China’s urbanisation rate is still only 45 per cent, with 50,000 new skyscrapers – we believe – needed by 2025. This urbanisation of the rural population is the largest peacetime mass migration in the history of the world. But we should not forget that we have India, Brazil and many other countries following this development pathway. While growth in China may eventually moderate, other countries will take up the slack. Rio Tinto CEO Tom Albanese – November 3, 2010
Global Resources Distribution: Strategic Options for Resources Investment
Speaker: Tom Albanese, Chief Executive Officer
Thank you for your welcome. I am very happy to be back in China my eighth visit this year, and it is an honour to speak here today.
I would like to take the opportunity to talk about future developments and supply challenges for major global industrial commodities and China’s role within this. In addition, I plan to cover the important role technology and innovation will play in the future of the mining and minerals sector.
Global demand for minerals
Let me now give an overview of global minerals demand and how that affects both our business and the industry. Since the industrial revolution, production and urbanisation has spread progressively around the world. The global consumption of minerals has grown in support of this economic transformation.
Over the last hundred years, we’ve seen average annual growth in global minerals demand of something like 3.5 per cent – roughly equivalent to a doubling of demand every 20 years. In particular, demand growth has risen dramatically for aluminium.
This trend suggests that over the next 20 years we expect to see an extra 3 billion people with incomes reaching $15,000. In contrast, it took 200 years for the first billion people to reach this goal. Substantial quantities of minerals will be needed to achieve such a transformation in living standards.
China as driver of growth demand
China is of course the contemporary driver of demand growth for these commodities. The country is now the world’s largest consumer of iron ore and steel, coal, aluminium, copper and nickel.
This slide shows how in 2009 China accounted for 68 per cent of demand in seaborne iron ore trade. It also shows how Shenzhen looked in 1982, and how growth and urbanisation had dramatically changed its appearance by 2007.
China’s urbanisation rate is still only 45 per cent, with 50,000 new skyscrapers – we believe – needed by 2025. This urbanisation of the rural population is the largest peacetime mass migration in the history of the world.
But we should not forget that we have India, Brazil and many other countries following this development pathway. While growth in China may eventually moderate, other countries will take up the slack.
Can resources meet demand?
In a world of such burgeoning growth, it’s fair to ask how are companies like Rio Tinto responding. Can the mining industry keep up with this demand for supply?
Let’s take another look at some of the statistics using iron ore as an example. It took more than 40 years for our Pilbara iron ore operations in Western Australia to achieve production of 220 million tonnes. It took only seven years more to double this capacity to meet the explosion of demand from China. We now plan to increase our total Pilbara production by over 50 per cent in the next five years.
Now while growth is great for mining revenues, the flip-side is capital requirement. In fact, growth projects could potentially consume the entire free cash flow of the industry. Financing projects will probably require non-traditional sources of capital.
A look at any iron ore growth chart will tell you that there has been tightness of supply in recent years. Global iron ore production has been simply outpaced by the rapid growth in China. And despite enormous capital investments in new production capacity, there are still shortfalls in iron ore supply that the industry is trying to close.
Adding to this scenario, the global financial crisis simply compounded the situation by delaying many capital investments. And it is not yet certain when iron ore production will catch up with global demand.
Such a growth scenario then begs the question: can the earth physically and sustainably continue to supply? In view of peak oil reflections, there could be a similar perception that global mineral depletion is threatened. But is this in fact the case?
In reality, the earth’s geological endowment of minerals is absolutely enormous. So speculation on “peak metals” is perhaps premature. That said it will be increasingly more difficult to find potentially high grade mineral resources.
For example, iron is the fourth most abundant element contained within the earth’s crust. The amount of iron available for mineral use is huge. So even if no more high-grade deposits were found by ongoing mineral exploration – although this is highly unlikely – technology or incentive price will allow the industry to mine lower and lower grades out into the future.
Some estimates confirm that despite growth in copper mine production, global reserves are replaced as fast as they are mined. This same picture of sustainable supply applies to all the major industrial commodities.
As an example, copper reserves in years of future production have remained constant since 1979 – while prices have experienced what we call a ‘saw tooth’ trend since 1929. So it’s ironic that minerals are non-renewable on a human time-scale. Yet our ability to supply them is far less of a problem than renewable resources such as water.
Giant deposits dominate but future is underground
As we look at this abundance of global minerals resources, let’s continue our focus on copper. Production of copper is dominated by giant operations with 16 of the largest mines accounting for 44 per cent. Half of these are in Chile or western United States which dominate the global reserves (ready to develop now) and resources (those that require more work to become economically viable) as shown in these two slides.
Longevity of these giant operations should not be underestimated. It has taken over 100 years for our Bingham Canyon mine in the United States to fall from first to tenth in annual production. And it has still produced more copper than any other copper mine on the planet.
Bingham is a surface operation, but surface discoveries are now rare in established copper mining districts. The new trend is towards discovery of buried deposits – some very high grade. So there is enormous potential for buried mineralisation around existing open-pit mines. And this will be a fertile avenue for copper exploration for many decades to come.
However, underground mines are more expensive to run and raise the question: are they economically attractive? Technology will provide some of the answers.
Technology in mining
Innovation and technology is an increasingly effective way to find new resources in a sustainable way.
We have a global technology and innovation programme underway called Mine of the Future™ that is developing and adopting advanced mining technologies to improve productivity, capture more of the available minerals resource and reduce our environmental footprint. These innovations are being used and developed in both surface and underground operations.
In our exploration activities we are in partnership with the University of Western Australia on step-change technology which measures changes in the earth’s gravity. This has the potential to significantly enhance our ability to explore for minerals in different terrains. We are also developing micro-analytical techniques to explore for diamonds and metals; and using 3D visualisation approaches to understand where minerals are located underground.
