The Western Australia Metals Mining Cluster

Microeconomics of CompetitivenessProf. dr. Fred van Eenennaam

IMBA 2010-117 October, 2011

ByKumar Mankala

Rodney Bosire, Michael Ukstins, Zdravka Paskaleva, Azadeh Pourzand,

Table of Contents

The Western Australia Metals Mining Cluster 1

Introduction – Why this Cluster? 4

History 4The Gold Rush 5Gold to Iron Ore 5

The Cluster Today 7Exports 8Innovation 8Investments 9

Regional Analysis 10Pilbara Region 10Mid West Region 10Goldfields Esperance Region 11Kimberley Region 11South West Region 12

Demographics 12

Economics 12Australia 12Western Australia 13

Political Landscape 14

Competitive Forces 15

National Competitive Advantage 16Factor Conditions 16Demand Conditions 17Related and Supporting Industries 17Firm Strategy, Structure and Rivalry 19

Cluster Comparisons 20China 20Canada 20Brazil 21Russia 22

Future Outlook 23Two speed economy1 23Unsustainable rise in standard of living2 23Over dependence on China4 23Labor shortage and implications3 24Infrastructure challenges 24Impacts of Mining: Environmental damage 24

Recommendations 25For the Present 25

Institutions for Collaboration 25Education 25The Government 25Competitiveness Among Companies 25Socio-Demographic Development 25China 26

For the Future 26Moving up the mining value chain 26Services hold the Key 27Expertise gained from Mining 27Energy Management 28Mining to Metallurgy 28

Appendix 29

References 33

Introduction – Why this Cluster?Australia is the sixth largest country in the world. It is so vast and diverse that it has been designated the status of a continent. However, a large part of Australia is arid or semi-arid making it difficult for inhabitation (more than 90% of its population lives in coastal cities). Interestingly, the arid and semi-arid areas of Australia hold vast treasures of valuable minerals and natural energy resources.

Being a geographically isolated island, far away from major landmasses of Asia, Africa and Americas, Australia has been dependent on trade and commerce for its economic development. Australia by exploiting its natural resources wisely grew into one of the world’s most advanced economies. In fact, Australia is one of those very few countries that could successfully exploit its natural resources for the benefit of its entire population. An indicator of this is, at $40,000 per person, Australia is the 10th highest per capita in the world.

Western Australia constitutes about one-third of Australia in area and has most of Australia’s mineral and energy resources. It has grown into a major mineral exporting regions of the world. Over a period of time, a symbiotic relationship between mining and other related and unrelated industries developed, that evolved into what is one of the largest mining clusters in the world. Western Australia due to its free economy has been at an advantage in encouraging dynamism within this cluster to make it internationally competitive.

Studying Western Australian mining cluster is of interest and importance because it gives an insight as to how countries can avoid the “resource curse”. It is interesting to analyze how a society can make use of its natural resources using a strong and free economy.

In this paper, an analysis is made on the Western Australian mining cluster. Cluster theory presented by Michael Porter will be used for the purpose of analysis. The report ends with briefing trends of concern with the Western Australian mining cluster in its current form and details a set of recommendations that could potentially help the cluster grow to its next logical step.

HistoryMining in Australia, in the purest sense, has occurred since the arrival of humans. For years, minerals mined from the Earth were used to color paints used in Aboriginal rock art. Modern mining, in the sense with which we are familiar, began in 1788 with the extraction of sandstone used for early buildings in the colony of New South Wales. Coal was discovered in the areas surrounding Sydney only three years later, providing fuel for heating and cooking, and for steam locomotives travelling across the greater colony. From there, coal mining grew into an industry, primarily for domestic consumption, and eventually for export with a first shipment to India in 1799.

Metals were first mined in the 1840s, most notably lead and copper in Southern Australia. It was the success of copper mines that led to the immigration of Cornish miners from England, who brought with them their experience, skill and mining technology. As settlers and outlaws moved west, more earth was explored and more metallic minerals were discovered, including gold. It was this discovery, centered around the towns of Kalgoorlie and Coolgardie, that sparked a gold rush and led to the rapid growth of Western Australia.

Western Australia is the largest and westernmost of Australia's seven states, occupying roughly one third of the entire country. The Dutch explorer Dirk Hartog was the first to land here in 1616 — Australia's second recorded contact with Europeans. Throughout the remainder of that century, more European ships came in contact with the western coast, although often unintentionally as the result of poor navigation or storms.

The British settled Western Australia’s first official colony, the Swan River Colony, in 1829. Three years later, the name of the area was officially changed to Western Australia — the name that today signifies the larger western state. Perth, Western Australia's current capital and largest city stand on the very same land originally occupied by the Swan River Colony.

The Gold RushDuring the early 1800s, shepherds, convicts and explorers began finding small deposits of gold throughout Western Australia. They, of course, were not eager to share their findings with others. And old laws from Britain that claimed all finding of gold and silver for the crown, did little to encourage active exploration for more. With the discovery of gold in America, in California, many Australians began emigrating there. In an effort to stop the tide of emigrants and encourage further exploration at home for their own country’s

benefit, the laws were reformed and the government subsidized exploration of gold through offering a prize for the one who found "payable gold".

With the discovery of "payable gold" in 1851 by Edward Hargraves, Australia's gold rush began. Centered around the towns of Kalgoorlie and Coolgardie, this led to rapid growth in the region. Entire industries developed around prospecting, and by the end of the century the Australian colonies were known worldwide for mining.

The Western Australian government supported this growth and in 1896, helped raise funds to construct a 530km long pipeline to transport five million gallons of water per day from Perth to the gold fields in Kalgoorlie. The pipeline, known as the Goldfields Water Supply Scheme, was completed in 1903 and is attributed by historians as an important factor driving the state's population and economic growth.

The gold rush fueled growth through the end of the century. But, as is the case in any rush, there comes a time when it dies out. Exploration and mining slowed down. What remained, however, were miners, their technology a growing Western Australia and a vast land waiting to be explored. And Western Australia had gained worldwide recognition for mining.

Gold to Iron OreIn the early 1900s, with little success finding new gold deposits, and completely unaware of any other resources in the soil, mining results began to subside. Also around this time, toward the end of the 1800s, self-governing and independence movements took hold, resulting in a federation agreement between the states in 1901. The Constitution of Australia came into force on 1 January 1901, and the colonies collectively became states of the Commonwealth of Australia. As the country continued to grow, so did its industrial need for resources.

Fueling growth of this new nation required vast quantities of iron-ore, something that, according to estimates at the time, were insufficient to meet rising domestic consumption needs. In a strongly worded decision in 1938, the Australian government placed an embargo on exports of iron ore, in the hopes of keeping any of the little production for themselves.

One unintended effect of the embargo, however, was to discourage serious mining and prospecting efforts. Without the possibility to develop full-scale production and export sales, there was little incentive to search for more. As a result, there were few new metal

or mineral discoveries in following decade and production from the region remained fairly small scale and scattered.

But early mining pioneers were looking and, possibly aware of the potential, began pressuring the Australian government to lift the embargo. On February 15, 1959 the Commonwealth Government lifted the embargo on iron ore. Reports of major finds of Iron ore in the Pilbara region and other parts of Western Australia came in quickly in the following years.

