance of Australian and global resources China’s Steel Industry energy sectors is how sustainable is China’s medium to long-term In an important part of the paper, demand for steel in the context we are told that China’s steel of its own future economic production over the last decade development profile. was used in the following ways: • Construction (50-60 percent); • Machinery (12-18 per cent); • Automobiles (5-6 per cent); and • Home appliances (2 per cent); China’s own efforts to meet its prodigious domestic demands have been hampered by the low quality of its iron ore resources and by their geographical separation from the principal production centres in eastern China. Geographical separation has also been a factor for the Chinese domestic coal industry. In both cases, Chinese for much of the last decade have reached the rational conclusion that it is in their overall economic interests to meet this demand through large-scale imports – initially from Australia but also increasingly from Latin America and Africa.

China’s Economic Development Model According to the ASPI-Brendthurst paper, and quoting the recent work by Song from Peking University, China has now entered “the mid-phase of industrialisation which is more energy and minerals intensive than the more labour intensive early phase”.

energy consumption will continue to increase, climate change and other considerations will cause the rate of growth in energy consumption to diminish and (consistent with Chinese policy directions) reduce the emissions intensity of Chinese production. Specifically, Garnaut is quoted as stating “resource intensity of production will decline rather more rapidly than seems to be the expectation, and more rapidly still as growth and the investment share of output fall from about 2015”. In a further analytical contribution to this debate, the paper also draws on historical patterns of resource usage in other global economies based on their respective historical experiences.

The paper then outlines two The paper observes that conflicting analyses of where “historical patterns suggest that China’s resource consumption will consumption of metals typically go to in the future. grows with income until income reaches about $15,000 - 20,000 US One possibility, based on the per capita in PPP adjusted dollars” trajectory that we have seen in Japanese economic history in Based on that logic, and based recent decades, concludes that on the per capita income figures China will not reach peak steel I referred to earlier, this would consumption per capita until place China at the mid-phase of 2024: in quantitative terms china’s current steel output is 600 million tones and that by 2024 it will surpass 1 billion tones.

Australians need to remind themselves that they are not the only potential significant sources The paper then offers a contrasting of supply to the Chinese market, position by Professor Garnaut although we are significantly who argues that while absolute 30  DIGGING & DRILLING MAGAZINE  JULY 2012 2012 SEPTEMBER

its industrialisation process. The key question then is that if this is the mid-phase, then what does the final phase look like in terms of absolute demand for resources and energy and its relative growth over the next


... IMPLICATIONS FOR THE AUSTRALIAN ECONOMY decade. This is where the degree of complexity in the analysis becomes acute. Many factors are encouraging including the analysis of the massive projected increase in the size of China’s middle class, rising to 1.1 billion by 2030. Leaving aside major problems such as traffic management and environmental pollution, China’s automobile penetration ratio is only five per cent of that of the United States. The paper concludes that China is projected to have nearly 20 times as many motor vehicles in 2030 as it had in 2002 which is a comparable level of vehicle ownership to that of Japan in the early 1970s. With the paper further noting that “China’s automotive manufacturing sector is the largest in the world and accounts for approximately 7% of GDP and rising.” Nonetheless the steel componentry in car manufacturing is likely to halve.

lived in Chinese cities than in the countryside.

• A million kilometres of new roads,

Although the paper predicts the high rate of urbanisation will now diminish, the infrastructure demands from China’s megacities and so called second-tier cities (that is the 100 plus cities that now have populations in excess of 5 million) will continue to generate significant demand for energy and resources.

• 28,000 kilometres of new metrorail,

Although the paper also wisely cautions us that one of the strengths and weaknesses of China’s national planning system, combined with its traditional approach to infrastructureintensive stimulus in times of global and national economic downturn, is that there has been excessive anticipatory investment in the Chinese infrastructure sector, thereby potentially reducing future investment demand. Nonetheless in a recent survey by Paul Braddick, the following anecdotals continue to blow our minds away as he describes the urbanisation‐related drivers of Chinese resource demand through until 2025;

• 170 mass transit systems (twice the number in all of Europe), • 1.6 - 1.9 billion square metres of new floor space as part of 5 million new buildings, • 50,000 new skyscrapers (the equivalent of 2 Chicagos per year), • 97 new airports, • And, the fuel the above, 1000 megawatts of additional coal fired generating capacity to be commissioned every week. • Combined with the new wind power turbine being built every hour and a half. As I said, this is enough to still take everyone’s breath away. Nonetheless the key question remains as to what the relative degree of what Chinese growth is likely to be into the medium to long term future.

All this leaves us however with a core question unanswered (that is whether we will see a relative A further positive factor in terms • 350 million more people to decline in the relative Chinese of Chinese overall resource move to the cities, demand growth for resources demand is the processes of starting in the middle of this • 221 Chinese cities of greater Chinese urbanisation. decade or the middle of the next than a million people (compared decade). For the first time in Chinese with the 35 in all of Europe today), history, in 2011, more people

JULY 2012  DIGGING & DRILLING MAGAZINE  31 SEPTEMBER


FEATURE ARTICLE »

CHINESE ECONOMIC GROWTH AND... Address to the Africa Down Under Conference Perth 30 August 2012

On this, the ASPI-Brenthurst following core ingredients; paper carefully avoids a definitive • Labour intensive, low wage conclusion. manufacturing exports; Nonetheless, they draw our attention to an important recent • Funded by high levels of national “stress test” by the Raw Materials savings and investment; and Group for what the Group • Replicating the early economic describes as “an almost worse development successes of the case growth scenario” for China. so called newly industrialised Their conclusion is that Chinese economies (the East Asian Tigers) iron‐ore demand will continue to of the 1970s and 80s. grow by 3.8 percent a year.

