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Josh Frydenberg - Liberal for Kooyong
  
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The Future and Growth of Mineral Exports, and the Policies to Support Mining Jobs and a Strong Economy

Date: Friday, 13 May 2016 4:02 PM
Location: NSW Mining Industry and Suppliers Conference, Sydney

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Introductory remarks

I’d like to acknowledge my fellow speakers Stephen Galilee, CEO, NSW Minerals Council; and Dr Brian Fisher, Managing Director, BAEconomics.

It’s great to join you for your annual conference, my first since being appointed Minister for Resources, Energy and Northern Australia.

More than seven months into this role, I have been highlighting the work your members do to support the Australian economy and to support jobs.

The mining industry and commodity exports provide an economic lifeline for our regions and the rest of Australia.

And NSW has a special place in Australia’s commodity export trade.

Indeed, New South Wales—from the Hunter, through the Central West, to the Illawarra—has pride of place in Australian mining history.

Australia’s first commodity export started here in this state.

It’s been more than 200 years now since that happened—since the first shipment of coal left Newcastle.

Today, Newcastle boasts the world’s largest coal export terminal, delivering much-needed jobs and revenue to the state’s economy.

But NSW’s pioneering influence on Australia’s mining industry isn’t only about coal.

Since Edward Hargraves’ discovery of a grain of gold in a billabong near Bathurst triggered the first gold rush in Australia in 1851, Australia has never looked back.

Your members are the ones carrying on this rich mining tradition in the 21st century and making a valuable contribution to the economies of NSW and Australia.

Knowing there are people like you committed to the industry’s success reinforces the great sense of optimism I have about the future of Australia’s mining industry.

Today, I’d like to speak to you about

·        the current state of the industry—the opportunities, the challenges and the benefits flowing to our economy

·        the Australian Government’s policy approach to supporting the industry and what I believe the future holds for it.

Mining’s contribution

The mining sector is Australia’s second largest industry after the financial services sector.

While the investment phase of the boom is subsiding, mining now represents over 9 per cent of the economy, reflecting the increased importance and size of the industry.

Over the past decade, our coal export volumes have doubled and our iron ore export volumes have tripled.

We are the number one exporter of iron ore in the world, the number one exporter of coal in the world, the number one exporter by 2020 of LNG in the world.

In addition, we have the largest known reserves of uranium in the world and are in the world’s top five for deposits of copper, gold, bauxite, lead, zinc, nickel and lithium.

The resources and energy sectors also provide direct employment for some 300,000 Australians.  More specifically, a NSW Minerals Council survey shows your industry creates over 21,000 direct jobs in NSW and pays $2.7 billion in wages and salaries. In addition, it indirectly supports over 114,000 jobs.

Despite recent reductions, the mining workforce is still more than twice the size it was before the mining boom.

On average, miners are amongst the highest paid and most skilled of any industry in the country.

The sector employs many indigenous Australians and gives many young Australians the chance to undertake an apprenticeship.

On the whole, mining contributes a total of nearly $25 billion to NSW’s Gross State Product and represents 4.8 per cent of Gross Regional Product.

As you already know, coal production is the predominant mining activity in NSW, with the state exporting almost half of Australia’s black coal by volume.

This major economic activity is important not only as a source of employment, but also a source of significant revenue for the NSW Government.

In 2014–2015 royalties, duties and taxes paid to the NSW Government totalled $1.3 billion—money used to deliver services and build roads, schools, hospitals, and other infrastructure.

There are also significant flow-on benefits from mining given the sector is a major user of Australian goods and services.

The Minerals Council survey also shows NSW mining companies purchased goods and services from over 7,600 local businesses.

That is a very large number of local businesses benefitting from the industry.

In addition, we have the $90 billion mining, equipment, technology and services sector, known as METS, which is truly a world leader. In fact, 60 per cent of the world’s mining related software is written in Australia.

Challenges and Future Prospects

Of course, there are challenging market conditions facing the resources industry.

Like you, we continue to monitor the volatility on world commodity markets because any impacts extend to government finances as well.

We’ve come to the end of a decade long super cycle marked by record prices as a result of an unprecedented ramp up in demand. We’ve returned to more normal, cyclical patterns of demand.

Unfortunately these developments have resulted in job losses, particularly in resource-dependent towns and regions around the country.