The iron-ore industry began to take off and, through analyzing extractions and further development of surveying technology, additional minerals were found. In the years following the 1960s, significant deposits of bauxite (from which aluminum is extracted), carbonate, nickel, lead-zinc, uranium, copper-zinc and natural gas. Nickel, in fact, became so popular that it fueled an extreme speculative bubble, known as the Poseidon Boom. Named after a nickel mining company, Poseidon, who saw its company shares rise from A$12 to A$280 in only six months.

In the late 1980s, former gold mines were re-examined using modern technology and many found viable for further extraction. Several mines were swallowed up by open-cut operations, a process where by miners dig an increasingly large hole down from the surface, as opposed to tunneling into the ground. The largest open-pit mine in Australia, known as the Superpit, is in Kalgoorlie and produces 850,000 ounces of gold every year and easily outweighs any other mining center in Australia.

The Cluster TodayAn overview diagram on the Western Australian mining cluster is given in Appendix. The value of Western Australia’s mining industry in 2009 was A$48.2 billion and there were 70,063 employees in total servicing in the industry. The mining industry falls under the mineral and petroleum industry, which had a total value of A$61 billion in 2009.

28.1; 46%

8.7; 14%6.3; 10%

5.7; 9%

3.6; 6%

3.3; 5%

5.3; 9%

Mineral and Petroleum Industry 2009

Iron Ore

Crude Oil and Condensate

LNG

Gold

Alumina

Nickel

Others

Value of the industry in billion A$

Iron ore is the largest sector by value and accounted for almost half of the total value of the state’s mineral and petroleum sales in 2009. The quantity of ore sold was 342 million tones. The value of iron sales reached $28.1 billion in 2009, which was 12% lower than the previous year. The drop in value can be explained by a decrease in the contract price for both iron ore lump and fines, which fell on average by 37% from April 2009.

The two largest producers are Rio Tinto and BHP Billiton accounting for 90 percent of all iron ore production in the state. Rio Tinto operates twelve iron ore mines in Western Australia and BHP Billiton seven, all of those located in the Pilbara region.

Gold delivered a record value of A$5.7 billion in 2009, a 29 percent increase in comparison to the previous calendar year. Gold production in the state increased by 9 percent, reaching 4.6 million ounces in 2009. The largest Western Australia gold mine was the Golden Mile, producing 20 tons, followed by the Telfer with 18.1 tons and St Ives with 13.4 tons. Investments in new gold production are constantly made. An example is the Boddington

Gold Mine with a project cost of US$2.9 billion, the largest gold project being capable to produce 900,000 ounces of gold per annum. The project commenced in 2009.

Alumina output remained fairly constant, with 12.4 million tons of alumina being shipped. Inventory levels around the world increased in 2009 placing pressure on prices of alumina. As a consequence sales in Western Australia decreased sharply by 27% to $3.6 billion.

Nickel contributed $3.3 billion to the total value of the State’s resources in 2009. This sector also experienced decline due to soft market conditions and the value of nickel fell by 19%.

Base metals were down in terms of overall value by 16% to $1.2 billion in 2009. Copper output increased by 10% but was not enough to offset the 26% decline in the copper price, which resulted in an 11% fall in the value of copper sales to $924 million in 2009. Sales volumes of zinc decreased by a sizeable 33%. Reduced output combined with a 12% price fall of zinc saw sales values drop by 35% to $213 million. Lead output almost doubled to 27 thousand tons in 2009 due to the recommencement of Ivernia’s Magellan lead operations. The value of lead sales increased by 36% to $44 million and 41% respectively.

ExportsMajor importers of Western Australia metal production are China, India and Japan. 71% of the iron ore production and 27% of the Alumina production is exported to China. 45% of gold production is exported to India.

37%

3%17%2%

6%

8%

10%

2% 12%

3%

Western Australia Merchandise Exports 2009-10 China

SingaporeJapanTaiwanUnited KingdomSouth KoreaIndiaUnited StatesOtherThailand

Total Value of the exports A$83.1 billion

9The Western Australia Metals Mining Cluster

Despite a challenging economic period the value of Western Australia’s mineral and petroleum industry reached $70.9 billion in 2009–10. Record results were achieved within the iron ore and the gold sector. Iron ore, petroleum, and gold together accounted for 83% or $59 billion of all mineral and petroleum sales in 2009–10. Western Australia maintained its status as the nation’s largest exporter in 2009–10 contributing 42% ($83 billion) to Australian merchandise exports totaling slightly more than $200 billion.

Innovation The mining industry is the backbone of Western Australia’s economy. To maintain this cutting edge, corporations, companies and local governments are constantly investing in new technologies to innovate mining techniques. Innovation goes throughout all sectors including the supporting industries such as logistics, equipment and safety.

Special attention is paid to the iron ore sector as one of the leading products within the Western Australia mining industry. The success of the iron ore industry in Western Australia rests on reliability, competitiveness and quality control. Since its inception in the sixties, the industry has continued to improve in mining practices, technological innovation and management processes. An example is the recently opened Remote Operations Centre near Perth Airport. This is Rio Tinto´s new high-technology entity. The center employs approximately 430 technical, planning and support staff. It is now the control centre for Rio Tinto’s network of mines, rail systems, infrastructure facilities and port operations in Pilbara.

InvestmentsWestern Australia leads all other states with mining investment. Figures for 2009–10 show the amount of capital expenditure on mining in Western Australia amounted to $21.7 billion, representing 71% of the State’s total ($30.4 billion) new capital expenditure. As of September 1, 2010, major investments have been committed to multiple projects throughout the industry. Leading are those in iron ore and alumina.

10The Western Australia Metals Mining Cluster

Regional AnalysisWestern Australia is strategically divided into growth regions. Below are some of the highlights of Western Australia as a whole:

All of the growth regions, described below, have access to the sea and the national transport network

Refining and processing of ores are typically done at very well developed ports

Tourism promotes the region's community infrastructure and invites the best talent for employment

Competencies such as water management, energy and logistics efficiency are an unexpected result of the mining industry’s reaction to inhospitable climatic conditions

Pilbara RegionAs the source of Western Australia’s largest export revenue generators — iron ore and liquid natural gas — the Pilbara region is crucial for the local economy and for Australia as a whole. Eastern Pilbara dominates the mining landscape.

Dry and mostly inhospitable, the region’s only sources of water are from the ground, forcing mining companies to improve in water management and recycling (disposal) technologies

Mining companies BHP Billiton and Rio Tinto operate private railways and the ports of Dampier, Hedland and Cape Lambert, making new entry to the market in the region difficult

Due to the lack of a qualified nearby labor, some companies operate fly-in fly-out programs making it easy for people to come, work for a few days and then go back to their homes

Due to the scarcity and high cost of power, mining companies excelled in achieving processing efficiency

Due to the vast area of the region and skewed demographics, mobile network coverage is limited and expensive, satellite phones are used around the mining areas

Mining equipment manufacturers have set up shops given the huge demand

Mid West Region The Mid West region is rich with a diverse range of mineral

resources including gold, copper, lead, zinc, and mineral sands.

The Port of Geraldton is large and handles most of the mineral metal shipping traffic

Iron ore demand is increasing the ability to handle volume at this port

Due to its dependence on energy from outside sources — electricity from the southwest and gas from Pilbara — the region invests in renewable energy sources such as wind farms

Electricity is supplied from the southwest and Gas is supplied from Pilbara region.

