A global business perspective on managing for growth in a volatile international environment – by Rio Tinto Chairman – Jan du Plessis (November 4, 2011)

Location: Australian Institute of Company Directors – Sydney, Australia

Jan du Plessis – Rio Tinto Chairman

Good afternoon ladies and gentlemen. It is a real pleasure to be with you today. 

I’d like to begin by acknowledging the traditional custodians of the land we have gathered on today, the Gadigal people of the Eora nation. I pay my respects to elders past and present.

I first visited Sydney in November 1991 and, over the course of several subsequent visits, fell in love with the place.  Twenty years later, having travelled around the world more than I care to remember, I still believe this is the most beautiful city in the world. 

Now, before anybody says Sydney is not Australia, let me assure you that over the last two-and-a-half years since becoming Chairman of Rio Tinto, I have seen quite a lot of your country.  And my visits have not been confined to stopping over in most of your major cities.  I have visited several coal mines and (I confess) vineyards in the Hunter Valley;  more coal mines in Queensland; and paid visits to our alumina refineries, aluminium smelters and other facilities in and around Gladstone.  Further up the Queensland coast, I have seen at first hand the congested coal terminals at Mackay.  At Weipa on the Cape York Peninsula, I was not only introduced to bauxite mining, but to some exciting fishing – with one eye looking for fish and the other for crocodiles!   When visiting the Ranger uranium mine in the Northern Territory, I also had the privilege of flying over the breathtakingly beautiful Kakadu National Park.

I cannot possibly supply you with my complete itinerary, but suffice to say I also visited the Argyle diamond mine in the Kimberley, as well as of course our extensive port, rail and mine facilities in the Pilbara, culminating in a visit to Rio Tinto’s world-class operations centre in Perth.

And as holidaymakers, my wife and I have spent a relaxing weekend in the Margaret River area in the south-west corner of Australia and on another occasion a glorious week scuba diving at Lizard Island in the Barrier Reef.

In fact, after visiting Australia almost thirty times over the last twenty years, one would have thought that Australians would start treating me with some respect. However, judging by the endless messages I received from my friends following South Africa’s defeat by the Wallabies at the recent Rugby World Cup, that dream is still a very long way off!

But it’s great to be back in Australia.  Sitting in my office in London last week, putting together my thoughts for today’s address, I could not help being struck by the painful realisation that Europeans and Australians now really do seem to live in different worlds.  Whilst arguably in Australia your biggest challenge today is the management of prosperity, countries across Europe – not only those in the eurozone, but also Britain – are essentially battling for survival.  Australia may be “down under”, but quite frankly Europe is not only “down” but has been struggling not to go “under”.

My plan for today is to take a quick tour of the world’s major economies, taking the temperature as I go, and offering personal views on where they are headed.  I’ll end up back here in Australia, but let’s start in Europe.  Much has been written in recent months about the intractable problems that continue to beset the eurozone.  I decided not to try and outdo them with yet further analysis and technical critique of potential solutions to the crisis, but rather to confine myself to sharing with you some of my deep-seated fears about the core of the problem. 

For many months now, I have been a keen observer of the problems that initially started in Greece, before spreading quickly to Portugal, Spain and Ireland.  The sovereign debt problems in these countries posed an obvious threat to eurozone stability, but over time markets somehow convinced themselves that the costs of bailing them out were manageable.  It was really only when the focus switched to Italy that some of Europe’s leaders began to pay serious attention.  Italy is too big to bail out. Given their weak political leadership and lack of credibility, few people trust their capacity to get their own house in order. 

It has become painfully obvious that the countries in the eurozone are locked together in a straitjacket and that the founders of the single currency have thrown away the keys.  Of course, some would say they never intended to make keys available!

The very core of the problem is that the countries of southern Europe are in some instances living way beyond their means and, in order to preserve the single currency, the tab for their excesses will have to be picked up by their neighbours to the north. The economies of southern Europe have prospered over the last decade, courtesy of the effective subsidy that was extended to them on joining the single currency, and the access to cheap money that it conferred.  Many started to believe that there truly is such a thing as a ‘free lunch’.

