ADDRESS TO THE
MINERALS COUNCIL OF AUSTRALIA
2002 MINERALS INDUSTRY DINNER

WEDNESDAY, 5 JUNE 2002
7.30 PM

Introduction

Thank you for affording me the privilege of delivering the keynote address

this evening.

It is a pleasure to address a gathering of the mining sector, an industry that

has always been a special interest for me. It started when I was 20 and Lang

Hancock invited me up to Wittenoom to have a look at some of the magnificent

iron ore mines of the Pilbara. It continued when I was a legal adviser to Robe

River during its dramatically successful reform of restrictive work practices

in 1986.

Mining Industry

Mining contributes around 5 per cent of Australia’s GDP.

Figure 1: Sectoral contribution to GDP, 2000-01

In 2000-01, mineral exports were valued at $42 billion, or around 35 per cent

of total export earnings. The sector’s export performance is critical to our

balance of payments position and the strength of the Australian economy.

Figure 2: Minerals contribution to total Australian exports

2000/01

Australia is the world’s largest exporter of coal, accounting for about one-third

of the world trade. Australia is also the world’s largest exporter of iron ore,

lead, diamonds, rutile, zinc and zirconium, and the second largest exporter

of gold and uranium. Our exports of gold and uranium each account for one fifth

of the world trade. Australia is also the third largest exporter of aluminium.

The mining industry is one of Australia’s most capital-intensive industries,

with about $1.4 million of capital stock per employee. This is about five times

the average across industries. The quality of the capital stock is just as important

as the quantity. Here again, the Australian industry is amongst the best in

the world. Indeed, over 60 per cent of the world’s mining operations utilise

technology developed by Australian companies. As a consequence mining technology

service companies are a growing and diverse sector of the Australian economy,

with the value of exports estimated at $1.9 billion for 2001.

Maintaining an effective capital stock requires substantial ongoing investment.

Around 12 per cent of Australia’s new business investment expenditure is attributable

to the mining industry. Prior to the Asian crisis of 1997, Australian business

investment was lifted by a surge in mining investment, which grew by around

81 per cent in four years to 1997-98. The onset of the Asian crisis saw mining

investment fall. However our Budget forecasts indicate that mining investment

is set to pick up markedly in the period ahead, and that work has already commenced,

or is about to commence, on a number of large projects, particularly in the

gas, coal and metals sectors.

The 25^th Minerals Industry Survey also found that profitability

for the industry improved strongly in 2000-01. A competitive dollar, higher

commodity prices and efficiency gains in the industry saw net profit return

on average shareholders’ funds come in at 13.9 per cent compared with 4 per

cent in 1999-00, 3.7 per cent in 1998-99 and 1.8 per cent in 1997-98. Last year’s

profitability also compares favourably with the ten year average of 6.9 per

cent and the average for the 25 years of the survey of 10.1 per cent.

After the investment lull arising from the Asian financial crisis, the coming

together of much stronger profitability and higher commodity prices is driving

an investment recovery, as indicated in the latest ABS capital expenditure data.

Firms have indicated that growth in mining investment of over 40 per cent is

in prospect for 2002-03.

Figure 3: Mining industry profit and nominal investment

The mining industry plays a key role in the development of regional Australia,

providing community facilities, transport infrastructure such as roads, ports,

airports and railways, communications facilities, and in some cases, entire

towns. The minerals industry is also a key provider of employment and training

to the indigenous communities.

Of course, without adequate ongoing exploration the minerals industry would

soon lose its position of leadership. For this reason we must constantly assess

the impact of national title and environmental controls on mineral exploration.

Still, Australia had the world’s second highest level of expenditure on non-ferrous

mineral exploration in 1999, 2000 and 2001. This does not mean we should not

have the highest.

The outlook for the sector is bright. The competitive Australian dollar, together

with higher world prices and an expected global recovery has pushed profitability

in the mining industry to well beyond previous levels, resulting in turn, in

further increases in investment.

National Accounts

Today’s National Accounts show that the Australian economy continued to grow

solidly in the March quarter of 2002, adding further to our economic security

and stability. Australia’s GDP increased by 0.9 per cent in the March quarter

and by 4.2 per cent through the year to March 2002, in line with the growth

recorded during 2001. This growth rate markedly exceeds that of any of the world’s

major developed economies.