Proposed Changes to the Model – The 12th 5 year plan

Of course a core driver in this model has been export driven growth, relying upon China’s global competitiveness and open access to global markets – all enhanced by China’s accession to the WTO in 2001.

During 2011, I spoke extensively around Australia on the strategic significance of the proposed China’s new model is radically changes to the Chinese economic different; growth model outlined in the • Less reliance on exports; 12th five year plan. • More reliance on high level of For anyone who’s interested, domestic consumption; these can be found on my website with associated power point • In turn fuelled by lower levels presentations. of savings, greater government investment in social safety nets to I call this series China 2.0. encourage less private saving, and The Australian business community driven by a burgeoning Chinese needs to be fully appreciative of middle class moving to China’s the deep processes of economic rapidly growing cities. transformation which the Chinese government has itself outlined in this critical document. China has recognised that its existing growth model is finite. That model has been based on the

In this economic model, the Chinse recognise that the domestic market is critical, including the rapid expansion of China’s services industries, consistent with the pattern of economic development of other middle-

32  DIGGING & DRILLING MAGAZINE  SEPTEMBER 2012

income economies in economic history. Encouraging China’s decision to transform its economic model has been China’s increasing wariness as to the long term reliability and accessibility of global markets in a period of sustained global economic necessity. Furthermore, China is also acutely conscious that rising standards of living are simultaneously compromising its traditional global competitiveness resting on low-wage levels and labourintensive production. The key question for Australia and the world is whether China’s political economy will enable this profound economic transformation to occur successfully without any significant political dislocation occurring domestically. And furthermore, what the successful implementation of such a transformation will mean in terms of China’s future resources and energy demand. These are profound questions for us all. Based on what we know so far, let me hazard some tentative conclusions of my own. First, while recent economic indicators suggest some softening in Chinese demand, China’s actual economic growth performance in


... IMPLICATIONS FOR THE AUSTRALIAN ECONOMY the year 2012 is still likely to come in north of eight percent (that is somewhat ahead of market expectations).

their bilateral FTA to underpin the broadening of our economic engagement for the future. Seventh, given the critical importance of investment flows in underpinning a material economic relationship, Australia should maintain its current open and non-discriminatory investment policies towards China.

Second, China’s leadership transition will turn out to be relatively smooth later this year and the new leadership under President Xi Jinping will continue to embrace the economic transformation project outlined And consistent with FIRB processes above. consider each application on its Third, given this, on balance I am merits, rather than yield to the cautiously optimistic about where politically driven populism that this will leave China’s demand we have seen recently from Mr curve for energy and resources Abbott and from his political and out to 2025. intellectual soul mate Barnaby Joyce. Fourth, what this means in the interim, however, is that I am an optimist for the future of the Australian economy and the Chinese economy. Australian business begin to need to embrace fully the I am an optimist in terms of future dimensions of the diversification of the Australia-China economy of the Chinese economy and our (noting that we are currently engagement with it to one which China’s largest single foreign is not exclusively based on the investment destination). resources and energy sector. Just as I am an optimist for how Fifth, consistent with what I Australia and Africa can work said in the China 2.0 series last together productively in securing year, this means great future a strong future for our respective opportunities also in agri-business, energy and resources sector. new materials manufacturing, the financial services, health services, education services, construction, engineering and design services, environmental services and tourism. Sixth, this means that Australia and China should rapidly conclude

SEPTEMBER 2012  DIGGING & DRILLING MAGAZINE  33


SUB FEATURE »

Runge: Rigorous Discipline in Mining Economics Key to Success

With expertise across a range of mining disciplines, Runge’s approach to the business of mining is strongly grounded in economic principles and delivering mine planning solutions that are tightly coupled with technological support and training. Runge currently operates 21 offices in 12 countries throughout the world.

E

fficiency of production will become the watchword of tomorrow’s mining successes, according to Runge Limited, mining’s trusted technical experts.

But it is a message that may have been lost in the boom era. Philippe Baudry, General Manager – Asia and Russia Operations for Runge Limited, said “as we see demand for mined resources drop, we will see a far greater importance placed upon This is the company’s strong message to mining maximising margins on projects.” “We must draw investors that they will deliver at today’s Discover a tighter focus on efficiency,” he said. Mongolia International Mining Investors Forum. Runge Limited has been sponsoring the event for The Discover Mongolia Forum represents an excellent opportunity to deliver the Runge Limited the last four years. message to Mongolia and globally. “We’re pleased Dr Ian Runge, who founded Runge Limited in the to be able to sponsor such an exciting and forward late 70s, and will speak at the Forum, said “in this thinking event,” said Mr Baudry. changed world, the winners will be the ones who understand the economics of their mine and can “Runge Limited has been helping new and existing adapt and change to maintain and improve these projects deliver on their potential for 35 years now. And every year this Forum adds more to mining’s economics.” global knowledge community,” he said. It is not a new message from Dr Runge, who has championed rigour and discipline in mining economics for all his professional life, nor is it new from the company he founded, which has delivered certainty to mining companies and investors for 35 years. Courtesy: Runge

34  DIGGING & DRILLING MAGAZINE  SEPTMBER 2012


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Digging & Drilling - Issue 2  

D&D Australasia print and on-line magazine is a comprehensive Australasian, 'Oil, Gas & Mining' publication featuring articles of interest t...

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