Australian Embassy, China
澳大利亚驻华大使馆
Embassy address: 21 Dongzhimenwai Street, Chaoyang District, Beijing - Telephone: 5140 4111 - Fax: 5140 4204

“Australia and China: Growing Together”
HE Ms Frances Adamson
Australian Ambassador to the People’s Republic of China
Speech to the 11th China International Steel & Raw Materials Conference
Qingdao
28 September 2011

Introduction

Mr Zhang Changfu, Secretary-General of the China Iron and Steel Association.

Distinguished guests, ladies and gentlemen.

It is an honour to be here today to speak to you about the great strength of the Australia-China relationship in the iron ore sector, and the opportunities to build on this relationship in coming years.

2012 marks the 40th anniversary of Australia-China diplomatic relations, and the iron ore trading relationship is a wonderful example of how far we have come in that time.

The message I want to convey to you today is that Australia remains firmly committed to this relationship for the long term.

Australia has consistently stood side-by-side with China as a reliable supplier of the resources that have, and continue to, feed China’s economic growth.

We meet today in Qingdao, home of China’s largest imported iron ore receiving port, but I would like to start by taking you back 26 years to a stunningly beautiful blue-sky day in Western Australia’s Pilbara region in April 1985 – a day that in many ways heralded a new beginning in Australia’s trading relationship with China.

On that day, Australia’s Prime Minister, Bob Hawke, and the General Secretary of the Chinese Communist Party, Hu Yaobang, stood atop Mt Channar and looked out over the sparse and beautiful landscape of the Pilbara region.

The image of the two leaders surveying the scene remains one of the most enduring symbols of the bilateral relationship.

It was a day that marked a turning point in the relationship – a day when the most senior leaders of Australia and China crystallised their vision for a close working relationship in the iron ore sector.

Just two years later, Sinosteel made the first ever Chinese investment in Australia through the Channar Iron Ore Joint Venture Project with Hammersley Iron (now a Rio Tinto subsidiary) – a project that continues to prosper.

I am here today to assure you that the determination of the Australian Government to take forward the bilateral relationship in the iron and steel sector is as strong now as it was on that day in April 1985, and as strong as it has ever been.

We know we face many challenges in the years to come, including reforms in both Australia and China that will position our economies for long-term growth into the future.

At the same time, we see a great wealth of opportunities for cooperation which have the potential to underpin our two countries’ shared prosperity.

We must seize these opportunities if we are to build on our already successful bilateral partnership.

Bilateral economic relationship

China is Australia’s largest trading partner, as well as our single biggest export market and import source, and Australia is China’s seventh-largest trading partner.

In the 12 months to June 2011, bilateral merchandise trade surpassed $105 billion, representing growth of 28 percent year-on-year, growth that has not been uncommon in recent years.

China now accounts for 26 percent of Australia’s merchandise exports. Iron ore is Australia’s single largest export item to China, worth $35 billion in 2010. At the same time, Australia is China’s largest source of imported iron ore.

Unsurprisingly, iron ore has been a cornerstone of the Australia-China economic relationship.

Iron ore trading relationship

The historic investment by Sinosteel in the Mt Channar project, though momentous, was not the beginning of our iron ore relationship.

The first shipments of Australian iron ore to China arrived in 1973, just one year after the establishment of diplomatic relations.

The long-term growth of the iron ore relationship has been remarkable, underpinned by the huge changes in China’s economy from the 1970s to the present.

From January to July 2011, Australia supplied 160 million tonnes of iron ore to China, accounting for 44 percent of China’s iron ore imports.

The Australian Government and Australian companies remain strongly committed to maintaining Australia’s position as China’s first-choice supplier of iron ore over the long-term.

Indeed, a clear sign that Australian companies share the Government’s long-term view of the relationship came during the global financial crisis.

Rather than rolling back investment in that difficult period, many Australian companies instead ramped-up their investments in mining and infrastructure, in the knowledge that long-term relationships with Chinese customers would see both parties through the crisis.

One of Australia’s great strengths is our capacity to provide high quality iron ore, and this will continue to be the case.

The quality of Australian iron ore is significantly higher than ore from many other sources, with low impurities and average grades exceeding 60 percent iron.

As members of this audience know well, a higher quality of ore leads to better blast furnace performance, improved energy efficiency and higher quality steel.

We know that more efficient production is a key element of the reforms taking place in China’s steel sector, and we’re happy that Australian exports are able to support this objective.

Another of Australia’s advantages is our capacity to provide the full range of other materials required for steelmaking.

Australia is one of the world’s most competitive suppliers of coking coal, nickel and manganese, all key elements in the steelmaking process.

In 2010, Australia exported 17 million tonnes of coking coal to China, accounting for 37 percent of China’s total coking coal imports. We would like to see this trade grow,particularly as Australia’s coal export capacity will increase by around 20 percent in the next three years with new mining and infrastructure investments in Queensland and NSW.