Source of water in the dry, hot Mid West inland is primarily ground water reserves

Railways are dominated by one company that provides track access, but leaves locomotive access open for competition

Due to a high rainfall, agriculture is a major industry and the industry uses the ports designed to handle mineral shipments to export wheat

Due to the diverse economy, manufacturing businesses that support mining, agriculture, fishing and tourism are based here

Goldfields Esperance RegionThe Goldfields Esperance Region is comprised of both the Goldfields and Esperance Regions, and is the largest region in Western Australia with a low and flat plateau.

The region has saline land, no rivers and a hot and dry climate

Gold and nickel are extracted and processed in this region Esperance port is the only port in this region through which

most nickel is shipped Kalgoorlie-Boulder is a well-developed and busy airport

connecting to the rest of the world and Australia Energy comes primarily from Pilbara region although

electricity is produced locally by diesel generator for mining Drinking water is supplied from Perth while water for mining

is supplied primarily from catchment, bore wells and desalination plants

Mineral processing bases in Esperance depend heavily on nickel and gold from the Goldfields region

Kimberley RegionThe Kimberley Region is the northernmost region in Western Australia and has huge potential for mining. Currently, the

12The Western Australia Metals Mining Cluster

economy is diverse, although mining is the largest contributor to the economy.

Iron ore, nickel, cobalt, gold and copper are the main minerals in order of their size

It has an added advantage of having a lot of young population Community infrastructure currently limits growth but this is

slowly changing The region has an advantageous 80% of Western Australia’s

fresh surface water (Lake Argyle) and abundant ground water

The port of Wyndham is primarily used to export nickel and the ports of Broome and Derby are used for live cattle and other agricultural commodity exports

South West RegionThe South West Region includes Perth and hosts a substantial population. Major industries include mineral extraction, processing and associated manufacturing.

Alumina, coal and mineral sands (zircon) make up the largest production

The region produces 15% of world’s alumina and 65% of Australia’s production, after which refineries convert bauxite into alumina

Due to the proximity to Perth and an excellent road transportation system, people are more willing to come and work in this region

The Australian Railroad Group carries bulk commodities such as coal, alumina, and soda to the port of Bunbury

A hub for electricity generation, more than 50% of Western Australia’s electricity is produced from the Collie coal and power station

DemographicsDespite being the largest state, Western Australia, with about 2.3 million residents as of June 2009, accounts for only 10.2% of the total Australian population. Seventy-three percent of people in the state reside in Perth, the capital.

The original inhabitants of Western Australia were indigenous Australians — Aboriginals and Torres Strait Islanders. Currently, indigenous Australians account for approximately 3% of Western Australia’s total population. Western Australia’s population is

13The Western Australia Metals Mining Cluster

comprised of 77% European descent. The female/male ratio is approximately 49%/51%. The median age is 36.9 years, which is slightly younger than the nationwide median age of 37.5 years.

Australia, like many other developed countries, is facing the challenge of an aging population due to decreasing fertility and increasing life expectancy. In the coming decades, population aging is projected to have significant implications for Australia in the areas of health, labor force participation, housing and demand for skilled labor. That requires countermeasures throughout the foundation of the governmental structures such as pension policies, healthcare and education systems.

The fact that more than 30% of Western Australia's population is born overseas allows the workforce to communicate relatively easily with countries and businesses around the world, particularly those in Asia and Europe, creating opportunities for Australian businesses.

EconomicsAustraliaAustralian nationwide Gross Domestic Product (GDP) is worth A$925 billion, which translates to A$65,869 per capita (10th in the world) or 1.49% of the world economy (13th in the world). In December 2008, amidst the economic recession, Australia’s GDP reached a historical high of A$1,015 billion. The main driver of the Australian economy is its services sector, but economic success is based on the profusion of agricultural and mineral resources.

Export of primary products is Australia's comparative advantage. It reflects the natural wealth of the Australian continent and the relatively small domestic market. The country is a major regional financial centre and a vital component of the global financial system.

Western AustraliaIn June 2010 Western Australia Gross State Product (GSP) amounted A$187,834,000 or A$81,795 per capita. Total GSP is only 13.8% of the nationwide GDP but Western Australia is the most productive state in Australia with highest GSP per capita.

Gross State Product per capita compared to Australia average:

14The Western Australia Metals Mining Cluster

2005-06 2006-07 2007-08 2008-09 2009-10

WA 78 023 79 584 80 732 81 317 82 653

AUST 56 015 57 095 58 197 57 770 57 925

The structure of the Western Australia economy is closely linked to the profusion of natural resources found in the State. The mining sector accounts for almost one-fifth of Western Australia’s economic activity; mining-related processing accounts for more than half the State’s manufacturing output. Main drivers therefore are its resources and services sector, predominant part being the export of iron-ore, gold, liquefied natural gas and agricultural commodities such as wheat.

The Western Australia economy is more capital-intensive than all the other states. “Diversification (i.e. a greater range of commodities) over the past 15 years has provided a more balanced production base and less reliance on just a few major export markets, insulating the economy from fluctuations in world prices (e.g. high oil and gas prices help sustain export income when prices of other commodities such as alumina and nickel fall)”

Services (particularly finance, insurance and property) and construction sectors in Western Australia have been growing strongly, which have increased their share of economic output. Recent growth in global demand for minerals and petroleum, especially in China (iron-ore) and Japan, has ensured economic growth of Western Australia above the national average.

18%

5%

9%

8%38%

13%

9%

Output By Industry Western Australia, 2003-04

Mining Agriculture, forestry and fish-ing

Manufacturing ConstructionServices Non-marketOther

15The Western Australia Metals Mining Cluster

Political LandscapeCurrently the Liberal party, headed by Prime Minister Colin Barnett, rules Western Australia. For more than a decade, Western Australia was a labor party state. State labor political direction was very much in line with the national Labor government and often avoided customizing their courses of action accordingly to local demographic and economic specifics. Labor State governments were often criticized of intellectual and managerial weaknesses as well as avoiding constitutional responsibilities through ´co-operative federalism agreements´

The political consequences of Federal Labor’s policies coupled with demographic changes are that Labor is seen as a real threat to prosperity in Western Australia. The challenge for Western Australia’s current Liberal-National government is to preside over the continuing development of the local economy, removing restrictions on business so it can diversify the sources of prosperity and open up new parts of the state for development.

A common political right trend is noticeable in Western Australia, illustrating a state willing to further prosper and increase its wealth by stimulating economic growth. With a liberal government the model of big government economic management and equal division of the common wealth among all participants is challenged. Western Australia was for many years the back yard for Australian economy. Economic activity in the state is predominantly deriving from a pioneering private sector, strong links to Asia and visionary entrepreneurs. Western Australia is currently the fast growing state in terms of GSP per capita, population, export and foreign investments. This trend is vastly linked to the great deal of mineral, metal and petroleum resources found in the state. The mining industry is at its apogee.

Competitive ForcesMichael Porter, in On Competition, describes five competitive forces that shape strategy: (1) threat of new entrants, (2) bargaining power of suppliers, (3) bargaining power of buyers, (4) threat of substitutes or services, and (5) rivalry among existing companies. Porter states, “The extended rivalry of all forces that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry”(Porter, 3). In what follows, this paper reviews some aspects of these five forces that make a difference in the overall

16The Western Australia Metals Mining Cluster

competitive nature of the metals mining industry in Western Australia.

