10 November 2009
Rio Tinto's role: serving our customers
Speaker: Tom Albanese, chief executive
Location: University of Western Australia: In the Zone Conference - Perth, Australia
Lunch plenary session: "WA's engagement with the economic powers of the 21st century"
Introduction
Thank you Tim [Shanahan, director of UWA's energy and minerals initiative] for your welcoming introductions. It is a pleasure to be here to address you this afternoon and an honour to share the platform with Premier Barnett.
I'd also like to thank [UWA chancellor] Michael Chaney and [vice-chancellor] Alan Robson and their team at UWA that has helped put this impressive initiative together, with so many distinguished contributors drawn from such a broad spectrum of talents.
I would also like to acknowledge the political representatives - past and present, state and federal - the diplomatic and consular participants, and other distinguished guests here today.
Rio Tinto is no stranger to the University of Western Australia. I have had the opportunity to visit the campus at least once a year over the last few years.
Earlier this year it was to see progress on a research and development programme being conducted jointly by UWA's Physics Department and Rio Tinto Exploration to make an improved airborne device for surveying the Earth's subsurface, called a gravity gradiometer.
Our partnership with UWA is a model for Rio Tinto collaboration with academic institutions and also symbolic of Rio Tinto's strong presence in Western Australia.
Rio Tinto has been mining iron ore in the Pilbara for more than 40 years. When Tom Price, our first iron ore mine, started operations in 1966 its production was just over five million tonnes per year. We are now producing iron ore at a rate of more than 210 million tonnes per year.
Last year we accounted for 13.7 billion Australian dollars in iron ore export revenue, mainly to our customers in China and other Asian nations. Our activities benefited the State with 778 million dollars in royalties, and nearly 14,000 people were employed in Western Australia, receiving almost one billion dollars in salaries and benefits.
As you can tell, as a corporate citizen and the State's biggest iron ore exporter, we have a major private sector role in the zone of our natural markets.
The time zone we are talking about contains 60 per cent of the world's population. It has the nations that will grow the fastest in the 21st century. And it is the region destined to be the global economic power in the future. For Rio Tinto, it is where we have customers who account for more than half of our profits.
Western Australia with its wealth of resources and proximity to these markets is a natural base for growth. As an iron ore producer Rio Tinto is well placed to link with these customers. I would like to take the opportunity of this conference to provide insights into how the growth and development of natural resource projects by the private sector can continue to support the growing needs of our natural markets in this all important time zone.
Economic outlook
What's important to our customers is also of importance to us. While we are seeing some signs of recovery in the global economy, there is still a great deal of volatility, something the business community will have to get used to.
Uncertainty about the strength and duration of the recent pick up in demand means that in ramping up supply to serve customer needs, we should remain cautious, particularly in regard to the big OECD economies, notably the US markets.
Also, when we are fully out of the slump, we don't expect "normal" to be the same as before the recession. Global financial relationships have changed. Global economic power is shifting from west to east. It is fair to say this shift, which was already under way a year ago, has been accelerated by the global financial crisis.
The massive Chinese economic stimulus, with its focus on metal intensive building infrastructure, has been important to the mining sector. We are still producing at our maximum rates in the Pilbara to meet the demand for iron ore.
Long term demand fundamentals remain strong. Over the next five years, China is expected to consume more iron ore than Australia has exported throughout its history. How Australia responds to the needs of China will be crucial to the future wealth of this country.
Rio Tinto continues to hold the view that ongoing development of emerging markets in the zone will generate underlying strength in metals and minerals demand over the long term. This represents continuing opportunities for Australia's minerals exporting economy.
Before I speak about China, I would like to say a few words about our long, profitable relationship with Japan. [Nippon Steel chairman Akio Mimura] Mimura-san and [Sir] Rod Eddington this morning said it well: we now take the relationship for granted, but we have to all work together and build on the success story.
Rod reminded us that establishing the initial trading relationship took real political courage back in 1957. There is maybe a lesson in that as we look to China now.
Chinese investment in Australia
Today's opportunity is of course mostly about China, which is our leading business partner and customer in the zone.
