Resources firms advised to tread softly when buying abroad
Howard Winn in Shanghai
Chinese mining and resources companies should adopt a low-key approach when looking to acquire overseas assets if they want to avoid inflaming nationalist sentiment, according to industry veteran Chip Goodyear, the former chief executive of BHP Billiton.
'It's better to start slowly, rather than with a big bang and trying to take 100 per cent and scaring people,' he told the Oriental Mining Club in Shanghai.
Goodyear was answering a question from a Chinese executive who asked for advice on how mainland companies could acquire assets in countries like Australia which has attracted considerable acquisitions attention from metals and resource firms, but at the same time raised populist concerns that Australia's resources were under threat.
'Over time as people get to know each other better the opportunity to do the next deal will come along,' Goodyear said.
Goodyear spent 10 years with BHP Billiton - the last four-and-a-half as chief executive - before retiring in October last year. During his tenure, BHP's volumes grew 55 per cent as the industry witnessed an astonishing resurgence.
'Twenty years ago, the mining industry was yesterday's business - now we are today's rock stars, the darlings of the investment community,' he said. The reason for this was not that India and China woke up one day and decided to buy resources.
There were two reasons, he said.
Firstly, the revolution in the communications industry which changed and diversified the ways in which people got information and showed people in the developing world the way the West lived and showed them that there was a better way of life. 'Once people see this they will usually work hard to get it.'
The second trigger was the collapse of the former communist economies which led to social and political changes. In some cases, this happened directly as in Russia and Eastern Europe and in others indirectly as in China.
The upshot was an aspiration among three to four billion people around the world to improve their standard of living. The impact on the mining and resources industry was dramatic with the market value of the top five mining firms rising from US$60 billion in 1999-2000 to US$620 billion at present.
BHP's market value has gone up from US$10 billion to US$220 billion over the same period as sales to the mainland have risen from US$370 million to US$10 billion in 2007. Rio Tinto's revenues went from US$8 billion to US$58 billion over the decade.
During that period, China increased its proportion of global metal consumption. Its consumption of the seaborne iron ore trade has increased from 60 million tonnes to 600 million tonnes, an increase from 15 per cent to 70 per cent; its copper demand rose from 13 per cent to 28 per cent of world demand; aluminium from 13 per cent to 34 per cent, while steel production rose from 140 million tonnes to 550 million tonnes.
Over the next 20 years, Goodyear said the demand for resources would continue to rise to feed the needs of the developing world for their communications, transportation, electrification, and energy. These resources were also going to become more expensive as lower-grade minerals were used requiring higher costs to process. Mining would also occur in more challenging environments which would incur higher costs.
Goodyear also said that consuming countries were beginning to realise the value of owning and controlling the supply of commodities. It used to be they were content to enter the market and buy what they wanted. Now, there would be more focus on long-term contracts and the forging of mutually beneficial relationships between countries.
At the same time, producing countries would look to earn more from the commodities, so royalties were likely to increase.
Goodyear said there would also be increased attention on the relationship between the resources and the public good. 'Gone are the days when the mining companies can create social and economic damage all in the name of an economic profit. And quite rightly so in my opinion,' he said.
On the question of peak oil or peak copper, he said the world would never run out of these resources so long as people were prepared to pay the cost of extraction. 'If somebody tells me that oil will get to US$1,000 a barrel, I can guarantee that you will get production up. The question is can the economy take oil at that price.'
Seeking a better life
The rise in aspirations in the developing world has given resources a boost
The market value of the top five mining companies has risen from US$60 billion in 1999-2000 to, in US$: $620b