1) Threat of New Entrants: Despite local and central government support for the growth of Western Australia’s metal mining industry, we believe the threat of new entrants is still quite low due to the following barriers to entry: (1) the capital and real estate-intensive nature of the industry; (2) heavy upfront investments in community infrastructure essential for their work, permits and equipment; (3) the responsibility of mining companies to plan and accommodate housing facilities and communities for their workers; and (4) local expertise, know-how and credibility, especially when dealing with sensitive issues such as mass displacement and rehabilitation, environment pollution and preservation. These threats all require mining companies to have a well-established and concrete foundation and access to capital in order to begin their work and successfully compete in the field — not easy for new entrants in the industry.

2) Bargaining Power of Suppliers: The mining industry, as whole, depends on many suppliers for building infrastructure, accessing machinery, scientific planning, labor and exportation. Moreover, the work of some of these suppliers goes beyond the metal mining industry. The scope of the work of the suppliers beyond the industry already implies a strong bargaining positioning for the suppliers as they naturally aim to extract the most profit from each of the industries they work with. Furthermore, for instance, in the field of infrastructure and construction, the work of the suppliers that provide machinery, insurance and safety are crucial and not to be undermined by other players in the industry. In other words, suppliers have a high bargaining power in the industry; one which is at the core of the whole industry.

3) Bargaining Power of Buyers: A few, powerful companies seem to dominate the supply side of the industry in Western Australia. Buyers of metals, however, deal with international commodity markets, with a number of options of suppliers. Since raw mining products are mostly sold like commodities, the rules of supply and demand apply which, to an extent, safeguard buyers against threats. In short, though the bargaining power of buyers may seem reasonably high, it is kept in check by the power of suppliers and the company’s struggles over access to vast resources required for success in the industry.

4) Threats of Substitute /Services: The threat of substitutes for raw material is very low, in the sense that metals cannot often be substituted with anything else. Although synthetic materials such as carbon fiber and other cheaper, alternative alloys may sometimes substitute base metals, their impact on the demand of

17The Western Australia Metals Mining Cluster

the base metals is insignificant. Chemically altered forms of aluminum, iron, steel, copper and gold have emerged, although pose no real threat of substitution. Any substituent alloy in turn derives its constituents from the base metals. For example, a decrease in demand for Copper might lead to an increase in demand for aluminum. The aforementioned metals are, at times, substitutes for one another, thereby, making it difficult for metal mining companies in Western Australia that do not focus on all of these metals at once. In other words, one way to overcome this challenge in the industry is to find and work on all of these metals in order to create a safety net against any such threats.

5) Rivalry Among Existing Companies: Rivalry among existing companies at the moment seems relatively low, aside form competing for the best employees or tackling environmental challenges. Metals are commodities and there is not much value addition or distinction one can bring to the base product. Hence, the more one produces, the more one generates revenues. Success in this industry depends on: (1) size of the company in terms of capital, infrastructure and real-estate holdings, (2) the company’s rather exclusive and extensive access to raw materials and, (3) collaborations with the government of Australia and Western Australia for accessing to resources necessary for mining, producing and exportations.

National Competitive AdvantageAustralia is fortunate to have been endowed with extensive and diverse mineral resources. Vast reserves of iron ore, copper, gold, nickel and uranium give the country a distinct advantage upon which to build a successful mining industry. But an abundance of natural resources alone are not enough to create a competitive and sustainable cluster.

Michael Porter, in his paper titled, The Competitive Advantage of Nations, outlines four influences that help describe the effect of location on competition. Western Australia, through a combination of these influences, has successfully developed an interrelated network of businesses and institutions comprising their world-leading metals mining cluster.

Factor ConditionsFor certain, Western Australia contains vast reserves of mineral resources. And there also exists experienced miners, advanced mining technology — all inputs into the production process. But what makes Western Australia unique, better than the rest, is their ability to further create and support the factors of production.

18The Western Australia Metals Mining Cluster

An early example of how government helped create factors of proportion was through support for the burgeoning population as a result of the gold rush in the early 1890s. The gold rush brought thousands of settlers into largely barren and dry land. The existing water infrastructure, however, was unable to support such a massive influx of people and there arose an urgent need for change. In 1896 the government commissioned construction of the Goldfields Water Supply dam and pipeline. The new pipeline delivered water to communities in Eastern Goldfields and was instrumental in supporting growth of the industry and population. Completed in 1903, the pipeline continues to supply water to the region today.

Also aiding in development of the cluster are government oversight agencies, the largest and most influential being the Department of Mines and Petroleum. Their mission, as stated on their website, is to:

… attract private investment in resources exploration and development through the provision of geoscientific information on minerals and energy resources, and management of an equitable and secure titles systems for the mining, petroleum and geothermal industries.

… carry prime responsibility for regulating these extractive industries and dangerous goods in Western Australia, including the collection of royalties, and ensuring that safety, health and environmental standards are consistent with relevant State and Commonwealth legislation, regulations and policies.

Jointly with the Department of State Development, they produce a quarterly magazine called Prospect, showcasing Western Australia’s resources sector to a local and international audience. The Department also maintains the MINEDEX website, a continuously updated database containing information on mines, projects, sites, estimates, mineral deposits and prospects. And numerous smaller regulatory agencies exist for mineral- or region-specific interests, such as the Australian Gold Council.

All of these specialized government agencies help support the cluster through the dissemination of information, regulation of policies and oversight of safety measures. In essence, they help support a fair and level playing field, thus encouraging competition for all cluster participants. It is through this competition that cluster inputs grow, and the factors of production are continuously improved.

19The Western Australia Metals Mining Cluster

Demand ConditionsDomestic demand for products supports clusters in several ways. Often, home nation buying habits help determine the direction and speed of which companies meet customer demand. Nations can increase their competitive advantage when this domestic demand pushes companies to innovate faster than if they were only dealing with international buyers.

In the case of Australia, however, we see an almost opposite trend. Domestic demand in Australia for mined metals is simply dwarfed by immense demand from China and Japan. Dealing in commodities, where product specifications and quality is similar worldwide, Western Australia’s advantage comes from playing against other large, international mining countries and organizations.

In looking at Iron ore, Western Australia exported close to 90% of their product, primarily to China (64%) and to Japan (21%). The remaining production was either exported to smaller markets or consumed at home. Worldwide demand for iron ore is growing at an average annual rate of 10% per year, with most demand coming from China, Japan, Korea, the United States and the European Union. Prices for iron ore are reaching all-time highs in January 2011, resulting in record profits for mining industry members.

With such overwhelming demand from abroad, Australia’s domestic market for metals has a reduced impact on the competitiveness of cluster companies. In this sense, we see Western Australia as primarily a mining operation for export.

Related and Supporting IndustriesAccording to analysis of the big mining companies in Western Australia, every job created in the mining and petroleum industry creates three more in other sectors throughout Western Australia. Not only are extra jobs are created, but more investments are done to create better and sustainable infrastructure that supports the industry. Multinationals, including private banks and mining contractors, have set up offices in Western Australia, whereas previously they would service the market out of Sydney or Melbourne. Universities have opened mining schools, such as the Western Australia School of Mines, to create the future workforce for the industry and minimize the dependency on immigrating, temporary labor.

Western Australia’s strategic location and organization, combined with effective government policies, encouraged mining companies to build infrastructure. The Kimberley, Pilbara and Mid West regions were almost entirely built by the mining companies. Mining

20The Western Australia Metals Mining Cluster

companies, such as Rio Tinto and BHP Billion, own or operate vast swathes of lands and resources including airports, ports and railways to effectively mine the region.