Rio Tinto was one of the first to recognise the awakening of China, and the gradual emergence of Chinese customers. The Group's first visit to China was one of the earliest initiatives by western organisations to develop closer relationships.
We sustained and multiplied our initial contacts, which ultimately resulted in our Channar mine joint venture agreement in the Pilbara in 1987.
Channar was China's first major offshore investment. The significance of Rio Tinto's role in attracting investment by a Chinese state owned enterprise in the Pilbara was recognised as a breakthrough at the time, winning the patronage of Bob Hawke, and his Chinese counterpart, Hu Yaobang.
The investment reflected the long term time horizons of China as a customer, covering supply in the decades ahead. At Rio Tinto we were determined to encourage China to focus on the Pilbara early, locking in trade with investment, before Chinese customers were motivated to look elsewhere. Ultimately this partnership was an extremely positive development for Australia.
Rio Tinto's lengthy history in trading with China underpins our long term confidence in that market, and provides us with the impetus to maintain our expansion plans in the Pilbara and elsewhere.
It is worth remembering that our expansions in the Pilbara started on the back of demand from Asia, particularly Japan, in the 1970s and 1980s. There is a striking similarity to today's growth with regard to China.
Because China has huge commodity needs for the future, it will buy and develop assets that are in competition with Australia if we fail to attract and encourage their investment.
And it is already happening - China has announced at least 33 billion US dollars in acquisition and development initiatives in African resources over the past few years. Then there is Latin America.
Australia can position itself uniquely for a mutually rewarding relationship that could define the next few decades. By forging a deeper engagement with China, including allowing substantial inflows of capital, enduring export markets could be established at a time when alternative markets for our products are few.
Rio Tinto's long term confidence in China, as a customer and strategic partner, is as strong as ever. We set an iron ore production record in the third quarter with shipments to China maintained at a high level.
We regret that we were ultimately unable to finalise earlier this year a transaction with China's leading resources group, Chinalco, also our biggest shareholder.
We are still keen to work with Chinalco in future on projects of mutual benefit. It is too early to say what these might be, but I am encouraged that we have had some recent engagement.
I would also like to refer to our four iron ore sales and marketing executives that are detained in Shanghai. Rio Tinto is respectful of the Chinese legal system and wishes to see a timely and transparent process take place.
Sam Walsh and I have made it our personal goal to ensure that the company exercises its duty of care to our colleagues and supports their families.
I have made clear my commitment to resolve the current issues. We want the underlying common interests between Rio Tinto and China to once again drive us towards ever deepening cooperation.
Perth location - Rio Tinto in WA
What are the implications for Perth and Western Australia of this dramatic increase in demand for resources?
As I mentioned earlier there was no Pilbara mining, and virtually no Australian iron ore industry, as little as 50 years ago. The same can be said of the offshore gas industry, which began off the Pilbara coast at the same time, and for the same reason: fuelling the development of Australia's neighbours to the north.
And I must say I have been impressed this week with some of the updates I have heard at this conference on the progress off the off-shore gas industry.
And as with my own business, and as Premier Barnett knows better than most, we haven't seen the half of it yet.
Such economic advancement does not happen by accident, and nor can it occur in isolation. Sensible development relies on proper ground rules, widely known and well accepted, covering everything from project approvals, environmental protection standards, local community participation and appropriate sharing of the risks associated with any development.
Mining, like politics, is the art of the possible. Without the proper political support provided by the foresight of governments in the region, the continuing response we have seen to strong demand would not have been possible.
It is critically important for companies like Rio Tinto to calibrate their investment in natural resources with the best interests of the zone's economics.
Unlike many other commodities iron ore is as close to a staple as you can get. You cannot build railways, roads, airports and apartment blocks on the scale Asia envisages without steel and therefore iron ore. You cannot accommodate the material needs of vast numbers of people moving from the country to the cities without iron ore.
It is no wonder Western Australia contrasts strongly with the sluggish economies in Europe and the US. This part of Australia has the vital ingredients that Asian countries need to build their economies and Rio Tinto is proud to play a major role in the continuing Western Australia success story.