These challenging market conditions are expected to continue for some time.

However, I’m confident that Australia is better placed than most other countries to ride out the current cyclical downturn and be ready for the next market upturn.

Our pre-eminence as a global resources and energy powerhouse is built on the Australian industry’s ability to innovate and adapt in the face of intense global competition and volatile prices.

An example of such innovation that will be well known here in NSW is Northparkes’ fully automated underground mining operations. The breakthrough, a world first, allows the mine to operate continuously 24/7, delivering optimal daily production at improved safety and reduced cost.

There are many firms that have been able to rapidly change their cost structure and achieve significant cost reductions over the course of a few years.

As the Chief Economist of my Department has noted in his March 2016 Resources and Energy Quarterly publication “the cost of producing thermal coal at some Australian operations halved between 2010 and 2015”. That is very impressive.

In some cases, declining prices are being partly offset by growing export volumes.

For instance, despite price falls of 43 per cent and 57 per cent, export earnings from coal and iron ore fell only 16 per cent between 2011–2012 and 2014–2015.

This reflects a 30 per cent increase in coal export volumes and a 60 per cent increase in iron ore export volumes, in addition to the impact of a lower Australian Dollar.

Gold producers have also benefitted from a lower dollar and rapidly rising gold prices, which are expected to drive higher export volumes and values over the short term.

Operations like Newcrest’s Cadia Valley Mine here in NSW are helping to boost gold production, which last year reached its highest level in twelve years.

On the whole, I believe the prospects for the Australian industry are strong.

Your businesses have the know-how to stay competitive in the face of difficult market conditions.

International demand for Australian resources remains robust, with demand projected to increase from markets close to Australia’s doorstep.

The economy of our biggest trading partner, China, continues to grow solidly.  Remarkably, each year the Chinese are adding an economy the size of Turkey.

For a country with such a large land mass and population, its rail system is one third of the size of that in the US and one sixth of that in the EU. That provides a lot of scope for Australia's iron ore and metallurgical coal.

When it comes to energy demand, China’s per capita consumption is still a third of that in the United States, an equation that the International Energy Agency (IEA) predicts will change dramatically as Chinese per capita energy use increases in the years ahead.

There are significant market prospects in India.  India’s economy grew by 7.3 per cent last year, with growth expected to remain at around 7.7 per cent over the medium term.

By 2040, the Indian economy will be five times bigger than it is today and demand for coal, gas, iron ore and renewables is expected to soar.

Consider this: today India has 18 per cent of the world’s population but represents only six per cent of global energy use. Astonishingly, on a per capita basis, it is lower than that in Africa.

Around 300 million Indians have little access to electricity or no access at all. But by 2022 Prime Minister Modi wants every Indian to be connected to the grid.

By 2020, India is forecast to overtake China, Japan and the EU to become the largest coal importer in the world as it seeks to almost treble coal fired power generation between now and 2040.

India’s consumption of steel is also comparatively low. On a per capita basis it’s a quarter of the global average and around one eighth of that in China. With over 300 million Indians expected to move to the cities by 2040, demand is soon to escalate.

This presents many opportunities for Australia’s resource industry, including NSW Mining Industry and Suppliers.

Government initiatives

The continued sustainable development of the nation’s mineral and energy resources is a priority for the Australian Government.

I was very happy to announce Australia’s commitment to implementing the Extractive Industries Transparency Initiative last week.

Known as EITI, the initiative consists of a global coalition of companies, civil society and governments from 51 countries working to improve transparency and accountability in the global resources sector.

EITI benefits Australian companies by providing greater transparency over the very significant taxes and royalties paid by the sector.  It also provides benefits to Australian companies operating in overseas jurisdictions through improved investment conditions.

I’m confident that through initiatives like the EITI, the public will gain a better understanding of the contribution made by the sector and thereby permit a more informed debate about the contribution of the sector.

More generally, we’ve backed this industry with policies that create an enabling business environment, including:

·        driving jobs and growth by cutting taxes

·        cutting red tape, including streamlining environmental approvals processes,

·        expanding export opportunities, and

·        supporting innovation.

Allow me to briefly remind you of the Government’s record in this area … we are at the beginning of an election campaign after all.

The carbon tax is gone; so is the mining tax.

We have cut more than $4 billion per annum in red tape.

