Melbourne Mining Club Being lucky is not enough/media/bhp/documents/...2 Includes direct contribution of $85 billion and indirect contribution of $117 billion; includes oil and gas

Melbourne Mining Club Being lucky is not enough

Don Argus, Chairman22 October 2009

Melbourne Mining Club, 22 October 2009 Slide 2

Economic Activity Contracted in All Countries

Global GDP Growth(%, Quarter-Over-Quarter, Annualised)

2005 2006 2007 2008 2009

Source: IMF World Economic Outlook Update October 2009.

(5)

(3)

(1)

1

3

5

7

9

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

WorldAdvanced EconomiesEmerging and Developing Economies


Natural resources have and will continue to be central to Australia’s growth

1 Reference year for chain volume measures has been taken as 2007-082 Includes direct contribution of $85 billion and indirect contribution of $117 billion; includes oil and gas3 Compounding annual growth rate

SOURCE: Australian Bureau of Statistics 5204.0—Australian System of National Accounts, 2007–08, Table Gross Value Added (GVA) by Industry Australian Bureau of Statistics 5209.0—Australian National Accounts

Input-Output Tables 1998–99; team analysis

18

82All other

sectors

Mining2

All other sectors

4.0%

2.4%

Mining1

100% = 1,095 Billion

Australia’s GDPPercent1

Australia’s GDP growth 2006-09; Percent3


Disputes double under new IR laws

Employers warn of rising costs20 October 2009

Australia is facing a number of important issues right now

Source: Press and web search.

3 August 2009

Economic stimulus packages6 June 2009

30 June 2009

Henry Taxation Review

Carbon Pollution Reduction Scheme (CPRS) debate20 October 2009

5 August 2009

Renewable Energy Targets


Size of stimulus package depends on

– Actual and anticipated severity of recession

– Size of automatic stabilizers

– Degree of dependence on internal versus external demand

– Public debt level

– Political will

> 3%

1% - 3%

<1%

4.9%

2.8%

0.6%

6.3%

9.2%1.5%

1.3% 2.9%

4.5%

3.9%

1.2%

1.5%

1.4%3.5%

1.9%

4.2% 2.2%0.3%

4.7%

Size of economic stimuli varies greatly by country– OECD average: 3.6% of GDP

(a) Includes only new measures announced and not pre-budgeted expenditure.Source: IMF (March 2009) -The State of Public Finances; IMF (March 2009) – Staff Note for Group of Twenty.

IMF ESTIMATES (March ‘09)

Total size of discretionary fiscal stimulus measures announced(a)

% of GDP, G-20 countries (~80% of global GDP)

G-20 PPP-GDPweighted average

Overall: 3.6%

EU G-20: 1.9%


41.5

17.5

15.2

10.4

4.5

89.5

0

20

40

60

80

100

EconomicStimulus

1

State Govt

Support

EconomicStimulus

2

AdditionalInfra-

structure

CleanEnergyInitiative

Total

Government spending

Federal Government GFC responseAnnounced in the last 12 months, A$ Billion

Australia’s debt obligations will riseNet debt as proportion of GDP, Percent

Source: Infrastructure Partnerships Australia, ‘Financing Infrastructure in the Global Financial Crisis’, March 2009; Australian Treasury, ‘Australia’s response to the global financial crisis’, Dr Steven Kennedy; Federal Budget, 2009-10, Overview; IMF World Economic Outlook, October, 2007 and July 2009

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014

Pre-crisis estimate

Post-crisis estimate

Melbourne Mining Club Being lucky is not enoughDon Argus, Chairman22 October 2009


Australia has abundant natural resources

Source: OECD Economic Survey of Australia 2006, table 1.1; BP Statistical Review of World Energy 2009.

Australia’s ranking of natural resource reserves by size

1Bauxite

1Nickel

6Coal

2Gold

3Iron Ore

1Uranium

20Oil and gas


The natural resources sector is now our largest source of export revenuesTotal export revenues(a)

(A$bn)

118

746358412931

93898575676266

0

3060

90120

150

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

MiningManufacturing

(b)

(a) Free on-board value.(b) Includes oil and gas.Source: Australian Bureau of Statistics; 8417.0 Mining Indicators (released Aug 2009); 8229.0 Manufacturing Indicators (released Aug 2009); 5368.0 International Trade in Goods and Services (released Aug 2009).