In the meantime, to the north, Germany was at last beginning to emerge from the task of re-unification, and German industry and trade unions were quietly but relentlessly restructuring themselves.  In the good old days of the Deutschmark, such an export powerhouse would have contended with a much stronger currency in relation to their neighbours. But with the advent of the Euro this countervailing force was removed and German industry thrived.  It is fair to say that just as southern Europeans began to enjoy their free lunch, the Germans were already eating their breakfast!

These economic imbalances, and the respective sets of cultural values that gave birth to them are, in my view, so intractable that it is very hard to see any solution that is truly sustainable over the long term.  Not surprisingly, about two thirds of German voters are against the provision of further financial support to their embattled southern neighbours. German Chancellor Merkel, and to a lesser extent French President Sarkozy, have the unenviable task of convincing their voters of the need for pan-European solidarity. 

And finally, just in case some of you are not yet depressed, please do keep in mind that the current levels of sovereign indebtedness are in my view mere symptoms of the real problem.  Regardless of how much Greek debt is written off, the country has lost the ability to re-establish a semblance of competitiveness through deflation of their domestic currency. This can only lead to many years of high unemployment, stagnation and – almost inevitably – social unrest and political instability. 

Whilst I am almost unreservedly negative about Europe, there are of course others who have a more benign assessment of affairs.  Many commentators in Europe insist that financial markets (and indeed people like me) simply do not understand the absolute determination amongst Europe’s political elite for the single currency to be protected and for the European project to be preserved.  That might be so, but the problems arising from the separation of responsibility for fiscal and monetary policy in the eurozone, and the consequent challenge of marrying economic and political realities, cannot be underestimated. Somehow Europe will probably muddle through, but it won’t be pretty.

If we cross the Atlantic, it is self-evident that the United States also has more than its own share of challenges.  After a shaky year in which it looked as if its previous economic recovery had almost completely stalled, the most recent growth figures brought more cheerful news. But it’s early days to proclaim the US has turned the corner, particularly given that the problem relating to its own fiscal deficit is arguably comparable to what we see in Europe.  It is easy to forget that gross US Government debt is almost 100 per cent of GDP – a ratio that is worse than what we currently see in countries such as Portugal or Spain.

In a fiscal sense, it is obvious that we are going to have to see a lot of belt tightening , although with politics in Washington being as ugly and divisive as anyone can recall, it seems highly unlikely that much will be achieved before next November’s election.  Until then, the only certainty in Washington will be paralysis. 

Ultimately though, I continue to have considerable faith in America’s ability to dig itself out of a hole.  To paraphrase Mark Twain, America’s premature death has on more than one occasion over the last forty years been greatly exaggerated.   We all well remember the seemingly inexorable rise of Japan in the eighties, and being submitted to a relentless diet of Japanese management techniques.   However, that miracle was sadly followed by stagnation, and with the end of the Cold War the United States emerged in the nineties as the undisputed global leader.

And there are some fundamental reasons why I believe America will get back on its feet, and why it has a much better chance of a successful recovery than Europe.  For one, they have a single government controlling fiscal and monetary policy, plus the advantage of having almost all its debt denominated in its own currency. The US is also a pragmatic nation that doesn’t give up easily, and has the determination and the optimism to keep trying new things until it solves a problem.   So yes, I think the US will come back, although it may take another election and a few more years to get there.

Understandably, the economic problems faced in the United States and Europe has led to greater scrutiny of China by those looking to measure the impact of worldwide turmoil on the powerhouse of Chinese growth.

While the Chinese economy continues to grow at over nine percent annually, it is slowing visibly.  However, an important difference between China and Europe or the US, is that the slowdown in China is largely the result of a lengthy and deliberate effort to tighten money supply and credit growth – an intentional safety valve to manage the inflationary pressures that have been building up in the economy.

While the declining prospects in the west will undoubtedly contribute to the Chinese slowdown, domestic demand (including domestic consumer demand) remains strong.   Although there are those who express concern about risks developing within China’s formal and informal banking sectors, the fact is that overall debt levels remain manageable, especially when compared to those of China’s western counterparts.  That is why at Rio Tinto we continue to believe that China would be fairly resilient to even a quite sharp correction in the OECD economies. 

Furthermore, although it will probably avoid the ‘shock and awe’ style of stimulus that we saw in 2009, if needed, China remains well equipped to support growth through a combination of fiscal incentives and monetary policy adjustments. With household and corporate savings rates at very un-western levels and rising, China has many more levers left to pull than most other nations.   So while there may be disagreement over China’s precise rate of growth over the next year or two, there is in my view little doubt that its long-term growth rate remains in place – keeping China firmly in position as the world’s primary engine of growth.