Australia’s own economy continues to perform well.

Our strength throughout the global financial crisis has been widely acknowledged, including through Euromoney’s much sought-after World’s Greatest Treasurer Award, which Wayne Swan will accept this week.

Our legal system and stable democracy are recognised by our Chinese partners as fundamental to our attractive trade and investment environment. China can be assured of its ongoing supply of iron ore from Australia.

Iron ore pricing

Despite the efforts of Australia’s miners, large and small, to expand supply of iron ore, it has not always been possible to keep pace with supercharged growth in Chinese demand. As we know, this has put pressure on global iron ore prices.

The Australian Government and Australian companies are well aware of concerns in China about iron ore pricing, but we can also see, and welcome, greater transparency in contracted prices.

In the end, iron ore prices, like other commodities, are shaped by market forces. Prices are determined on a commercial basis between companies. Just as iron ore prices rise in periods of strong growth in demand, so too will prices moderate as the market stabilises. In fact, we are seeing moderations in prices now.

The high grade of Australian iron ore, and our close geographical proximity to China are both factors that help Chinese steel companies to reduce costs.

Moreover, existing plans for significant expansion of iron ore supply in Australia, and China’s continued integration into the Australian iron ore sector through investment, strengthen the basis for a long-term partnership.

A shared value chain

The Australian Government is firmly of the view that the relationship will only remain healthy and prosperous long into the future if we work together for mutual benefit.

That is why I am pleased to see Australia’s major mining companies source mining, processing and infrastructure equipment from China. The market is worth many billions of dollars in total, and is growing strongly.

Australian companies are well aware of the benefits this two-way relationship can bring, not least because of the increasingly high quality of the equipment being produced in China.

At the same time, I also want to reiterate that Australia has a long and proud mining history. Our mines are among the safest, most productive and low cost operations in the world – we could never have achieved this without the great ingenuity and technical proficiency of our mining technology and services industry.

I encourage Chinese companies operating around the world to look to Australia to see how they can utilise these capabilities and technologies to extract resources from their operations more efficiently and safely.

Bilateral investment

Another way in which Australia and China continue to share in the rewards of the mining boom is through investment.

Australia has long relied on international capital to open new investment opportunities and to develop our natural resource reserves.

Foreign investment not only provides capital for Australia’s growth, it also creates new jobs, encourages innovation and skill development, introduces new technologies and promotes healthy competition in a market economy.

We know China is looking to increase foreign investment under its “Go Out” strategy, and we want to say, “come to us”.

Come to us because we have one of the most open and transparent regulatory environments for foreign investment anywhere in the world.

Come to us because this is reflected in the strong growth of Chinese investment in Australia in recent years. Between 2007 and 2010, the Government approved over $50 billion in Chinese investment, including in businesses and real estate.

Like China, Australia screens foreign investment proposals on a case-by-case basis to ensure they are consistent with our national interest.

Come to us because we generally do not prohibit investment in any sectors of our economy, and nor do we impose equity caps or have requirements for levels of local ownership.

And finally, come to us because Australia’s Foreign Investment Review Board is willing to engage Chinese companies before investment proposals are formalised and lodged to help explain Australia’s foreign investment application procedures.

There are many fine examples of successful and prosperous Chinese investments in Australia’s mining sector.

That enduring partnership I spoke of earlier between Rio Tinto and Sinosteel continues today, as strong as ever. In December 2010, the two parties signed a new agreement for extraction of a further 50 million tonnes at the Mt Channar mine.

Just last week in Beijing I met the Chairman of CITIC Group, Mr Chang Zhenming, who told me about the progress being made in CITIC Pacific’s Sino Iron Project, a magnetite mining project in which the China Metallurgical Group Corporation (MCC) has a stake. MCC is also developing the Cape Lambert magnetite iron ore project.

Chinese investment is particularly important in the development of Australia’s magnetite iron ore resources, as China has long experience in use of such ores.

With the many success stories of Chinese investment in Australia’s mining sector, we hope too that China will engage in further reforms of its foreign investment regulations to allow Australian companies to lend their expertise to develop China’s resource sector and boost mineral and energy self-sufficiency.

At present a number of barriers to investment remain, in the form of restrictions on investment in certain mining fields under the Foreign Investment Catalogue, as well as equity caps and restrictions on the types of business that can be undertaken.

Total stock of Australian investment into China is A$ 6.7 billion, accounting for around 1.9 percent of total Australian outbound foreign direct investment.

We want that to grow. We want our investment relationship to be genuinely a two-way one. Just as Chinese investment benefits Australia, Australian investment will also bring great benefits to China.

Economic reforms in Australia

As I mentioned at the outset, it is not just China that is embarking on a period of economic reform and restructuring. Australia too is engaged in reforms that will bring fundamental changes to the structure of our economy.