The March quarter National Accounts also confirm that inflation remains moderate.

Household consumption increased by 1.4 per cent in the March quarter of 2002

and was 4.0 per cent higher than a year ago, making a major contribution

to overall economic growth.

Net exports contributed 0.3 of a percentage point to GDP growth in the March

quarter. Exports increased by 4.0 per cent, which is the strongest

quarterly growth since the September quarter 2000. The recovery in exports in

the March quarter is consistent with early signs of an economic recovery among

some of Australia’s trading partners. Imports were up by 2.2 per cent in

the March quarter as demand for imports was supported by growth in domestic

spending. Australia’s terms of trade rose by 1.8 per cent in the March quarter,

continuing the upward trend evident since 1998, despite the recent weakness

in the world economy.

The National Accounts measure of profits in the private non-financial corporate

sector recorded solid growth of 4.6 per cent in the March quarter. Profits were

up by 8.8 per cent through the year to March. Gross mixed income was up by an

exceptional 11.7 per cent through the year to March, boosted by profitability

in the farm sector.

The Australian economy has performed very well during a period of global economic

uncertainty and weakness. Going forward, improved prospects for a world recovery

and rising confidence levels will provide continued momentum for the Australian

economy. Exports are likely to strengthen over this period as Australia’s major

trading partners recover, and business investment will become a major driver

of economic growth in 2002-03. This positive outlook will enhance Australia’s

ongoing economic prosperity and security.

Government Leadership

This audience will understand readily that a strong and stable economy is of

direct benefit to all sectors of the economy, including the mining industry.

Australia’s strong economic performance during the recent period of weak global

growth has been assisted by sound macroeconomic policy and the payoff from sustained

microeconomic reform.

A direct benefit of our recent economic performance is the low cost of capital

for Australian firms. Current interest rates on business overdrafts of around

8 per cent are around levels not seen for at least 20 years, furthermore the

interest rate on the average business loan is a very low 7 per cent. Solid demand

for Australian corporate bonds is also making it easier for companies to obtain

finance at very competitive rates.

Record profits currently being enjoyed by the mining sector mean that internal

funds are now more plentiful than a few years ago. The relatively strong performance

of the Australian stock market suggests that conditions for raising equity capital

remain very favourable. In fact, the mining industry accounted for almost one

in three initial public offerings in the March quarter, and most of the companies

expected to list on the ASX in coming months are mining ventures.

The success of recent capital raisings such as Amcor (A$2.9 billion), the Macquarie

Infrastructure group (A$1.7 billion) and the Westfield America Trust, where

over $2 billion of quality demand was identified in under 18 hours, and institutional

placement was scaled up to $1.15 billion after 4 hours, provides some indication

of the ability of the Australian capital markets to support large capital raisings.

Tax Reform

This great show of investor confidence, has, I believe, been underpinned by

the business tax initiatives and indirect tax reforms undertaken by the Government

in recent years, to give Australia a modern, internationally competitive taxation

system which has therefore benefited the mining industry.

The tax reforms have seen:

• The removal of embedded taxes on exports with the abolition of WST and

  the introduction of GST which makes exports tax free

• A full rebate to replace the partial rebate for excise on diesel used for

  mining operations

• A full rebate for excise on diesel used in rail transport
• Cost reductions for on-road diesel of 18.5 cents per litre through the

  Diesel and Alternative Fuels Grants Scheme

• Reduction in the company tax rate from 36 per cent to 30 per cent
• Capped effective lives for gas transmission and distribution assets (20

  years), offshore oil and gas platforms (20 years), oil and gas production

  assets (15 years) and assets used to manufacture condensate, crude oil, domestic

  gas, liquid natural gas and liquid petroleum gas (15 years)

• Capital gains tax relief on demergers
• Consolidation
• Scrip for scrip rollover relief
• Blackhole deductions where the mining industry benefits from being able

  to write off expenditure such as capital raising costs on a straight-line

  basis over five years. Other costs such as community infrastructure upgrade

  costs may be written off over the lifetime of the mining project.

