partnering with china in the asian century

Philip Kirchlechner Iron Ore Research PTY LTD

Iron Ore Research PTY LTD 1

Global Iron Ore & Steel Forecast 16th Annual Conference & Exhibition

Perth 19-20 March 2013

PARTNERING WITH CHINA IN THE ASIAN CENTURY

DISCLAIMER

In preparing this presentation Iron Ore Research “IOR” has used information from a wide range of sources for which IOR is not responsible. The data in this presentation may contain inconsistencies or may be otherwise unreliable. Forward-looking statements in this report, including but not limited to expectations about prices, markets, and sales reflect IOR’s views at the time of writing but are only predictions – actual events will differ materially. IOR makes no warranty regarding the accuracy, completeness, or reliability of the information in this presentation.


CONTENTS

Partnering with China in the Asian Century

- Why foreign investment is important and the mining tax is a barrier - Chinese investment in context - Frictions and challenges - Business needs to become Asia-literate - Importance of long-relationships - China in transition - what it means for us


CAN WE AFFORD CAPITAL XENOPHOBIA? “State governments failed to capture enough of the market value of the minerals the largely foreign-owned miners were being permitted to extract” - Ross Gittins, Sydney Morning Herald

“Profits go largely to foreign-owned mining companies” – Jessica Irvine, Herald Sun

“It is right and proper that resource companies, most of them not owned by Australians, pay a fair amount of tax on our common wealth” - Paul Howes, AWU


JAPANESE INVESTMENT BUILT THE FOUNDATION FOR OUR BIGGEST EXPORT INDUSTRY

• “Is more Chinese FDI in America a good thing? The answer is yes. It’s a good thing for American workers. It’s a good thing for American business” - Gary Locke, US Commerce Secretary

• “Australia’s economy is not just attracting investment capital because it is successful, but it is successful because it has attracted foreign capital” -Andrew Cornell, AFR.

• Investment by Britain was crucial for Australia’s early development of infrastructure and export capabilities. - Tim Harcourt, Austrade


CHINESE INVESTMENT IN PERSPECTIVE Total foreign investment stock in Australia in billions

2010 2011 - United States $548 $555 - United Kingdom $475 $470 - Japan $119 $123 - China $19.5 $19 - Total all countries $1971 $2030 - China share 0.99% 0.94%

Foreign annual direct investment in Australia in billions

2009 2010 2011 - United States $2.9 $15.4 $12.0 - Japan $9.7 $6.2 $11.8 - China $4.9 $2.6 $2.0

Source: Australian Bureau of Statistics


CHINESE CONTROL IS STILL LIMITED


Sources: WA Department of State Development, company announcements Mt/a: million tonnes per annum

Mt/a

WA SHIPMENTS TO CHINA

CHINA OWNED PRODUCTION

MOUNTING FRUSTRATIONS Recent statements by senior Chinese officials - Facing Reality: import dependency - Ownership of resources still limited - Complaints about increasing cost of doing business in Australia

Policy Responses “Going out” 走出去 policy …combined with the new….. “Going In” 走进去 policy

- Country by country risk assessment - Key criteria: approvals, unions


RECOGNIZING CULTURAL BARRIERS

Cultural barriers - China had only 3 decades of reform - Japan started reforms in 1868

Reasons for business failure in China - Lack of understanding of history and culture - Not being aware of political situation and how the bureaucracy works


AUSTRALIA IN THE ASIAN CENTURY – WHITE PAPER “a complex sophisticated document” – Craig Emerson “wake-up call that the easy days of Australians getting filthy rich shipping rocks to China are over” - Jessica Irvine

Noble objectives but how to get there? - NBN – long distance learning - Unions - Diversify economy - MRRT - Cut superannuation concessions - Prioritizing China, India, Indonesia, Japan

and Korea

Key challenges remain - Instil interest in Asian at an early age - To bring business and education together - Attract Asian entrepreneurs and capital



LONG-TERM RELATIONSHIPS WILL HELP US WHEN THE BOOM ENDS

Ross Garnaut : ”Australia would not enjoy forever the privileged access of the mid-eighties.”