Clean Energy Future Plan

The Australian Government is preparing the country for a low-carbon future, and in July 2011 released the key details of a reform package that will achieve that aim – Australia’s Clean Energy Future Plan.

Legislation to give effect to this has now been introduced into the House of Representatives and is expected to pass both Houses before the end of the year.

The plan includes the introduction of a carbon price, as well as a suite of measures to promote innovation and investment in renewable energy and to encourage energy efficiency.

In recognition of the fact that tackling climate change requires a global effort, the Government has also pledged to extend Australia’s 2050 emissions reduction target from 60 per cent to 80 per cent below 2000 levels.

The carbon pricing scheme will commence as a fixed price from 1 July 2012, becoming a cap and trade emissions trading scheme with a flexible price from 1 July 2015.

So what does the Clean Energy Future Plan mean for the iron and steel sector?

It means a competitive advantage for companies, investors and innovators who find cleaner and more efficient ways of doing business, such as using Australia’s outstanding renewable energy resources to power mining operations in remote areas.

It means regulatory certainty. Businesses operating in Australia, as well as potential investors, now have a clear understanding of the Australian Government’s plan for a low-carbon future.

Mineral Resources Rent Tax

From 1 July 2012, Australia will also introduce improved resource taxation arrangements. A new Mineral Resources Rent Tax, or MRRT, will apply to mining of iron ore and coal.

The MRRT will ensure Australia remains a stable supplier of resources at a competitive price.

Companies with small amounts of MRRT assessable profits (50 million dollars per annum and less) will be excluded.

New investments will be given generous treatment, with tax not payable on projects until they have made enough profit to pay off upfront investment.

Transitional arrangements will also shield the market value of any existing investment.

Investment in resources and energy projects is expected to continue to be strong under the MRRT. Indeed, companies have committed to multi-billion dollar expansions of their Pilbara iron ore operations since the announcement of the tax.

Reforms such as the Clean Energy Future Plan and the Mineral Resources Rent Tax will help to ensure Australia’s growth, prosperity and sustainability well into the future – a vision shared by Chinese leaders for their own country.

Economic reforms in China

Like Australia, China faces a challenging transition to a low-carbon economy.

In his speech to the World Economic Forum meeting in Dalian on 14 September 2011, Premier Wen reiterated that the period of the 12th Five Year Plan would be critical to China’s ongoing efforts to build a moderately prosperous society.

China will raise the share of non-fossil energy in primary energy consumption to 11.4 percent, reduce energy consumption and carbon emissions per unit of GDP by 16 percent and 17 percent respectively, and cut total discharge of major pollutants by 8-10 percent.

These changes too will have an impact on China’s steel sector, including through cutbacks in inefficient production capacities, restrictions on expansion of new capacity and upgrading of steelmaking technologies.

Australia’s potential to meet China’s iron ore demand in future
China is now the out-and-out powerhouse of the global steelmaking industry. In 2010, China accounted for around 45 percent of global crude steel output, with over 626 million tonnes of production.

By most predictions, China’s production of crude steel in 2011 will surge again, this time breaking the 700 million tonne barrier.

With the continued expansion in China’s demand for iron ore, Australia is well placed to supply the resources needed for the coming phase of growth in China.

Expansion plans by the major miners and expected capacity from new suppliers will result in Australia having an additional output potential of well over 500 million tonnes of iron ore over the next three years.

Total investment in the mining sector is expected to exceed A$83 billion by the end of 2012, eight times greater than it was a decade ago, prior to Australia’s first mining boom.

The Australian Government is committed to providing a sound regulatory environment for investment in this expansion in our iron ore production and infrastructure.

We are pleased to see the great progress being made by Australian iron ore miners in improving rail networks and expanding port capacity at Port Hedland, Cape Lambert and Dampier, our key bulk export ports in the Pilbara.

Likewise, we welcome the Western Australian Government’s proposal for new Pilbara port facilities at Anketell Point – a proposal that has already attracted the support of a number of companies, including some with Chinese partners.

With this ambitious expansion of both mining output and infrastructure, we are extremely confident about Australia’s capacity to meet China’s iron ore demand into the future.

Conclusion

With all that we now know about the strength of the Australia-China relationship in the iron and steel sector, I believe it is true to say we have met and surpassed in every way the vision of Australia and China’s leaders on that perfect day at Mt Channar in April 1985.

This relationship has been one of enduring strength and remarkable complementarity.

Before I commenced my term as Ambassador, I visited the Pilbara region. I, too, saw a blue sky and a bright and prosperous future.

With the many changes that the coming years will bring, I reiterate that Australia’s commitment to the relationship remains absolutely firm.

We will continue to be a competitive, reliable supplier of raw materials for China’s steel industry, and we will encourage ever closer partnerships between companies in both countries.

The Australian Government is determined to ensure that we continue this outstanding partnership, that we continue growing together.