The Government remains committed to progressing work to build a one-stop-shop for environmental assessment and approvals.

Creating a single assessment and approval process will remove duplication between the Australian and state and territory governments.

All states and territories have agreements with the Commonwealth about using their assessment procedures to assess projects under the Environmental Protection and Biodiversity Conservation or EPBC Act. 

But the legislation necessary to complete the delegation of approval decisions to the states and territories is being blocked by the Senate.

I know there’s strong, long-standing support from industry for these reforms.

This is of course a double dissolution election campaign brought about by the Senate blocking our important workplace relations reforms, which are absolutely vital to the mining sector.

If re-elected, the Government will restore the rule of law in the construction industry by re-establishing the Australian Building and Construction Commission.  Let’s not forget that industrial disputes increased by 34 per cent since the abolition of the Australian Building and Construction Commission and this increases costs and decreases productivity in the construction phase of major mining projects.

Tax

The Government outlined a 10-year Enterprise Tax Plan in this year’s budget to reduce the corporate tax rate to 25 per cent. The Turnbull Government knows that our corporate tax rates must be internationally competitive if we’re to build a strong new economy.

The Government has not made any further changes to the thin capitalisation rules. Australia already has some of the most robust thin capitalisation rules in the world.

We understand that reasonable debt deductions are vital for supporting large resources projects with long lead times, and that Australia is competing for international capital to fund these projects.

That doesn’t mean multinationals shouldn’t pay their fair share of tax.  

Last year, we secured passage of world leading multinational tax avoidance laws. The new powers and penalties in these laws are now in place.

The Budget announced new laws backed up by a taskforce of more than 1,000 specialist staff in the ATO, with the new laws including:

·        a new diverted profits tax, as implemented in the United Kingdom, that taxes profits multinationals have sought to shift offshore at a penalty rate of 40 per cent

·        strengthening protections for whistleblowers

·        And increasing penalties for multinationals that fail to meet their compliance and disclosure obligations to the ATO. 

In contrast, Labor’s approach to tax will reduce investment. 

Labor has announced changes to the thin capitalisation rules. The rules currently cap debt deductions for the Australian subsidiaries of multinationals at the higher of three tests. Labor would remove the safe harbour limit and the arms-length tests, leaving only the worldwide gearing limit test.

As a senior Treasury official said to Senate Estimates last year, Labor’s proposals would “increase the cost of capital” and would “reduce the attractiveness of that activity and therefore the likelihood that it would proceed”. Further, the Board of Taxation in a report prepared for the Government found that without the arms-length test many major resources projects would be at risk.

I also note that the MCA, the BCA and others have been highly critical of Labor’s approach, particularly coming at a time when Australia needs further investment, jobs and growth.

Exploring for the Future

Another policy priority for us is to help ensure continuity of the industry well into the future through programmes that support exploration.

Exploration is a necessity for the industry.

The story goes that Edward Hargraves’ gold discovery in NSW triggered the 1850s gold rushes was made after washing sand and gravel in a borrowed tin dish. Tin dishes may have been the tool of the trade then; perhaps even innovative at the time.

I don’t have to tell you that today’s exploration requires a lot more complex tools, a lot more effort, and a lot of money. The Government is committed to helping.

As announced in the Budget, the Government will provide $100 million to fund the Exploring for the Future programme.

This programme will deliver new pre-competitive geoscience to assist industry in better targeting areas likely to contain the next major oil, gas and mineral deposits.

The programme is designed to address Australia’s declining share of global exploration expenditure and to maintain a pipeline of resource development in this country. In doing so, the programme will provide us with new insights into the resource potential of much of Australia, of which around 80% remains underexplored.  It will also use innovative techniques to provide information on potential resources beneath the surface rocks and at greater depths than has previously been the case.

It will be delivered through Geoscience Australia over the next four years.

While the focus of the programme will be unexplored or underexplored areas in Northern Australia and parts of South Australia, NSW-based mining companies will be able to leverage the information generated to assess opportunities in other parts of the country.

The METSs sector will particularly benefit as the programme draws on private sector expertise in the undertaking of various data acquisition, analysis and delivery projects over the next four years.  This in turn will reduce the risk of further exploration and facilitate additional investment.  With the highest concentration of Australian METS companies located in NSW, this program will deliver real long-term benefits to the sector in this State.

