Leigh Clifford - Address to AusIMM

“Boom Nation – Reflections on the Resources Cycle and the Australian Economy”

Melbourne, 13 March 2014

Good afternoon and thank you to the AusIMM for the invitation to speak to you today.

This industry has produced many outstanding leaders and I’m honoured to follow some of them as a Distinguished Speaker.

Over the course of my career, the Australian resources sector has been characterised by the cycle of boom and bust.

For more than 30 years I experienced the cycle first hand – a sinusoidal wave of varying frequency and amplitude.

Resources have helped to shape the modern, prosperous Australian economy.

Yet for all the industry’s remarkable progress, we have never really softened the impact of the cycle. We probably never will.

The cycle is complex, hard to predict and often poorly understood in the wider community.

Today we are in another period of transition, with the slowing of the great 2000s boom. It has been one hell of a boom. And it will continue to benefit Australians for many years to come.

But clearly, the heady days are over – at least for the medium term.

Everybody wants to know – what next?

At such times we do well to reflect on the lessons of history.

This afternoon I will look back on my own experience of the cycle.

I then want to take a closer look at our most recent boom, and what needs to happen next.

The Resources Cycle Over the Decades

In 37 years at Rio, I saw the cycle repeat itself time and time again.

You learn to recognise the trajectory but not the boom itself – we don’t tend to “go long” in this industry.

I began my career just as the 1960s nickel boom came to an end.

In the 1970s and early 80s, the first and second oil shocks were a major global disruption.

At the same time, the oil shocks created opportunities for Australia – especially in coal but also in gas.

Australia’s diverse endowment of resources has always been a source of national strength.

Ever since the Gold Rush, different minerals and metals have had their time in the sun.

Australia has been a stable environment for mining investment. And Australia has always responded to external demand.

That demand began to grow rapidly with globalisation in the post-war era.

I know it’s fashionable to talk about an Asian Century now. But in fact, the economic shift in demand from Asia was apparent from the 1960s, with first Japan then others in East Asia – including, of course, China.

From the mid-1980s the opening of the Australian economy put us in an even stronger position to attract foreign investment and meet export demand.

The mid-2000s saw the onset of the greatest resources boom of our time; the greatest since the gold rush of the 1850s.

This boom is one of the defining economic events of the 21st century so far.

It kept our economy strong at a time of painful reckoning in the United States and Europe.

Strong demand, especially from China, saw us through the Global Financial Crisis.

Nevertheless, the jury is still out on Australia’s handling of the boom.

Of late, productivity has declined.

The debate about the mining tax polarised the community – making rational debate more difficult just when it was most needed.

There is still a window of opportunity to prepare for the next phase of the cycle. But I’ll return to that point shortly.

The Lessons of History

Before we ask, “what next?”, it’s worth looking back on the lessons we can draw from the cycle over the decades.

Clearly, each boom is different in nature and magnitude.

Some booms are broadly-based. Others are driven by a dominant mineral or metal.

In every boom, there is a tendency towards over-exuberance and, at times, reckless expansion.

Remember the language – “different this time” – “strong for longer” – “super cycle”.

We like to think supply will align with demand, but there are always the eternal optimists willing to take a bet.

Sometimes great things are predicted for a certain mineral or metal. I remember well the great predictions for molybdenum a few years back.

All the available evidence suggests that our industry will remain cyclical.

Let me give a few examples.

Copper was under $1 per pound for most of my career.

For a brief period in the 1990s it went up to $1.50. It then fell back to less $1 until the early 2000s, then surged to $4 per pound.

Molybdenum hit $40 per pound in the mid-2000s and has since moved back to single digits.

Yet aluminium and, to a lesser extent, zinc haven’t move to anything like the same degree.

Industry structure as well as demand comes into play.

The top of a boom is characterised by high wages, increased production costs and high construction costs.

In a boom, the marginal tonne is very rewarding.

When things start to cool off, the response is to constrain capital, cut costs and focus on technology – not surprising! Then come the inevitable write downs.

In Australia, the resource sectors have generated huge demand for labour and skills, be it for operations or construction.