Difference between mining(b) and manufacturing export revenues(A$bn)

26

(15)(23)

(17)(26)

(33)(35)(50)

(30)

(10)

10

30

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009

21% 20% 25% 29% 29% 32% 42%

Mining proportion of total Australian exports

%


Future demand for our minerals is strong

SOURCE: Global Insight; IMF; OECD; IISI; USGS; JFK

Crude steel intensityKg/capita (solid lines)

China/India steel intensity

Other steel intensity

GDP at 2000 PPP/capitaUS$/capita

0

200

400

600

800

1000

1200

0 5000 10000 15000 20000 25000 30000 35000 40000

India

China China and India account for 38% of world’s population

US (1900–2006)

Japan (1955–2006)

Taiwan (1970–2006)South Korea (1970–2006)


Ensuring international competitiveness

1. Funding for large scale growth opportunities

2. Flexible and responsive labour market

3. Supportive policy and regulatory environment

4. Tax system






4. Tax system


Australian corporate bond market is small compared with US and UK

Debt Capital Market (DCM)(a) corporate deals as proportion of GDPPercent of real GDP (2005 base year)

Source: Dealogic; Global Insight (World Market Monitor)

0

1.0

2.0

3.0

4.0

5.0

6.0

1994 1996 1998 2000 2002 2004 2006 2008 2010

AustraliaAustraliaaverage 1.5%

United KingdomUnited States

US and UKaverage 3.3%

(a) Includes corporate bond and other notes, that is, excludes asset and mortgage backed securities; for non-bank, non-government deals


11

52

89

48

0

20

40

60

80

100

1999 2008

Foreign direct investment is a crucial growth enabler

37 40 45 4963

8192

0

20

40

60

80

100

2001 2002 2003 2004 2005 2006 2007

+17% p.a.

FDI in Australian mining (A$bn)

Canada case example(Controlling ownership of mining assets, %)

Foreignowned

Locallyowned

C$131bC$67b

(a) 2008 figure extrapolated from published 2006 data to include Alcan acquisition.Source: ABS Catalogue 5352 Supplementary Statistics 2007 (released on Jan 30 2009), table 15a; Statistics Canada; Corporations Returns Act CANSIM 179-0004.

(a)







4. Tax system


Mining jobs are of high value to the economy

56.7

(30)

(15)

0

15

30

45

60

Mining Manufacturing

(17.2)

Gross value added to the economy per employee(A$ thousand, FY2007)

Jobs created, 2001–07Thousands

Average annual income per employee(A$ Thousands, FY2006)

(a) Manufacturing subsectors per the Australian Bureau of Statistics include—food, beverage and tobacco; textile, clothing and footwear; wood and paper products; printing, publishing and recorded media; petroleum, coal, chemical, etc; non-metallic mineral products; metal products; machinery and equipment; and other manufacturing.

Source: Australian Bureau of Statistics; 5204.0—Australian System of National Accounts, 2006–07; 6291.0—Labour Force, Australia; Aug 2007, 8415.0 Mining Operations; Australia, 2005–06, 8221.0 Manufacturing Industry, Australia, 2005–06

515.5

93.2

0

110

220

330

440

550

Mining Manufacturing

47.9

85.4

0

20

40

60

80

100

Mining Manufacturing(a) (a) (a)


Canada46

India69

31 Canada

UK25

Australia’s labour market is less flexible than that of many other countries

(a) Countries’ labour-employer relations were scored on a scale of 1 to 7 (where 1 = relations are generally confrontational and 7 = relations are generally cooperative), then ranked in descending order of score (b) Countries’ flexibility of wage determination were scored on a scale of 1 to 7 (where 1 = wages are set by a centralised bargaining process and 7 = wages are up to each individual company), then ranked in

descending order of score(c) Countries’ non-wage labour costs were estimated by adding the social security payments and payroll taxes associated with hiring an employee in fiscal year 2005 and expressing this sum as a percentage of the

worker’s salary, then ranked in ascending order of quotient. Note, this data from 2008-09 report.Source: Source: World Economic Forum, The Global Competitiveness Report, 2008-09 and 2009-10.

Japan10

US26

Brazil87

Cooperation in labour- employer relations(a)

(Survey rank)

Australia43

China60

Mexico75

Korea131

South Africa121

Germany24

India40

Non-wage labour costs(c)

(Survey rank)

South Africa4

US26

UK35

Australia85

Mexico89

Germany80

China126

Brazil123

46 Japan

Korea46

Flexibility in wage determination(b)

(Survey rank)

Japan11

US14

UK18

Canada29

Brazil110Australia90

China53

Mexico88

38 Korea

South Africa123Germany130

India44

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4. Tax system


Increasing legislation and regulation increases complexity of doing business in Australia

Source: Banks Regulation Taskforce 2006, citing BCA submission; BCA ‘Towards a seamless economy’, 2008

60 Federal regulators and national standards bodies

40 Ministerial councils

1,300 Regulators across all 3 levels of government

35 Areas of state/state overlap in regulation

18 Areas of federal/state overlap in regulation

28 Taxes administered by more than 1 government

56 Business taxes administered in Australia

Total pages of legislation passed

0

10,000

20,000

30,000

40,000

50,000

60,000

1900s 1920s 1940s 1960s 1980s 2000s






a. Environmental policy

4. Tax system


Carbon prices could be volatile under the CPRS due to the variability of carbon demand