Government provision of pre-competitive information has the potential to have a major multiplier effect, with estimates of returns in excess of $20 for every dollar invested.  An example of a previous success is the $3 million of work by Geoscience Australia in the Browse Basis in 1996 which facilitated the discovery of the Ichthys field and about $72 billion in export earnings over the next forty years.

The discovery of Olympic Dam, the world’s largest single uranium deposit, also benefited from pre-competitive information generated by the Government.

The Exploring for the Future program is in addition to the Australian Government’s Exploration Development Incentive for encouraging investment in greenfields mineral exploration in Australia.

This is another $100 million scheme, which was a Coalition election commitment in 2013 and which has been operating since 2014–15, which uses a refundable tax offset to help junior miners undertake greenfields exploration.

In the Scheme’s first year of operation, 84 applications for credits were made as a result of $70 million of greenfields exploration expenditure. As a result, exploration companies have been able to issue more than $21 million in credits to their shareholders.

At a time when exploration budgets have been cut across the board, this is an important initiative to incentivise exploration and investment.

Growth Centres

We are also keen to see Australia’s resources sector stay at the cutting edge of mining technology, as this is crucial for the global competitiveness of the industry.

Australia now has two industry growth centres dedicated to its resources industry.

They aim to build stronger engagement between industry and research organisations by connecting the energy and mining industries more closely with our scientists and researchers to solve problems and innovate.

They will also identify opportunities to reduce regulatory burden, boost collaboration and commercialisation, improve capabilities to engage with international markets and global supply chains and enhance management and workforce skills.

The Oil, Gas and Energy Resources Growth Centre, also known as National Energy Resources Australia or NERA, was launched in February.

NERA is headquartered in Perth, with nodes to be established in Adelaide and Brisbane. Its focus is on the oil, gas, coal and uranium sectors.

METS Ignited, the other resource-focused growth centre which I referred to earlier, was launched last October.

It has its headquarters at the Queensland University of Technology in Brisbane, with nodes to be established in Newcastle and Perth.

METS Ignited will seek to strengthen collaboration, identify best practice in the mining innovation system and help the industry to reduce barriers to success.

It has already hit the ground running, establishing working relationships with industry and research organisations, supporting conferences and hosting workshops.

There is a strong base to build on.  The 2015 Austmine survey, New Realities, Bigger Horizons, demonstrates just how committed the METS sector is to innovation. The survey found that:

·        63 per cent of businesses said innovation was core to their business strategy

·        78 per cent invested in R&D, spending a total of $1.18 billion in 2013-14

·        And 81 per cent of companies launched new products or services continuously or every few years.

Trade agreements

Our successful free trade deals with Japan, Korea and China will also enhance the competitiveness of our resource exports in Australia’s most valuable export markets.  These three countries combined purchase more than two-thirds of Australia’s resources and energy exports – purchases that were worth $117 billion in 2014-15.

Take, for example, China, Australia’s largest resources and energy market buying 38 per cent of our resource and energy export – worth $65 billion in 2014-15.

Our trade agreement with China is already in force.

It provides greater certainty for our exporters by locking in existing zero tariffs on major resources and energy products: iron ore, gold, crude petroleum oils and LNG.

Other major resources and energy products will also benefit. Tariffs of up to 8 per cent will be eliminated by 1 January 2019, with most already eliminated last December.

For example, the trade agreement with China has eliminated the 3 per cent tariff on coking coal and will remove the 6 per cent tariff on thermal coal by 1 January 2017.

Conclusion

Your industry represents almost 10 per cent of our economy, generating a quarter of a million direct jobs and supporting around 1 million indirect jobs. 

The Coalition Government believes in the Australian resources sector and has a plan for its continued success. 

The resources sector stands to benefit enormously from the economic transformation occurring in Asia. 

We’re backing the Australian resources sector to capitalise on the enormous opportunities on our doorstep:

·        Through our Free Trade Agreements with China, Japan and Korea.

·        Through ongoing removal of red tape, streamlining of environmental approvals, cutting taxes and re-establishing the rule of law on building sites.

·        And through investing in geoscience to attract investment in the mines of the future.

Your industry, innovative in nature and global in outlook, is absolutely critical to the continued strength of the Australian economy, and every day, I, as the Minister, will promote that message.

Thank you.

Ends

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