The mineral processing and refining industry has become concentrated around ports

Transportation infrastructure built for mining is now used for exports of land-intensive agriculture products such as beef and other livestock from the vast, fertile lands of Western Australia

Tourism industry promotes the region’s community infrastructure and invites more people to seek employment.

The Land Corridors give unusual business stability compared with any other major mining nation. The companies can concentrate on efficiency.

Due to arid and extreme climates, mining companies have developed competency and technologies to deal with water management, and are able to export their techniques

As an offshoot of the difficulties of mining in vast geographical dispersed land, companies have achieved efficiency in energy utilization and transportation

Desalination plants are put in place to pump in seawater for mining and drinking use. With the easing of Uranium mining restrictions, nuclear energy could be used for power and water. This is a huge benefit Western Australia has over rest of the areas.

Because of the mining industry, roads are developed, towns are built, and pipelines, power stations and port extensions are created. Mining companies often contribute to community projects in cooperation with the local shire councils. This infrastructure development has a substantial impact on the future economic growth and of Western Australia regional and remote communities.

On the downside, the mining boom has crowded out the market for low and semi-skilled labor. This has had an upward effect on wages in Perth for all jobs, especially the service industry such as tourism and agriculture, which are the other big wheels in the Western Australia economy. Skilled labor such as carpenters have also been sucked in to the vortex meaning that it is very difficult to find people to do home improvements for example. Motivation for young people to get skills is reduced as they can earn A$130,000 with any mining job – even holding a sign on the side of the road.

It has also has had a rapid effect on consumer inflation and housing costs. Perth used to be one of the cheaper places to live but has now caught up to Sydney on many measures.

21The Western Australia Metals Mining Cluster

Firm Strategy, Structure and RivalryAustralia is a parliamentary democracy with a free-market economy. Companies are free to enter and exit the mining industry as long as permits, safety and industry standards are observed. With mining companies in Western Australia earning record-breaking profits, it is easy to see the attraction of the industry, currently resulting in robust domestic competition. This competition is good for the cluster as a whole, encouraging mining companies to constantly innovate and operate more efficiently and sustainably than others.

A few large, international companies have a significant presence in Western Australia, mainly BHP Billiton and Rio Tinto Group — both British-Australian cooperative companies. An Australian company, Fortescue Metals Group Ltd has helped bring Australia’s iron ore production to second in the world. Other major companies include Xstrata, Anglo American, and Alcoa of Australia Ltd.

Understandably, metal mining is a weight intensive industry. The process of extracting rock and metals from the ground requires tremendous power and machinery, requiring a large investment in equipment, transport and, often, infrastructure improvements to support this weight. In effect, this could make it difficult for small firms to enter the industry and compete with the large, rich companies.

This is where government support can prove helpful. Through agencies and departments they can provide regulation and information sharing to be used by all cluster members. However, the government needs funding. At issue this moment, in light of record profits from mining firms, is the government’s decision to levy a 40 % Resource Super Profits Tax.

This tax will hit large companies such as BHP Billiton, Rio Tinto and Xstrata the most, and is estimated to rise about A$12 billion in its first two years. BHP Billiton chief executive Marius Kloppers said in a statement:

“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians,”

As we saw in Australia’s past, with the lifting of the iron ore embargo in 1959, that government actions can have tremendous impact of the success, or even existence, of the cluster and its participants. In 2008, the Australian government lifted 25-year old restrictions on uranium mining, a move that is estimated to stimulate the industry — taking advantage of the fact that 23% of the world’s proven uranium reserves are located in Australia.

22The Western Australia Metals Mining Cluster

23The Western Australia Metals Mining Cluster

Cluster ComparisonsIn this section, we look at other mining clusters in the world. We select only four, as they are well developed and large enough to compete with the sophisticated Australian cluster.

ChinaFactor Conditions: China is ranked third globally in total mineral reserves. It has access to cheap labor both at home and abroad. Furthermore, they have a well-developed infrastructure in which they invest heavily — for example, a 82.2 billion Yuan plan to build railways, roads, airports, coal mines, nuclear power stations and power grids.

Demand Conditions: China’s high economic growth rate, urbanization and rapid industrialization created a large demand, making it the largest iron ore importer worldwide. 64% of iron ore produced in Australia was exported to China. It is also the world’s largest consumer of refined lead <<Mining Magazine 2006>> and the world’s largest producer and consumer of coal. $100 billion was invested this year in 23 new infrastructure projects in efforts to boost domestic demand.

Context for Strategy and Rivalry: China is encouraging foreign investment in many sectors of the mining industry. However, the government wants to build state-owned enterprises that it hopes will compete successfully abroad with strong international firms like BP. In this endeavor, the number and size of privately owned firms and the equipment they can use have been restricted. Its worldwide success is linked to an effective strategy that combines trade inducements, increased investment flows, technology transfer and aid for infrastructure. For example, China has been refurbishing several railways in Angola and invested extensively in Congo’s infrastructure in return for metals worth $50 billion. Though Chinese mining industry has poor records in environmental, social, health, and safety issues, poor countries are accepting China’s advances because the latter are willing to overlook their human rights violations and other questionable ruling practices.

Related and Supporting Industries: The mining industry system in China comprises a wide range of departments: construction, geology, equipment manufacture production, scientific research, design, management, and education. The China Chamber of Commerce of Metals, Minerals, Chemicals Exporters and Importers administrates and promotes the Chinese minerals trade.

24The Western Australia Metals Mining Cluster

CanadaFactor Conditions: Canada is the world’s third largest producer of iron ore, one of the country’s most important minerals. Toronto is a very important finance base — the mining finance capital of the world — for this mining cluster and has stimulated investments in infrastructure across Canada, especially in roads and railways. Furthermore, the Toronto Stock Exchange is home to more than 400 mining and exploration company offices as well as a worldwide destination for financing international projects.

Demand Conditions: The increasing demand for iron ore has caused Rio Tinto, a British-Australian firm, to set aside capital for an expansion program at its Iron Ore Company of Canada. Apart from iron ore, Canada exported $66 billion worth of metals and non-metals in 2009. The European Union is an important destination for Canadian gold, iron ore, uranium and diamonds.

Context for Strategy and Rivalry: Because of the cyclical nature of this business, many Canadian mining service companies have expanded overseas and currently, 40% of revenues are from offshore operations. Its strategy has been strongly geared towards technology advancement. Also it is focused towards creating sustainability and social responsibility, a strategy that’s greatly supported by the Mining Association of Canada.

Related and Supporting Industries: About 70% of Canadian port volumes and 55% of rail freight revenues are generated by mining activities. The Ports of Vancouver and Montreal depend on this industry. About 3,200 suppliers provide expertise to the industry in engineering, technical, environmental, consulting, legal and financial issues. CAMESE is a trade association that supports Canadian firms in mineral exports. It also assists foreign buyers in finding supplier sources in Canada and helps mining companies collaborate and network with each other both locally and internationally.

BrazilFactor Conditions: Brazil has abundant labor resources and the minerals sector employs about 4% of the country’s total workforce (approximately 650,000). The country also has many mineral resources: bauxite, gemstones, columbium, gold, tin and aluminum.

Carajás Mine is the world’s largest iron ore mine with the highest quality iron ore worldwide. The infrastructure is also well developed and being continually improved. For example, Vale (CVRD), which is also the world’s second largest miner, owns about 10,000km of railways, nine ports and a large fleet of ships.