0

100

200

300

400

500

600

700

2010-2011projectedemissions

Free permits 2010-2011projected

emissions notyet covered by

permits

2010-2011reduction

target

Permitsavailable

Carbon emissions/permitsMillion tonnes

These emissions make up the demand for permits. Demand can vary widely depending on

external factors; e.g. cold winter increases energy industry’s demand for permits

These emissions make up the demand for permits. Demand can vary widely depending on

external factors; e.g. cold winter increases energy industry’s demand for permits

Excess demand for

permitsUnpredictable demand is likely to cause price volatility

Source: Carbon Pollution Reduction Scheme White Paper


Cost per tonne concentrate(a)

(Indexed, 2005 = 100%)

Carbon, energy and labour costs will account for almost 75% of future cost base

(a) Open cast mine.(b) Assumes carbon cost of 20 Euro/tonne.Source: Infomine; The Economist Intelligence Unit; International Energy Agency.

100

122

151

198

0

20

40

60

80

100

120

140

160

180

200

220

2005 2010 2015 2020

CO

Energy

Labour

Other

2

Non-energy

(b)






b. Access regulation

4. Tax system


Our regulatory environment deters investment in infrastructure

Source: BHP Billiton analysis; Jerry Hausman analysis; Economic literature.

Access regulation reduces the attractiveness of investment

As access contracts are shorter than asset life, the access seeker has an option not to renew access, and so is insured at the expense of the investor

Seek access – enjoy positive returns

Do not seek access

Outlook at the expiry of access contract

Good

Bad

Seek continued access – keep profiting

Do not renew –avoid losses

Outlook at the start

of access contract

Good

Bad

Response from 3rd partyMarket outlook


Asian players are completing projects at dramatically lower cost and shorter timeframes

500–1,000Asia

Developedmarket 1,450

33–65%

Asia

Developedmarket

Average investment(US$/kW, US$m/kbpd)

Average timeline (Months)

Coa

l-fire

d po

wer

pla

ntPe

trol

eum

refin

ery

Source: Company websites; Industry interviews; Internal analysis.

20–50%

30–36

45–60

8–15

15–60%

18–20

30–48

10–50%

54–60






4. Tax system


15.8

14.0

11.811.2

10.710.5

8.76.4

4.0

2.9

2.0

1.2

0.50.2

0.1

Factors perceived to be the most problematic for doing business in Australia

Restrictive labour regulations

Access to financing

Tax rates

Tax regulations

Inefficient government bureaucracy

Inadequate supply of infrastructure

Inadequately educated workforce

Policy instability

Inflation

Foreign currency regulations

Government instability/coups

Poor public health

Crime and theft

Corruption

From a list of 16 factors, respondents were asked to select the five most problematic factors for doing business in their country and to rank them between 1 (most problematic) and 5. The bars in the figure show the responses weighted according to their rankings.Source: The World Economic Forum ‘The Global Competitiveness Report 2009-2010.

Survey of the most problematic factors for doing business in Australia(% of responses)

Poor work ethic in national labor force


2933

2015

14

2008

77 8

18

9

2015

1

2008

3088

2015

2

2008

120 44

1330

2015

1

2008

A$18b incremental export revenue benefit by holding share in 4 minerals to China & India

Seaborne iron ore(c) Alumina Coking coal(b) Copper(c)

A$18b in export

revenue(a)

Australia’s ‘fair share’ of futureChinese and Indian demand

(a) Assumes current prices, future share based on share of current Chinese imports only.(b) Australia’s share calculation based on global share of total coal (thermal and coking) production.(c) Chinese demand only.Source: Internal analysis; EIA; USGS; Metal Bulletin; LME; SBB; Platts; UN Comtrade; ABARE

Chinese and Indian demand by mineral(A$bn)


Other economic and social benefits will be created in Australia

Estimated Chinese iron ore demand(Million tonnes)

Capturing 33% (Australia’s current share of Chinese iron ore imports) of forecasted growth would have significant benefits(a)

Additional annual export revenue A$14b

Additional annual GDP contribution A$34b

Additional annual tax revenue A$8b

Additional jobs created 35,000

2008

ForecastGrowth

2015

343 168

383

894

(a) At current prices.Source: Internal analysis; EIA; USGS; ABS Input-Output multiplier table, employment multiplier table, 5204.0 National Accounts; Federal Budget papers; Oz Forex; ABARE; UN Comtrade; Team analysis.

Australia’s ‘fair share’ of future China demand


Melbourne Mining Club Being lucky is not enough

Don Argus, Chairman22 October 2009

Documents

Melbourne Mining Club Being lucky is not enough/media/bhp/documents/...2 Includes direct contribution of $85 billion and indirect contribution of $117 billion; includes oil and gas