Courtesy of Rio Tinto


“TENNIS DIPLOMACY”

The Age 5 September 1986

New Straits Times 12 February 1984


CHINA IN TRANSITION – CAUTION WILL PREVAIL

17th Party Congress October 2007 “5th generation” future leaders elected to Standing Committee “SC” of the

Political Bureau • Xi Jinping: previous positions in Shanghai, Zhejiang, Fujian • Li Keqiang: previous positions in Henan, Liaoning 18th Party Congress November 2012 • New SC: Xi Jinping, Li Keqiang, Zhang Dejiang, Yu Zhengsheng, Liu

Yunshan, Wang Qishan, Zhang Gaoli

12th National People’s Congress March 2013 19th Party Congress November 2017

Rising star: Sun Zhengcai


CHONGQING CRISIS – DEALING WITH THE AFTERMATH

Interim Party Secretary Zhang Dejiang

Former Party Secretary Bo Xilai

New Party Secretary Sun Zhengcai


PREMIER’S FIRST NEWS CONFERENCE

Priorities

• Sustainable growth at 7.5%

• Improving people’s lives • Social justice

Premier Li Keqiang with new vice premiers at the Great Hall of the People 17 March 2013

Vice Premiers

• Zhang Gaoli • Liu Yandong • Wang Yang • Ma Kai


WE ARE IN A GLOBAL COMPETITION FOR THE INVESTMENT DOLLAR

- We must work harder on relationships

- Think Long-term – “Neanderthal marketing”: "Trying to make a profit on each transaction

rather than trying to profit by managing customer lifetime value" - Philip Kotler, Kotler on Marketing- How to Create, Win and Dominate Markets, 1999

- Asia/China literacy essential

- Deal with growing basket of risks for investors – MRRT, Carbon Tax, Approvals, Industrial Relations

- We cannot take our success for granted

- Open the gates - To labour and capital - Remove restrictions on state-owned investment

Philip Kirchlechner Director

Iron Ore Research PTY LTD ABN: 18 119 514 920

Mobile: +61-418-937-429 Email: [email protected]


NEW DEVELOPMENTS 2003 China becomes biggest iron ore importer,

import value reaching $4.8 billion 2007 May: Marius Kloppers to be new BHPB CEO Nov.: BHPB proposes combinaCon with Rio 2008 Feb: Chinalco acquires Rio stake Rio reject BHPB offer Oct.: CISA Conference without Rio/BHPB China Iron Ore Imports reach US$60 bio 2009 Feb: Rio partnership with Chinalco Jun: Rio/BHPB WA iron ore JV 2010 Apr: Rio announces shiV to QTR pricing China Iron Ore Imports reach US$80 bio


AUSTRALIAN INVESTMENT ABROAD

Total direct investment stock in billions

2010 2011 • United States $94.3 $97.9 • United Kingdom $71.3 $52.1 • New Zealand $39.8 $40.2 • Canada $21.3 $23.3 • China $6.7 $6.4

Source: Australian Bureau of Statistics


Speaking Chinese can get you in trouble

Iron Ore Research PTY LTD 20 Mark Knight – Herald Sun

Different Styles of Business Conduct

Korean Japanese Chinese

Courtesy Jean Ough – Representative, Government of Western Australia Trade and Investment Office, Korea

Unresolved Problems

Deng Yuwen, Dep. Editor of the Central Party School journal, Study Times, wrote an arCcle saying that lack of reform during the last decade was brewing a legiCmacy crisis.

Unresolved problems: -‐ Stagnant economic restructuring -‐ PolluCon -‐ CorrupCon -‐ Outdated household registraCon system -‐ Moral degradaCon


partnering with china in the asian century

Business

capital iron ore research

awuiron ore research

limitediron ore research

austradeiron ore research

usiron ore research

unions iron ore research

iron ore research pty

investment capital