In addition to iron ore, Rio Tinto's other operations in Western Australia include diamonds, talc and salt and we manage our global Rio Tinto Marine division from here.
Next year we will expand incrementally from our current 220 million tonnes per annum to 225 million tonnes per annum, initially with the expansion of Dampier port and rail infrastructure.
Studies are now under way for investment in a further five million tonne expansion plus two incremental stages at Cape Lambert of 50 million tonnes each to take us to a total capacity of 330 million tonnes per annum in 2015.
At the same time we are pioneering mining technology that will make Rio Tinto the global industry leader in automated drilling, blasting and hauling.
Leveraging the maximum value from our assets will be critical to ensuring success. A key feature of this will be the proposed production joint venture with BHP Billiton. The joint venture will bring together the Western Australian iron ore assets of both companies, while keeping marketing arrangements totally separate within each company.
By working together under the joint venture framework we will be better positioned for future demand growth and will capture substantial synergies for our shareholders.
Sustainable development
How the future looks concerns us all. That's why a responsible business like ours seeks to sustain the benefits we enjoy today into the future, even though mines have a finite life. We call it sustainable development.
Part of the future, like providing customer satisfaction, is building and maintaining strong relationships with communities, and managing the footprint of our activities.
We support a wide range of projects and partnerships in Western Australia through two programmes - the Rio Tinto Western Australia Future Fund and the Pilbara Community Partnerships Programme.
The Future Fund manages strategic partnerships to deliver long term State wide projects. We currently support ten major community partnerships, and in 2008 distributed 2.6 million dollars across Western Australia. The Future Fund also manages several major sponsorships.
Looking further into the future, we are continuing to focus on combating climate change through greenhouse gas reduction. We have made a commitment to create new power infrastructure in the Pilbara which will reduce carbon emissions by 25 per cent.
We would like to test the use of hybrid locomotives to haul ore from mine to port and we are considering introduction of trucks powered by liquid natural gas. All of this is aimed at reducing greenhouse gas emissions.
Turning to the bigger climate change picture, we believe Australia needs to set an example of a cap and trade scheme as a means of reducing carbon emissions, but it should not be to the detriment of its own economy vis à vis the needs of competing economies in Asia and elsewhere.
We believe the legislation as it is now framed will affect the international competitiveness of Australian resources companies. It could have long term consequences for Australian jobs and the Australian resources sector's ability to compete in global markets.
Recognising we also have to reduce our footprint on the ground, Rio Tinto's environmental programmes manage the biodiversity of our land as well as groundwater resources disturbed when we have to mine below the water table.
These kinds of programmes are in line with public expectations and give us enhanced access to land, people and capital.
Conclusion
To sum up my message today, Western Australia has the right address and the rich resources to reap the rewards of Asia's emerging economic leadership.
As for Rio Tinto's role, with our long standing presence in the Western Australian resources industry, we are well placed to continue to build the mines and infrastructure that will continue to benefit the State and its people, as well as our shareholders and our customers in Asia.
In closing, there is an excellent local example of what lies ahead located where many of you arrived at Perth airport. It is our new integrated planning and control Operations Centre which has recently opened and is progressively being brought into full operation.
The Centre uses powerful computers and global positioning systems to direct operations at mines and infrastructure up to 1,500 kilometres away, a key aspect of our overall Mine of the Future project.
Remote controlled operations are safer, more efficient, reduce costs and mean employees can have the option of working closer to home. Midway through our ramp-up, we have nearly 200 employees there already, with truck, mine, rail, and port schedulers all working under the same roof.
This state-of-the-art facility, using technology that is ahead of anything else in the mining industry, will help us serve our natural markets in Asia better and faster than before, with a lighter environmental footprint.
This new facility is a great example of investing in the future, in this zone.
In partnership with our communities, working with business associates in Asia and elsewhere, as well as host governments, we intend to continue to be a key player in serving our customers, by bringing to market the raw materials that will build the new centres of economic power in Asia.
Thank you, and I would be happy to answer your questions.
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