And throughout my time in the industry, mining has been at the heart of Australia’s changing industrial relations landscape.

In the 1970s the industrial relations system was very centralised and regulated.

Pattern bargaining was the norm and the focus was on “what they can afford”, with little regard to productivity.

“Terms and conditions” and “log of claims” were the catch cries.

Companies often used capital investment in technology to solve productivity challenges.

Bigger trucks, loaders, drills, long walls, and so on. One of my colleagues referred to it as more horsepower per employee.

Later, the move to an enterprise focus enabled bargaining to take account of the circumstances of each operation.

Further deregulation of the labour market opened up different working arrangements, such as flexible shift lengths. In each case these arrangements were relevant to the individual enterprise.

This new enterprise focus was combined with increasingly advanced technological solutions – driverless trucks, GPS surveying, or remote-control loaders, for example.

All these developments improved the industry’s performance.

The re-regulation of the labour market a few years back stalled the productivity improvement.

In fact, productivity went backwards – just as demand was softening and capital spending was slowing down.

It’s interesting now to hear comments from many in the labour movement recognising that we have a challenge which needs to be addressed.

Productivity is a never-ending race.

In my view it is critical that we deregulate the labour market, increase flexibility and focus on the enterprise.

The individual workplace is where the debate about details should take place.

A final observation from recent history is that resource booms can mask structural problems in the wider economy.

Greater competition, high labour costs and a strong dollar have posed hard questions for many of Australia’s export sectors.

The dollar has weakened and may keep doing so.

But I hope we don’t believe that a weaker dollar is all we need to fix competitiveness.

This is a challenge for Australia.

How do we continue to maximise the strength of the resources sector, while enabling other sectors to play a bigger economic role?

Global factors cannot be ignored. As emerging economies develop and mature economies recover, Australia will be placed under increasing pressure.

The Aftermath of the 2000s Boom

Let me move on to the aftermath of the current boom.

It has been a unique boom in the size of its impact on Australia’s terms of trade, investment and export volumes.

And it has been unique because no other boom has been so dominated by a single country.

The rise of China is the biggest economic story of the late 20th and early 21st century. And as you are acutely aware, a good deal of that story has played out in the resources industry.

I was accused at a few points in my career of underestimating demand from China.

To some extent that was justified.

I don’t think I particularly underestimated the size of China’s demand for minerals. But I certainly underestimated the pace of the growth in demand.

Many people did, including the Chinese themselves. I well remember the Chairman of Baosteel telling me steel production would peak around 350 million tonnes.

China’s share of global primary energy consumption rose from 8 per cent in 1990 to 20 per cent in 2010.

Over the same period, China’s share of global iron ore consumption doubled to around 50 per cent – of which 40 per cent is sourced in Australia.

The acceleration of Chinese demand has been reflected in a range of Australian commodities. But iron ore has been the talisman.

Most observers agree that we are now into the third phase of the boom.

The initial phase saw rapid growth in demand, with constrained supply and the resulting high prices lifting our terms of trade to record highs.

These trends were briefly interrupted by the Global Financial Crisis, but the basic trajectory continued.

The second phase of the boom saw heavy investment in new supply – especially in iron ore.

More recently we have shifted gears away from investment and into production.

Prices are now well off the peak, but still high by historical levels.

We have seen projects deferred and a tighter focus on cost-control, productivity and competitiveness.

Some projects are under pressure, though that is nothing new in the circumstances.

The stronger players in the market are capitalising on the benefits of recent capital expenditure.

In so far as the boom is continuing, it is clearly now a production boom.

The backdrop, of course, is China itself.

There is a cottage industry devoted to predictions about the direction China might take.

The new leadership has committed itself to reform, with the aim of moving growth away from investment and toward consumption.

We will see how it goes, but no doubt there will be some hiccups along the way.

On the one hand, it is safe to assume that Chinese demand for minerals will remain a dominant force in our economy for the foreseeable future.

On the other hand, our terms of trade might well not return to the levels seen in the mid-2000s.

I believe we have reached the phase of the cycle that I described a moment ago.

With prices coming off, the focus now moves to productivity and the application of technology to solve business challenges.