25The Western Australia Metals Mining Cluster

The economic status is conducive to investing — 7.5% annual growth — while mineral licenses enjoy security of tenure. Furthermore, the financial and banking systems are well sophisticated. Foreign aid investment is also growing at a staggering pace. Many Australian firms are considering locating here because of much lower corporate taxes.

Demand conditions: Brazil is currently the world’s largest iron ore exporter with annual production of over 200 million tons. Its top quality iron ore is a prized key export, whose strong growth is expected to account for 70% of the seaborne trade in iron ore by 2020.

Context for Strategy and Rivalry: The Brazilian government will invest at least $350 billion by 2030 in efforts to more than triple output of iron ore and other metals. A constitutional amendment allowing foreign investment and privatization has strengthened the industry. Brazilian firms have invested heavily offshore to improve competitiveness. The government also seeks to promote greater processing of ores into higher-value final products such as steel to increase industrial employment, tax revenue and social development. Plans are in place to create a national mining council to guide national policy.

Related and Supporting Industries: The Brazilian National Mining Association, works on behalf of the mining industry trying to expand it both locally and internationally. It also gives support in research, and use of the best technologies in mining and organizes conferences and seminars to share knowledge in efforts to give the sector a competitive edge. WorleyParsons Ltd, a Canadian construction group said it has been won a contract to offer engineering, procurement, construction and project management services in Brazil.

RussiaFactor Conditions: Although Russia’s iron ore is of lower grade, the country is ranked fourth in the world in terms of iron ore production, after Brazil, Australia and China. In 2005, Russia ranked among world leaders in production of other metals: diamond, aluminum, gold, and platinum. However, the Ministry of Natural Resources has cited depletion of reserves and low discovery rate of new reserves.

Demand Conditions: Domestic demand for Russia’s minerals has decreased due to the poor economy, devaluation of the rouble and a waning defense sector (responsible for the consumption of several metals). This has resulted in Russia turning to export markets. Russia’s minerals production is generally of a lower grade and quality, so few companies can compete globally. China

26The Western Australia Metals Mining Cluster

imported 811,000 tons of iron ore though that amount may reduce this year if the Chinese government restricts expansion of the real estate industry.

Context for Strategy and Rivalry: By 2005, Russian companies had begun to seek exposure to

Western markets and stock exchanges to raise money in larger quantities and more cheaply than in Russia.

Public pressure has forced the industry to address sustainability issues over the past decade resulting in the formation of the International Council on Metals and Mining (ICMM) which has since developed a range measures and standards for the industry.

Russian companies have seen the need to upgrade technology and meet modern environmental and production efficiency standards

Russia has recognized the need for partnerships and is signing memoranda of understanding, with local or international partners for major ventures (Treadway, 2005). Also mining businesses are forming alliances with local power structures.

There is a growing trend to internationalize Russia’s mineral enterprises. Russian companies e.g. ALROSA, Noril’sk Nickel, and RUSAL, are acquiring major foreign assets while other key firms are aspiring to become major international players.

Firms are integrating vertically so as to be better able to respond with promptness and flexibility to changes in the market situation

In these hard economic times, most firms have also resorted to reducing costs.

Related and Supporting Industries: The sector employs services of many professionals, including geologists, engineers, metallurgists, logisticians, and maintenance engineers. MiningWorld Russia is a specialized, international annual exhibition covering areas such as extraction, refining, engineering, safety, environment, logistics, and refining. It is designed to bring together suppliers of mining equipment, machinery and their associated services.

Mining infrastructure in Russia is still underdeveloped and this creates many opportunities for Australian suppliers of mining equipment and technology. Russia is getting increasingly keen to source such expertise despite having limited direct links.

27The Western Australia Metals Mining Cluster

Future OutlookOutlook towards Western Australia‘s future looks mixed. On one hand WA seems to have largely unaffected by the recession and is booming, on the other hand, its over dependence on mining and energy sectors looks concerning as metal mining is becoming a commodity industry: Despite innovation in the industry, continuous investment in expansion of current excavation fields, guaranteed demand and competitive pricing, growth in the metal sector is limited.

The mining cluster in Western Australia seems to be threatening the entire Australian economy with “Dutch disease”. An economy contracts Dutch disease when a surge in the value of its commodity exports strengthens its real exchange rate for an extended time, which worsens its international competitiveness and destroys other industries in its tradable sector.2

Following are some of the most important concerns regarding future outlook of Australia:

Two speed economy1

Western Australian (and Australian) economy is running at two different speeds. The economy is strong in parts but chronically weak in others. Manufacturing, Education, Tourism and Retail are weak and are exposed to higher interests rate. Boom in mining fuelled by exports (mainly China), is causing inflation to rise resulting in higher interests rate hurting non-mining sectors.

Unsustainable rise in standard of living2

Western Australia (WA) boasts of the highest per capita income in Australia even surpassing many other industrial nations. If WA were separate country, then its per capita income would be fourth highest in the world.

Most of this improvement in standard of living can be attributed to increase in export incomes due to high global commodity prices, increase in government expenditure and inflow of foreign capital. It is ironical that the improved standard of living is not attributable to improvement in productivity and competitiveness of the industry. This is a possible indication of Dutch disease.

Over dependence on China4

Australia’s over dependence on commodity and mining exports could be affected by a slow down in Chinese economy. China has been over investing in infrastructure and growth might be already saturated. Eg., 65 million empty homes are waiting for their resident.

28The Western Australia Metals Mining Cluster

Also, China is slowing down due to its dependence also on Europe and USA, contributing to a further dip for Australia’s demand.

Labor shortage and implications3

Mining industry is suffering from labor shortages and hence is resulting in higher wages. Persistent high wages in the mining sector is destroying other industries by attracting their best labor to mining. Western Australia needs at least 150,000 more skilled workers for its $350bn planned mining projects.

There are also seemingly unintended consequences of this acute labor shortage. A good example is: The iron-ore mining boom in Western Australia experienced since the early 2000s has seen a large influx of residential and fly-in-fly-out workers, which has led to rising of prices of land and a deprivation of the local towns of the chance to earn an income. The locals in Pilbara feel that the immense wealth created by the mining industry is passing them by. They also consider the financial gains and employment opportunities to be inadequate compensation for the damage that the mining industry is doing to their environment.

Infrastructure challengesA big challenge in Western Australia remains socio-economic development8. Western Australia is home to only 10% of population but accounts for 14% of Australia’s GDP and 36% of nation’s total exports. 3/4th of its population lives in the capital city (Perth). Due to the excessive skew-ness in WA’s population density, the national government is tempted to ignore the infrastructure needs of the lowly populated but resource rich areas. Additionally, both the governments and mining companies shove onto each other, the responsibility to create and maintain infrastructure in thinly populated areas.

Impacts of Mining: Environmental damageSince historic times, mining has had a big environmental impact in Australia; for example, the mountains of Queenstown and Tasmania’s were completely degraded by logging and pollution from a mine smelter. Coal mining and burning in Australia has contributed to 42% of Australia’s green house emissions, climatic change, global warming and a rise in sea level. The Pilbara region is home to a diversity of endemic species adapted to this tough environment, but the population of wildlife has been damaged by the extraction of iron, asbestos and natural gas. Mining projects in Pilbara also have a potential significant impact on ground and surface water resources, especially if extraction occurs below the water table.

