It comes as no surprise that Australia’s resources industry makes a healthy showing in The Diplomat Global 100, with the sector having 15 companies on the list. The industry’s two champions, BHP Billiton and Rio Tinto, are so globalised it is difficult to think of them still as Australian. The oil and gas companies, Roc Oil, Santos and Woodside, have operations dotted throughout the Atlantic and Pacific oceans, from Papua New Guinea to the Middle East.
The remaining ten companies are miners that regularly make the headlines. But unlike the two majors, almost all are Australian exporters only. Four have operations in one other country: Straits Resources and Newcrest in Indonesia, Oxiana in Laos, and Iluka Resources in the US.
The initial assumption, of a parochial industry uninterested in following BHP to overseas glory, is false, says chief executive Mitch Hooke of the Minerals Council of Australia. Hooke wouldn’t be drawn on the specifics of individual companies, but he said each company had to be judged on its own particular circumstances.
Some have no interest in expanding: there is little incentive for coal companies such as MacArthur to move offshore; and ERA and Coal & Allied are wholly owned, domestic subsidiaries of Rio Tinto. Some had their start overseas, such as Oxiana, which began in Laos then moved to Australia. And the domestic resources industry is still recovering from a downturn that lasted nearly 10 years. In the mid-1990s, copper sold at US70 cents a pound and gold mines considered closing as the metal hovered around $US280 an ounce.
Brendan James, resources analyst at Deutsche Bank explains that there “just wasn’t the money to go into the resource sector, so all of the background work stepped right back to exploration, which is why it has taken so long to see the new resources come on line. Basically, the industry had to start again.”
Hooke says there is no simple formula to expansion, but there are some familiar characteristics. Resources is a highly globalised and globally integrated industry which is facing converging global supply. Companies are looking to build economies of scale on the cost side and supply side, and market presence in some other area. But they need to build their capacity in their country of origin first, says Hooke: “There’s no point letting your domestic operations grind into dust while you go looking for opportunities offshore.”
While Australian mining is more accustomed to a globalised way of business, miners face challenges to overseas operations which make it hard to leave their home town.
One hurdle lies in the nature of today’s resource-rich countries. As exploration moves deeper into the developing world, inadequate infrastructure is only one of the hurdles. Resource companies face corruption, cultural difficulties and language barriers in Africa and Asia. But the greatest challenge is political instability. Smaller players cannot afford to explore and develop a site with the risk of losing it all to a civil war or change of government. Resource companies need to be big enough to take on that political risk, says James.
Eventually, Australian miners will have to go where the resources are, says James, and some are reaching critical mass. This means expanding into Asia: Laos, the Philippines and Indonesia will become far more important. James also notes that it takes time to establish relationships in Asia, which means companies like Oxiana have a head start.
Oxiana’s first success was its Sepon copper and gold project in Laos, and it is expanding into other parts of the country as well as into neighbouring Thailand, Cambodia and Southern China, says Owen Hegarty, managing director and CEO of Oxiana. “We saw a huge opportunity in Asia. Asia consumes 50 per cent of the world’s copper, but produces only 15 per cent and it is an extremely prospective part of the world. It boasts truly world class deposits but is undeniably under-explored and still only receives around 5 per cent of all mining companies’ global exploration budgets,” says Hegarty.
However, Asia may be a short stop on the way to Africa. Australian resource companies have a total investment in sub-Saharan Africa of $US17 billion – close to their 2005 global tally – and are the third-largest spenders on exploration in Africa after the US and Canada, according to a recent report by Roger Donnelly and Benjamin Ford from the Australian Government’s Export Finance and Insurance Corporation (EFIC). BHP Billiton alone plans to spend $US4 billion on sub-Saharan mega-projects in coming years, say Donnelly and Ford.
Africa’s largesse also extends to the supporting acts; Australian engineering companies have accumulated African order books of more than $US1 billion in total.
But these rewards won’t come easy. China is also signing up deposits in African countries through state-owned companies to secure supply for its construction and manufacturing bonanza.
Consequently, Australian resource companies will need to adapt to new political risks, say Donnelly and Ford. “Unfair competition for resources and contracts from state-owned and state-directed companies is one. As part of the ‘New Great Game’ on the [African] subcontinent, governments are throwing in large sweeteners, such as soft loans, aid and infrastructure, to win licences and contracts.”
The contest to control supply has an impact at home too; witness Sinosteel’s recent deal with steel producer Midwest. And Australian-owned agribusinesses have steadily fallen to foreign investors over the past 12 months – is the same in store for Australian miners?
Industry watchers indicate this scenario is very unlikely. Although the Foreign Investment Review Board approved the China offer, Midwest is relatively small in the steel business. James says the Australian government is unlikely to open the gates as wide to inward capital for resources as it has for other sectors.
“If there was a sense that pricing was being controlled away from Australia, I think that would be the point where they would look at stepping in,” says James.
The threat of consolidation by overseas players has receded somewhat, too. The boom appears to have arrived in time to make Australian miners too expensive for their foreign competitors to buy.