Autonomous equipment in our Pilbara mining operations in Australia is controlled from 1,300 kilometres away in Perth. Here, systems are controlled by computers and robots for drilling, loading and operating trains. This reduces the need for on-site staff and support infrastructure.
Innovation in sinking shafts and tunnelling technology is the key to unlocking mineral deposits in a sustainable way. Remotely controlled autonomous equipment will provide the next generation of mining efficiencies and more safe working conditions as shown here.
This approach uses advanced ways to extract minerals deep within the earth while reducing environmental impacts.
Trade-off between discovery and risk
Aside from technology advances, there are higher-risk options for companies to grow production – for example, what we call greenfield sites in unexplored countries. These are the places that still offer potential for giant high-grade surface discoveries, with Guinea and Mongolia just two examples of Rio Tinto involvement.
There are normally some pretty good reasons why frontier countries remain under-explored. Resource nationalism, corruption and unstable investment frameworks are real issues in certain countries. Or there may be a history of political instability or conflict.
Exploring in these frontier environments – provided it is safe to do so – clearly requires a favourable long-term outlook on a country’s sovereign risk. Yet adverse changes can never be ruled out with the potential to threaten an investment.
This trade-off between prospecting and sovereign risk faces the entire resources industry. And risk can vary from country to country.
Many may consider a move to frontier countries as the inevitable future of mining. But it will be an option for the industry rather than an imperative for a considerable time to come. From Rio Tinto’s perspective, we have around 85 per cent of our assets in OECD countries, which gives us a stable platform from which to extend our reach into the developing world.
Balancing growth with sustainable development
Having talked about the growth in mineral demand and the resources available let me turn to the issue of whether this can be managed in a sustainable way.
Such demand has to be balanced with the social and environmental factors involved. There is now greater awareness of an industry’s footprint and how critical areas such as biodiversity are integrated into the business model.
Social and environmental considerations are at the root of what we do within Rio Tinto – this is what we see as our “licence to operate.” It means making decisions for today that preserve options for future generations. It means obtaining the consent of communities for our activities and providing clear economic benefits for them. And it means taking care of global issues important to the future of our planet such as carbon, water use and biodiversity.
This gives governments confidence that we will develop resources in a way that will benefit their economies and communities and will protect their environments.
With our sustainable approach, Rio Tinto is changing the face of mining. We are aiming to be a global leader in fully integrated, automated operations while reducing our environmental footprint.
In Rio Tinto we see a carbon-constrained future framed by the context of global warming. Responding to the global challenge of climate change is a critical aspect of our business strategy.
We recognise that a move to a low-emission global economy is vital and it will call for a price on carbon – potentially resulting in higher energy prices. However, the transition must occur in such a way that global energy security and economic growth are not reversed in the process.
The mining industry has its part to play by reducing emissions and energy through its complete operational cycle. Competitor advantage will be with companies who can demonstrate a low-carbon footprint.
Importance of partnerships
Before concluding, I would like to speak on the importance of partnerships.
Rio Tinto’s relationship with China stretches back more than 50 years. So the historical platform is sound with long-held business relationships. China’s phenomenal growth story underpins our long term confidence in this market, and provides us with the belief to maintain our expansion plans in Australian iron ore and elsewhere.
China is important to us in many ways and we see the relationship as one between partners, rather than simply supplier and customer.
A recent example was our signing of the joint venture agreement with Chalco, subsidiary of Rio Tinto’s largest shareholder Chinalco for the Simandou iron ore project in Guinea, and we have enjoyed a relationship of more than 20 years with Sinosteel our joint venture partner in the Channar mine in Western Australia.
It’s a classic example of the future options open to Rio Tinto and China in terms of the future of global mineral resources. Together we are developing the largest private integrated iron ore and infrastructure project ever developed in Africa – and the world’s largest greenfield iron ore project.
China is now our largest customer and accounts for a quarter of our revenues. Since the year 2000, sales to China have risen from a mere $400 million to nearly $11 billion. At the same time this relationship is not one way. China is a huge supplier of goods to Rio Tinto amounting to $700 million.
The partnership with Chalco opens the potential for further cooperation with China’s state owned enterprises, focused on helping China to achieve its goal on a sustainable supply of raw materials over the long term.
I have two ideas in this regard. The first revolves around China’s growing interest in acquiring resources abroad, of which the Simandou joint venture is a good example. With our experience Rio Tinto can help meet this need. We have developed projects all over the world and know the importance of a “licence to operate,” along with understanding the social, environmental and economic impacts on local communities.
The second idea revolves around assisting China in the search for world class minerals resources in its own backyard within China. I do believe Rio Tinto’s experience in exploring for and finding mineral resources around the world could usefully be brought to bear to supplement China’s own efforts.
I also see opportunities for us to team up with Chinese companies to explore outside China, bringing strengths to projects from both sides.
In partnering with China, Rio Tinto will continue to do what we do best – find, mine and process the earth’s resources to meet society’s needs and contribute to improved living standards in a sustainable way.
I would like to close by underlining the challenges facing the mining industry and global commodities as a whole.
We see unprecedented demand from emerging economies continuing. There will be a shift in economic power from west to east and the uncertainty and economic volatility we have recently experienced is likely to continue.
Global reserves and resources for commodities will be replaced as fast as they are mined. Finding the easily accessible resources will become more difficult.
Meanwhile, stakeholders will demand less environmental impact from our operations in a carbon constrained future – and there will be higher energy prices and possibly real energy constraints.
Ultimately, we see the future being different from the past in some fundamental, unavoidable ways – to which we as an industry will need to respond.