29The Western Australia Metals Mining Cluster

Mining activities need a huge area in which to operate and this had led to the local Aborigines being displaced from their ancestral lands to which they attach so much cultural value. For example, the development of a Rio Tinto iron ore mine in Pilbara involves the damage of damage to the Weeli Wolli Spring and the Creek – sites, which have been considered sacred by the Aborigines for thousands of years. To add on, efforts to embark on uranium mining in Kalgoorlie-Boulder have been tough especially as the mineral is considered a safety hazard to workers, the local community and the environment.

30The Western Australia Metals Mining Cluster

RecommendationsIf we were to orchestrate the future of the WA economy and keep on strengthening the metals mining cluster we should pay attention to a few areas, both for the present and for the future:

For the Present

Institutions for CollaborationChina will remain largest customer for WA minerals. Yet WA should try to divest risk, as coming years will be crucial for further expansion in new markets. Many metals mining clusters in other locations are up and coming and pose a real threat for the further success of WA cluster. Currently the IFCs established in WA have very local focus in some supporting areas around the industry. We believe the role of the IFCs in the coming years is to actively lobby for expanding the available markets internationally. IFCs could help for better knowledge sharing with Chinese mining cluster. China will always have crucial role in WA development. It is either a friend or a foe. Flexibility in foreign trade policies and diversity of the exports will be very important for WA cluster to deal with peaks and downs in the Chinese demand.

EducationOne of the largest challenges of WA is developing of highly skilled labor. The mining industry pays very attractive salaries and contributes to the lack of motivation among the youth to pursue higher education. As of now many mining courses are available throughout education institutions in WA. We believe all those courses should add additional compulsory degree in an industry related to mining to stimulate higher education.

The GovernmentThe government should play prominent role within the cluster. Tax encouragement is necessity as one example because of the rivalry of other clusters such as Brazil and China. Government should be involved in strategy planning together with the big mining companies in the cluster to actively determine future economic growth of the sector and minimize the negative socio-demographic impact. Role of government in helping companies establish infrastructure needs to be improved.

Competitiveness Among CompaniesDespite the capital intensiveness of the cluster we would create even more favorable policies for more companies to entry the cluster. At present we see many companies with narrow specializations in the different minerals and metals. Iron ore is still

31The Western Australia Metals Mining Cluster

the largest in value and production but two major companies (BHP Billiton and Rio Tinto) are predominant in iron ore mining. As we expect relevance of iron to decrease we will see more competitiveness among companies in the cluster. To extend that will be healthy and would stimulate further development of the financial sector in WA. We also expect some WA based companies to emerge. Most of the mining companies present in the cluster are foreign.

Socio-Demographic DevelopmentMining will continue having both positive and negative impact on the socio-demographic development of WA. On the positive site mining will keep on boosting economies of remote areas and will help for further settlement and establishments of new towns and communities. If we were to influence the socio-demographic aspect we would suggest that other industries emerge around mining in those areas to secure further existence of the communities after mines are closed.

In order to minimize the negative impact such as seasonal workers that drive prices of real estate unrealistically high, displacement of aboriginals and low skilled labor we would think of policies that regulate rent prices, offer proper migration policy for aboriginals and investments in higher education for mining workers.

ChinaRecently China has cut export quotas for rare earths by 35%, creating a tremendous opportunity for WA exports of rare-earth minerals. This could create a new dimension to the state’s booming minerals sector. China supplies more than 90% of rare-earth metals to the world for use in high-technology electronics. We believe China’s move would benefit Lynas Corporation’s Mount Weld project in WA’s Goldfields, the richest known deposit of rare earths outside China. It will bring another competitive advantage to WA minerals and mining sector. The market outside of China is 60000 tons and with only half of quota for the year, the non-China market will require additional sources. Price situation should be favorable. 2010 was the first year demand for rare earths outside China was higher than the combined total of Chinese exports and production elsewhere. Developing rare-earth projects is very slow and it is unlikely other mines could be brought on line quickly. Therefore WA will be able to benefit from this favorable situation in the next 5 years.

China is clearly experiencing internal deficit for rare earth minerals. This also represents opportunity for WA. We believe WA knowledge and innovative know-how can be further shared with the Chinese cluster.

32The Western Australia Metals Mining Cluster

For the Future

Moving up the mining value chainAustralia currently exports raw materials and imports finished goods10. This means the country (including WA) needs to move up the value chain to gain sustainable competitiveness. Western Australia needs to look beyond mining. A full-scale cluster development strategy should include:

Manufacturing: Ramping up manufacturing industry. Current manufacturing capacity is concentrated around Perth and is limited in both scope and scale. Most of the industries including mining are experiencing an acute shortage of skilled workers. The labor shortage could result in:

Manufacturing becomes unsustainable OR Present factors of production (labor) become more productive

The first case of unsustainable manufacturing industry losing its competitiveness makes WA’s economy more prone to the Dutch disease. A reinforcing loop could result in self-fulfilling prophecy of over dependency on Mining exports.

The second case of improvement in labor productivity aids in cluster development. Labor productivity becomes a readily exportable sustainable asset and could secure a competitive advantage.

Services hold the KeyThough services account for close to 70% of Australian GDP, services currently contribute to only 20% of Australia’s exports12, most (75%) of which is education. Australia does not export any other major services.

Services hold key to moving up the value chain. Due to seemingly persistent labor shortages, Western Australia is currently forced to import labor from outside. However, over a period of time, automation becomes cheaper and technology for automating mining and other related infrastructure would advance, resulting in productivity improvement as stated above.

This is where Western Australia can gain a sustainable competitive advantage. In addition to having a significant global mining share, WA needs to establish itself as a global research and development center for Metal Sciences and mining technology. Metal sciences and research organizations could play the role of IFCs. For example, CSIRO (Common wealth Scientific and Industrial Research Organization) already plays a big role in developing high-end capability into metals and mining. However, an accelerated

33The Western Australia Metals Mining Cluster

effort needs to be put in to improve the value added services in mining.

Expertise gained from MiningInfrastructure: The mining industry has experience in providing infrastructure services such as telecommunications, hospitals, logistics, a nearby airport and other community infrastructure even in inhospitable areas. Hence, the cluster as a whole has developed considerable expertise and capability in building world-class infrastructure in remote and isolated areas. For example, Kalgoorlie-Boulder, a town of 30,000 exists purely around the mining industry. Mining towns in the Pilbara offer a wide range of sport and recreation opportunities as well. Hotels and youth hostels are also fully occupied with the flood of mining employees from nearby iron-ore pits.

Expertise in establishing such infrastructure would result in creation of an important knowledge base in WA, over a period of time. As the cities get over stressed in developing countries, they look for new ways to make regions self-sustainable. An example is India. Here is where mining companies can leverage their expertise, in building infrastructure for community living even in some of the most inhospitable places. It would be truly exportable service that can provide dynamism to the mining cluster.

Water, Waste and Energy: Additionally, Western Australia has a huge potential when it comes to turning itself into a knowledge hub in water, waste and energy management. Given the remote nature of the mines and the water and energy intensive nature of them, mining companies have become efficient in water and energy management. This know-how combined with help from additional research institutions (IFCs) could become an exportable knowledge related services.

In short, decentralized power, water and infrastructure development and maintenance is an obvious offshoot of the present day mining cluster. The above-mentioned expertise can catapult WA into a major service and knowledge hub.

Financial ServicesDue to capital-intensive nature of the investment, Mining cluster need to invite financial services that specialize in risk management, loan evaluation and disbursement. Also, having a commodity market could boost the metal trading giving WA a higher degree of stability in commodity valuation. However, for financial services to foster, government needs to incentivize companies to make loans locally. Vertical integration

34The Western Australia Metals Mining Cluster

could become a norm as companies generate efficiencies in economies of scale and scope.