Globalisation

I now want to turn to some of the drivers underlying your theme of leadership

embracing change. A process which has received greater scrutiny in recent years

is globalisation – that is, the advances in communication, information technology

and transport which have expanded international markets in the trade of goods

and services, and increased competition for investment. These developments are

creating global markets and reducing the effectiveness of national boundaries,

and are, in my view, quite likely to accelerate.

As I have previously argued, globalisation is not a value, it is a process.

Globalisation describes what is happening. Our choice is not whether to stop

the processes, but how to adapt and manage them for the benefit of our citizens.

Of all the countries in the world where this should be well understood, it

is Australia. The founding of the colonies in Australia was an example of globalisation.

At the end of the 18^th Century as its economy strengthened and its

technological capacity developed, Britain was able to establish and maintain

a settlement 12,000 nautical miles from its global centre in London. It couldn’t

do this in the 16^th Century where its capacity to maintain colonies

extended only 3,000 nautical miles to North America. That settlement was Australia.

And two of Australia’s great industries – mining and agriculture – grew on the

basis of exports; global sales.

The mining industry did not seek tariffs or domestic price support schemes

to protect it against global competition. Competition forced it to become efficient,

in many respects the most efficient in the world.

Two years ago, when the NASDAQ was still rising and the dot.com bubble was

in full swing it was common for press commentators to lament that Australia

was an `old’ economy with industries like mining rather than a `new’ economy

with clean bright ICT industries.

When you pointed out (as I did) that Australia was a great user of ICT which

made it very much a `new’ economy the critics would dismiss this as second rate.

What we needed (they said) was semi conductor and ICT manufacturing to be a

real `new’ economy.

Shortly the NASDAQ was to fall, the dot.com bubble burst and countries reliant

on the manufacture and export of ICT were hit hard by recession. Our country

avoided recession and grew faster than any comparable developed economy in 2001-2002.

Have a guess which industries are now back in favour?

None of this is to underestimate the importance of productivity and the use

of ICT to improve all business operations. But it is the productivity improvements

to other industries – including mining – that counts. In fact one of the industries

in Australia that has the highest and most sophisticated utilization of ICT

is the mining industry.

Why? Because it is exposed to global competition and needs to be at the cutting

edge of productivity improvements to survive.

Foreign Investment

One aspect of globalisation that has attracted attention over recent months

is foreign investment.

In the past few years, I have had to make a number of decisions to balance

competing interests and ensure that foreign investment is conducive to the development

of the resource and processing sectors in Australia.

As you know I rejected Shell’s proposed bid for Woodside Petroleum in 2001.

It was, as I said at the time, a tough decision. The issue was not about whether

the companies were Australian or foreign – both firms are foreign under the

Foreign Acquisitions and Takeovers Act. The issue was whether I could be sufficiently

certain that following the takeover, the North West Shelf would be developed

in a way that would benefit Australia and lead to the maximum development and

exploitation of that great natural resource. In that case I could not. I took

the view that it was contrary to the national interest. The rejection was one

of a handful (not counting real estate) since I have been Treasurer and the

only rejection in the mining sector.

Contrast that with the case of Mitsui’s acquisition of the Moura Coal mine.

Mitsui is one of the world’s largest mining and natural resource conglomerates.

Over the last forty years Mitsui has acquired significant Australian mineral

assets including coal mines in Queensland and New South Wales, and has made

a significant contribution to the development of the Moura Coal Mine since the

1960s. This acquisition received considerable media attention as Mitsui was

competing with an Australian mining firm, MIM Holdings, for the right to acquire

the additional 55 per cent interest.

The significance of the ultimate acquisition relates to changes that are occurring

in the way coal is mined and more specifically, marketed around the world. The

blending of different coals to deliver a consistent product is a key commercial

strategy. Acquisition of a further interest in the Moura Mine gave Mitsui that

capability. I had no doubt that the acquisition would not inhibit the development

and exploitation of that great natural resource and consequently was not contrary

to the national interest.

The long term

But if you will allow me, I want to come back to the theme of leadership and

talk briefly about the next big task of Government leadership with the release

of the first ever Intergenerational Report (IGR).