Before I turn more specifically to Australia, perhaps we should pause to ask where all of the above thoughts are leading.  More specifically, the big question is whether we will be experiencing a second Global Financial Crisis.  I am not going to be so bold – some would say brave – to offer a precise opinion, although I do believe that the world has changed irrevocably and that it has altogether become a much more volatile place in which to invest and plan for the future. 

The world today feels very different from the one of relative stability and shallow economic cycles of the 1980s, 1990s and early two thousands.  Of course, this is not the first time the world has experienced shocks – the oil instability of the 1970s, the rise and fall of Japan and the Asian currency crisis, just to name a few – but never before have we witnessed something of this scope and magnitude.

The European economic and nascent constitutional crisis; America’s fiscal deficit and harsh political divisions; fears of a double-dip recession in the west; and anxieties about the impact of these on China’s phenomenal growth story, are all here to stay – in some cases for many years to come. For all of us here, fluctuations in commodity prices will be the most prominent symptom of a volatile environment.    This volatility is something that Rio Tinto has been flagging for a good 18 months.  In February, while acknowledging that the long-term picture for commodities remains very positive, we forecast that, in light of global economic imbalances, volatility would increase. And that seems to be what is playing out at the moment.

And that thought finally takes me to Australia – or “The Lucky Country”, as it is affectionately called.   It is an expression that I have never entirely understood, and, having consulted the dictionary, the sentiment that you are lucky can only reflect a belief that your good fortune is somehow entirely fortuitous or indeed almost undeserved.   Using that as a loose definition, I have been able to identify three examples of luck which have no doubt served you very well.

Firstly, and as chairman of a mining company I have to start here, Australia is truly blessed with abundant natural resources.  I don’t expect disagreement on that point.

Secondly, Australia’s location on the globe has not only meant that for most of the post-war era it has been conveniently distant from the world’s trouble spots, but in the early 21st Century your close proximity to the world’s largest buyer of natural resources has given you a distinct competitive edge in relation to your competitors in Africa and South America.

And thirdly, you have a wonderful climate, which has allowed you to establish a lifestyle that is the envy of many in the world.  Some of you might retort that that has resulted in you being surrounded by more South Africans than you ever thought you needed, although perhaps that is a topic for another day!

So Australia is no doubt lucky – you have valuable natural resources, an attractive location and great weather.  However, in my view, that is about where your luck stops.  In fact, I realise you use it as term of endearment, but I firmly believe that the name Lucky Country risks underselling your considerable achievements.  As any sportsman might say, you have also been good at making your own luck.

Reforms by successive governments over the past 30 years have been critical in creating a solid growth platform, from floating your currency in 1983 and reducing tariff barriers, to reforming your labour markets and modernising tax and competition laws.

You not only have a skilled workforce, but Australians generally have a healthy disrespect for convention – creating a “can do” culture which often succeeds against the odds.

Australia has an untarnished, fully functioning and well regulated banking sector that escaped almost entirely unharmed from the Global Financial Crisis.

You have historically allowed – indeed encouraged and facilitated – aggressive investment in your mining industry and the various world-class operations that we see in the Pilbara today bear testimony to a philosophy that both encouraged risk taking, but also allowed the risk takers to be fully rewarded for their endeavours.

Taken together, these considerable achievements explain why Australia was almost the only OECD economy to avoid entering a technical recession during the GFC, and why you continue to have such a robust economy and low unemployment rate.

So, as a bridge player might say, Australia was not only dealt a good hand, but you have played your cards well.  However, looking to the future, it is now important that you continue to press home your considerable advantages in the good times to ensure that you are well positioned for the tougher times when they arrive. 

It is in my view a counter-intuitive truth that societies generally have greater difficulty in the management of prosperity than in establishing an effective mode of survival in times of hardship.   More often than not, good times are wasted.  Prosperity seems invariably to lead to complacency and complacency often leads to decisions where short-term time horizons and popularity seem to take greater precedence than the health of society over the longer term.

I know that in my family, even when we have our squabbles, the last thing we need is the neighbour leaning over the fence and magnanimously sharing with us his words of wisdom.  Nothing unites the family more than outside interference!