Energy ManagementNatural GasAustralia imports significant Petroleum. However, Western Australia has one of the largest natural gas reserves in the world9. As mining and manufacturing consumes 70% of total electricity consumption11, and most of the mines in Pilbara region have their own sources of electricity generation, primarily diesel, dependency on foreign oil can be substituted for natural gas. Abundance of natural gas especially in Northwest of Australia could be a boon in disguise in this regard. Natural gas can be transported through pipelines, Compressed or Liquefied state. It is clean and cheaper.

UraniumFor years uranium mining was banned in WA. In 2008 the ban was lifted after the state elections, won by the Liberal Coalition. No uranium mining currently takes place in the state and developing projects are not scheduled to enter their mining phase before 2013. However uranium is key for the prosperity of the state and evolution of cleaner energy. Strict regulations and legislations will take place for this most wanted sector within the mining industry. At present day values, proven Australian reserves are valued at more than $300 billion. This will increase as uranium ore prices rise on increasing demand, with more countries turning to nuclear power generation as a means of dealing with global warming and declining stocks of fossil fuels, and as exploration discovers new reserves.

Uranium is a radioactive element that makes all the strategy around mining it very controversial. Economically it will be a great opportunity for WA and could become a cluster on its own. Strictly speaking, law regulations for the trade with uranium would be crucial for the future of democracy in WA. Since the ban is lifted we expect strong presence of government institutions in the mining of uranium to commence in 2013. We would recommend creating separate legislative commission with short-term mandates of its members to avoid corruption and enhance safety. We also recommend a secondary government entity to monitor trading and to issue licensing for trade with uranium.

Mining to MetallurgyAs the world demand for lighter and stronger synthetic materials rise, WA needs to move up from being ore exporter to an Alloy or synthetic material researcher. The mining cluster could develop into a metallurgical cluster. Lightweight materials find use in aircraft, automobiles and various other industrial uses.

35The Western Australia Metals Mining Cluster

AppendixGross State Product per capita

2005-06

2006-07

2007-08

2008-09

2009-10

NSW 54 177 55 105 56 168 55 834 55 868VIC 52 236 53 201 54 088 53 402 53 316QLD 56 275 57 934 58 857 57 360 56 881SA 45 101 45 540 47 584 47 979 48 053WA 78 023 79 584 80 732 81 317 82 653TAS 41 164 41 920 43 428 44 414 44 208NT 69 766 71 484 72 863 74 731 74 052ACT 70 391 73 031 74 233 73 814 73 140AUST 56 015 57 095 58 197 57 770 57 925

Commodity ProductionCommodity ProductionIron ore 341.64 million tonsGold 142,519 kgNickel 172,000 tonsAlumina 12.4 million tonsCopper 142,000 tonsZinc 105,000 tonsLead 27,000 tonsMineral Sands not reportedSalt 9.5 million tonsCobalt 4,629 tonsDiamonds 11.9 million caratsCoal 6.6 million tons

Annual production of metals in Western Australia — value in A$ billionCommodity

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Iron ore 4.365

5.245

5.064

5.061

6.173

11.308

14.751

16.165

31.896

28.085

Gold 3.08

3.24

3.46

3.37

2.94

3.15 4.24 4.07 4.39 5.66

Alumina 3.188

3.767

3.339

3.14

3.179

3.656

4.767

4.704

4.901

3.594

Nickel 2.243

2.075

2.243

2.68

3.261

3.484

5.844

6.958

4.059

3.281

Annual production of metals in Western Australia — value in A$ millionsCommodity

2000

2001

2002

2003

2004

2005

2006

2007 2008

2009

Copper 82.61

120.71

145.49

145.09

160.94

434.71

917.78

1,018.75

1,041.6

923.58

36The Western Australia Metals Mining Cluster

Mineral Sands

862.93

909.22

855.87

760.75

749.08

880.37

883.67

780.28

797.89

620.61

Salt 197.32

249.24

250.53

197.01

185.08

213.78

241.64

229.6 276.72

432.44

Coal 257.84

258.21

266.4

266.41

281.91

283.26

317.9

265.15

305.5

308.16

Diamonds

713.68

499.53

650.34

661.86

414.81

740.1

446.9

555.0 490.71

230.0

Zinc 290.11

208.72

173.06

139.73

57.78

118.91

607.12

695.54

329.13

213.47

Cobalt 157.66

146.27

118.95

145.04

262.18

166.95

220.43

343.08

378.71

178.9

Lead 25.76

44.90

32.69

24.32

0.31

41.17

130.61

115.57

32.61

44.33

20%

1%

43%1%

5%2%

5%

22%

1%

WA Mineral and Petroleum Exports 2009

PetroleumHeavy Mineral SandsIron OreDiamondsNickelBase MetalsAluminaGoldOther

37The Western Australia Metals Mining Cluster

71%

17%

8%

3% 1%

Iron Ore Exports 2009

ChinaJapanSouth KoreaTaiwanOther

8%4%

37%

2%4%

45%

Gold Exports 2009

ThailandSingaporeUnited KingdomSouth KoreaOtherIndia

38The Western Australia Metals Mining Cluster

3%

14%3%

12%

3%

27%

13%

9%

2% 6%

8%

Alumina Exports 2009IndonesiaSouth AfricaIndiaBalhrainArgentinaChinaUAEMozambiqueRussian FederationUnited StatesOther

39The Western Australia Metals Mining Cluster

Appendix: WESTERN AUSTRALIAN MINING

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australia26. State politics, regional governance and Western Australia

http://www.menzieshouse.com.au/2011/01/state-politics-regional-governance-and-western-australia-.html

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28. Western Australian mineral and petroleum statistics digest 2009 – 10 http://www.dmp.wa.gov.au/documents/Statistics_Digest_2009-10.pdf

29. Western Australia sees bonanza in Chinese move - http://www.raremetalblog.com/2010/12/western-australia-sees-bonanza-in-chinese-move.html

30. Department of Business and Employment - http://www.nt.gov.au/dbe/economics.shtml

31. Perth Home Prices Slide Even as W.A. Has Mining Boom - http://www.bloomberg.com/news/2011-01-30/perth-home-prices-slide-even-as-western-australia-sees-record-mining-boom.html

42The Western Australia Metals Mining Cluster

32. Curtin School of Mines - http://wasm.curtin.edu.au/index.cfm

33. Where would WA be without the mining and petroleum industry? http://www.dmp.wa.gov.au/documents/000043.heidi.smith.pdf

34. The Australian Resources Sector—its contribution to the nation, and a brief review of issues and impacts - www.aph.gov.au/library/pubs/bn/sci/AustResources.htm#_Toc273016102

35. Website of National Development and Reform Commission36. Steel Guru : Iron ore contract price seen at record in Q2 -

Reuters poll; Feb 6, 2011;http://www.steelguru.com/raw_material_news/Iron_ore_contract_price_seen_at_record_in_Q2_-_Reuters_poll/189652.html

37. Ancient Australian History; http://www.australianhistory.org38. Memorandum by Mr J. McEwen, Minister for External Affairs,

http://www.info.dfat.gov.au/info/historical/HistDocs.nsf/(LookupVolNoNumber)/3~221

39. Mining History : Australian Mining History Association,http://www.mininghistory.asn.au/mining-history/

43The Western Australia Metals Mining Cluster