The IGR identifies changes which we know are occurring now and attempts to

project the impact they may have on public finances in 40 years time. Like the

mining industry, the Commonwealth has several areas where long term trends are

an important consideration in our planning and long lead times are required

to bring about and implement change.

Let me refer briefly to the analysis in the IGR.

Firstly, it finds that while the budget situation is manageable in the next

10-15 years, the gap between spending and revenue could grow to 5 per cent of

GDP by 2042 or around $87 billion in today’s dollars.

Figure 4: Fiscal pressure

Secondly, the overall conclusion is that we as a nation are better placed to

cope with future budget pressures than most comparable countries because we

have been repaying Labor’s debt and strengthening our financial position.

Figure 5: General government net debt levels in selected

countries

Our targeted pension scheme and superannuation arrangements also protect our

financial position as the population ages.

Thirdly, health spending, and in particular the cost of the Pharmaceuticals

Benefits Scheme (PBS), is the fastest growing area of spending. This is not

simply a result of an ageing population. In fact nearly two thirds of the growth

in health spending over the past decade has come from non-demographic factors

– that is advances in technology in both treatments and medicines.

The cost of the PBS has quadrupled over the last decade.

Figure 6: Growth in the PBS

But this is nothing compared to the next decade and beyond. The IGR projects

that PBS spending could grow more than fivefold from a current 0.6 per cent

of GDP to 3.4 per cent in 2041-42. This increase, of course, applies to a growing

GDP so in nominal dollar terms the projections take PBS spending from about

$4.3 billion in 2001-02 to about $158 billion in 2041-42.

Figure 7: Further growth in the PBS

The point I make here is that if small changes are not made now, more drastic

changes will have to be made in the future to put the PBS on a sustainable footing.

By making the PBS more sustainable, the Government can continue to provide Australians

with affordable access to new, highly effective, but expensive medicines.

For example,

• Humulin NPH, a drug widely used in the treatment of insulin dependent diabetes

  costs $229.13 per prescription; and

• Avonex, a drug widely used for the treatment of multiple sclerosis costs

  $1,090.81 per prescription. A patient on this drug would normally take 13

  prescriptions per year.

Under our proposals to limit the rate of growth in PBS costs – not cut the

costs – we will make these drugs available to pensioners and concession card

holders for $4.60 and to other Australians for $28.60 per prescription. That

is, for Avonex, the Government subsidy will be $1086.21 for pensioners and concession

card holders and $1062.21 for other Australians.

For concession cardholders, prescriptions are free after 52 prescriptions are

filled in a year. For non-concession cardholders, prescriptions will only cost

$4.60 after about 31 prescriptions in a year.

To ensure that necessary medicines such as Humulin NPH and Avonex can continue

to be listed on the PBS, we must act now to adjust the scheme and get it on

a more sustainable footing.

The Labor Party likes to pretend that by opposing the Government’s changes

it will help the poor. Nothing could be further from the truth. The sick and

poor will suffer most if the taxpayer cost of the PBS escalates at the current

rate. The system will become unsustainable. In order to meet costs at first,

Governments will refuse to admit new treatments to the scheme, later others

will be delisted but eventually the scheme will collapse. Only those able to

pay market price will have access to pharmaceuticals in such a scenario.

We can make small adjustments now. The longer we leave it the more drastic

the adjustments will become in the future. There are two alternatives – small

moderate changes now, large drastic ones later. Do nothing is not an option.

Conclusion

In conclusion, let me reiterate the Government’s continuing support for your

industry, and express my thanks for its contribution to Australia’s economic

performance over many years.

It is clear that the challenges posed by greater globalisation, the demand

for environmental sustainability and the need for international competitiveness

are not going to go away. If anything, they are going to intensify.

Management of these issues will require leadership to pre-empt and embrace

changing circumstances, and to look over the short-term horizon to plan for

longer term eventualities.

Just as it is incumbent upon governments to lead and to embrace change and

to plan for the future, so too the mining sector must put leadership into practice

for the benefit of all Australians. I applaud you for recognising this in the

theme for your conference this year.