So, at the risk of being the fool who rushes in where angels fear to tread, what kind of policies do I think will help Australia to continue being so successful?  How can Australia lift productivity to promote economic growth and create new high skilled jobs? What can be done to encourage businesses and families to relocate from low growth to high growth regions?  How can we increase the access to skilled immigrants to fill the numerous gaps in the labour market?
 
I clearly do not have all the answers to these questions, but if Australia is going to make the most of its good fortune, it is going to have to find a way of re-shaping the workforce in accordance with its new and emerging needs.  Policies concentrating on the labour market are therefore one of the keys to maintaining and increasing competiveness. The demand for skilled labour to meet the requirements of a burgeoning energy and resources sector is already straining HR departments and wage budgets across the country. And all the signs indicate that this problem will become even more acute. The giant wave of investment in the minerals sector cannot be stalled in order to build a pool of skilled workers. At Rio Tinto, we have identified diversity in the workforce as a key tool in boosting the pool of skilled workers, with gender and ethnic diversity helping to broaden the available talent.

I believe that any solution to the skills shortage will need innovative thinking from business and government, working together. Amplifying opportunities for young people aiming for a career in the resources sector to take an apprenticeship, or to undertake other forms of training, will be an essential part of the mix. Maximising training and re-skilling opportunities for those wishing to move into the resources field will be fundamental.

Needless to say, wage increases linked to productivity improvements must be at the core of any labour negotiations. Without this principle firmly in place, efficiency gains and improved work practices will be much harder to come by.

Australian jobs are, of course, paramount, but realistically, skilled migration and temporary skilled migration have to be part of the response, and I’m pleased to acknowledge that the Government has recognised this.

Mobility in the workforce must also be encouraged, and a level of fly-in, fly-out and drive-in, drive-out to more remote mining operations will continue to be an essential feature of the Australian landscape.   Making use of fly-in, fly-out workers benefits many regions and cities that wouldn’t otherwise share in the benefits of mining.   We recognise that this practice creates challenges for existing towns in established mining regions, but the answer does not lie in restricting them, but rather in managing them better.

Taxation is another area that needs to be addressed, and I mention this not just because the new Mineral Resources Rent Tax legislation was introduced into Parliament earlier this week.  In fact, I think it is widely acknowledged that the  unfortunate controversy of the original mining tax proposals had resulted in insufficient credit being given to a number of good ideas that were previously floated in the Henry Review.  That review not only emphasised, in my view correctly, the need for greater simplification of the tax system, but concluded that Australia has too many taxes and too many complicated ways of delivering multiple policy objectives through the tax and transfer system.  Rationalisation of the architecture in this area should clearly be a strategic priority.

We have made our position on the Government’s carbon tax well known so I won’t go into detail today, except to say many of the concerns we held about the original mining tax proposal regarding international competitiveness and the disincentive to invest in relation to Australia, may also apply to the Government’s proposed carbon tax.

The mining sector operates with long-term strategic planning at the centre of its decision making process. Rio Tinto’s chief executive Iron Ore, Sam Walsh is already looking at iron ore resource maps more than 50 years from now. In our business, investment decisions made today are borne out many years in the future.

Public policymakers carry that responsibility for long-term planning with greater public scrutiny. All nations, not just Australia, would benefit from policy reform work undertaken with a long-term view of the world, framed for the volatility of the economic cycle.  I recognise the challenges imposed by day to day political realities, but, in an increasingly competitive world, such a long-term mindset would deliver confidence for investment and capital flows.

Ladies and gentlemen, in my earlier remarks I emphasised that the perspective from Sydney is a marked contrast to the view of the world from my office in London.  Almost regardless of how events in Europe and North America unfold in the months ahead, it continues to be my view that the global economy will for several years continue to be marked by considerable volatility.  Fat years will almost certainly be followed by lean years and these events will invariably also impact Australia. 

Whilst policymakers elsewhere are grappling with the considerable dilemmas they now face, Australia is in the privileged position of having to manage the challenges arising from prosperity.  It will require tremendous discipline and strong leadership to stop this success from giving rise to complacency.

Australia finds itself at a crucial time in its history as a central player in the global commodities boom.   Do remember that decisions made – or not made – have very long-term consequences.  You are in a wonderful position – please don’t miss the opportunity to remain one of the most fortunate countries on earth.
 

Thank you.

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