The resources industry in Australia has a strong record of leadership in technology development.

Indeed, this industry has generally been quicker to understand and respond to changing circumstances than governments.

We need to maintain our competitive advantage in skills and knowledge.

However, as I mentioned earlier, we must also recognise the challenges we face in terms of productivity.

Even relatively productive sectors, such as iron ore, have seen weak productivity in recent years.

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To some extent this is understandable. In the midst of the boom, the priority was to increase volume to match soaring demand.

Over the past two years, a shift has emerged. Resource companies are restructuring to become leaner. There have been positive signs of greater discipline in managing work processes. Overheads have been reduced.

Perhaps this is simply the effect of the cycle itself – the focus at the peak of the boom was on development and production. With very high margins, a cost focus gets lost.

We are still learning the lessons of the 2000s boom. Perhaps it will soon be time for a new chapter in Geoffrey Blainey’s “The Rush That Never Ended.” But I would like to think that, at this point in the cycle, there is a greater awareness of the long term importance of productivity.

This is the most discussed and analysed boom in history. We have more research and data available than ever before. We should use this rich mine of data to inform the decisions we make for the future.

What next?

There is a view in some quarters that Australia has squandered the benefits of the 2000s boom.

Hindsight allows us to draw some interim conclusions.

Clearly, the resources boom helped Australia navigate the GFC. But broader policy reform was not attempted.

The Henry Tax Review was meant to be a root and branch review of taxation in Australia.

Unfortunately, most of its findings were ignored and a poorly designed tax was applied to our strongest industry.

It really did damage our reputation internationally.

In the private sector, some companies have been slow to modernise and have been caught in the slipstream of the boom.

As I said earlier, the call for more flexible labour laws is increasing.

It is already too late for governments to invest the proceeds of the boom. Those proceeds have gone.

We are now in need of major infrastructure investment like the second Sydney airport, as well as major roads and rail, at a time when government budgets are under pressure.

However, I believe there is still time to learn and apply the lessons of the 2000s boom.

We need to move quickly.

And we need to play to our strengths as a nation.

Unlike some countries that have suffered from the fabled “Dutch Disease”, Australia has some important advantages.

We have a diverse resource base, and we have the skills and technology to capitalise on it.

We will never be able to avoid the cycle altogether. “Strong for longer” will never become “stronger forever.”

Demand and supply are subject to forces that are not always predictable, often driven by global factors beyond our control. Look at the impact of technology on the US shale gas industry and its dramatic effect on the US economy, as well as the LNG industry globally.

You can never accurately foresee the next boom, even when you are entering it.

The industry must use the current relative slowdown to focus relentlessly on efficiency, value and returns, while tackling productivity.

Equally, I would encourage the industry to continue speaking up on regulatory and policy challenges, whether project approvals, skills shortages or industrial relations issues.

In addition to the ongoing central role of resources, we need to play to our strengths in other sectors that can give us a competitive advantage, especially in growth markets.

We should cultivate tourism, food production, professional services and other skill-based industries.

We need to create the conditions for these sectors to grow and seek out new markets, through sensible economic policy.

Australia must also secure the benefits of its proximity to Asia. At a time when the rest of the world is scrambling to build stronger relationships with the region, Australia has the experience of decades of engagement. But we cannot be complacent.

We have to create a network of close, long-term partnerships in Asia that go beyond just the transactional. Doing so will not be straightforward, but it will deliver incremental economic returns across a wide range of sectors.

Closer engagement with Asia may also mean taking a more enlightened view of foreign investment and immigration than is currently the case. We need to recognise the needs of major resource projects – especially in construction.

We should take care to make sure that we really are “open for business”, rather than just saying so.

Finally, we need to regain Australia’s flair for reform – and the self-confidence to think about the bigger picture.

Our political leaders must look forward and establish a positive national vision for Australia in the 21st century. Business leaders should inform and support this vision.

Leaders of all kind will need to be honest about the hard decisions we must take to lift our productivity in the national interest.

If we can do all this, Australia will be in a stronger position to manage future resource booms, deliver continued prosperity, and secure high living standards for decades to come.

Thank you very much.

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