tag:theconversation.com,2011:/global/topics/bhp-billiton-1315/articlesBHP Billiton – The Conversation2019-10-23T05:36:56Ztag:theconversation.com,2011:article/1248772019-10-23T05:36:56Z2019-10-23T05:36:56ZPoliticians must mine the divide between coal lobbies and energy companies<figure><img src="https://images.theconversation.com/files/298030/original/file-20191022-56234-ksdff3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">BHP has voted to stay in the Minerals Council of Australia.</span> <span class="attribution"><span class="source">Environmental Change and Security Program/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>It’s time we started talking about the principal opponents to action on climate change – fossil fuel industries. If history has taught us anything, it is when oil, gas and coal industries oppose policies to reduce greenhouse gas emissions, <a href="https://theconversation.com/the-too-hard-basket-a-short-history-of-australias-aborted-climate-policies-101812">those policies fail</a>. </p>
<p>And make no mistake, they do oppose. Revelations this year that mining giant Glencore spent millions of dollars globally to <a href="https://www.theguardian.com/business/2019/mar/07/revealed-glencore-bankrolled-covert-campaign-to-prop-up-coal?CMP=Share_AndroidApp_Tweet">bankroll a pro-coal campaign</a> are just the latest example.</p>
<p>However, <a href="https://www.sciencedirect.com/science/article/pii/S0301421517303725">my research</a> shows that there are specific strategies policymakers can use to help overcome the resistance from incumbent fossil fuel industries, including exploiting the divisions within and between fossil fuel industries. </p>
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<a href="https://theconversation.com/carbon-emissions-will-reach-37-billion-tonnes-in-2018-a-record-high-108041">Carbon emissions will reach 37 billion tonnes in 2018, a record high</a>
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<p>I have spent the past few years studying the behaviour of these <a href="https://www.routledge.com/Business-Battles-in-the-US-Energy-Sector-Lessons-for-a-Clean-Energy-Transition/Downie/p/book/9781138392717">firms and industries</a> in the United States – the home of fossil fuel resistance. After all, the US is now the largest producer of oil and gas, with the largest reserves of coal on the planet, and it is the home of companies, such as ExxonMobil, that have <a href="https://www.scientificamerican.com/article/exxon-knew-about-climate-change-almost-40-years-ago/?amp">known about climate change for 40 years</a> and have been denying its existence for almost as long.</p>
<p>To get to know the way they work, I spent countless hours in the offices of major coal corporations and their lobbyists. I met with executives from oil and gas corporations in Houston, and their lobbyists in Washington DC. </p>
<p>I also spoke with small renewable startups, and billion-dollar companies running endless battles to preserve tax subsidies for wind and solar, which they claimed were only fair given the subsidies to fossil fuels.</p>
<p>So what are the lessons for policymakers seeking to advance a clean energy transition? Three stand out.</p>
<h2>Support clean energy industries</h2>
<p>First, governments need to entrench and build existing interests in support of clean energy. Targeted policies, such as subsidies to the solar industry or tax rebates to households for solar power, both boost the industry and build a specific political constituency in support of solar power.</p>
<p>For example, US investment tax credits for solar power helped drive a boom in recent years, growing into an industry measured in the billions of dollars. As industry revenues increased, so has the industry’s power to defend the investment tax credit and oppose fossil fuel companies.</p>
<p>Indeed, the Solar Energy Industries Association in the US is now a vocal advocate for clean energy in Washington, just as the Solar Council is here in Australia. Both groups have helped offset the tide of fossil fuel lobbying that regularly washes against the shores of government.</p>
<h2>Split fossil fuel industries</h2>
<p>Second, policymakers should seek to exploit divisions within and between fossil fuel industries. When incumbent industries are divided or politically weak, green coalitions are easier to build. </p>
<p>For example, if the aim is to regulate coal, policies are more likely to succeed if they exploit the natural divisions between coal mining companies and the electric utilities that burn it to generate electricity. </p>
<p>In this case, the best bet is to target politically weak industries less able to mount a resistance campaign.</p>
<p>In the US the obvious example is the coal industry. The US coal industry is in structural decline, with production and revenue falling steadily. In fact, between 2012 and 2015, more than 50 firms representing 50% of US coal production <a href="https://www.iea.org/newsroom/news/2016/november/world-energy-outlook-2016.html">filed for bankruptcy protection</a>, including three of the largest: Peabody Energy, Alpha Natural Resources, and Arch Coal, all of whose share prices have plummeted. </p>
<p>Coal’s decline has been manifest in a shrinking lobbying presence, with key coalitions reducing their operations, and with it the industry’s capacity to oppose policies that support clean energy.</p>
<h2>Shift interests</h2>
<p>Third, policymakers should not only seek to entrench existing commercial interests and exploit divisions, but also to shift commercial interests. </p>
<p>Policies, such as renewable energy targets that compel utilities to invest in renewable energy, over time will shift the commercial interests of these firms towards policies supporting renewable energy. </p>
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<a href="https://theconversation.com/when-it-comes-to-climate-change-australias-mining-giants-are-an-accessory-to-the-crime-124077">When it comes to climate change, Australia's mining giants are an accessory to the crime</a>
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<p>Indeed, repeat signals demonstrating to business the regulatory landscape is changing can create a tipping point, when a critical mass of affected companies stop opposing a specific policy such as emissions trading. </p>
<p>This was the view of many electric utilities during the Obama administration who decided to support climate policies. As the CEO of Duke Energy, Jim Rogers <a href="https://www.nytimes.com/2008/06/22/magazine/22Rogers-t.html">put it at the time</a>, “if you’re not at the table, you’re going to be on the menu”.</p>
<p>Of course none of this will be easy. BHP shareholders last week voted to <a href="https://www.afr.com/companies/mining/bhp-s-british-shareholders-vote-to-stick-with-minerals-council-20191017-p531sv">remain a member</a> of the coal lobby Minerals Council of Australia, showing the fossil fuel industries are far from toothless.</p>
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Read more:
<a href="https://theconversation.com/how-to-transition-from-coal-4-lessons-for-australia-from-around-the-world-115558">How to transition from coal: 4 lessons for Australia from around the world</a>
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<p>But with the <a href="https://www.nature.com/articles/nature14016">science showing</a> a third of the world’s oil reserves, half the world’s gas reserves and 90% of global coal reserves must be left in the ground to meet the Paris targets, governments urgently need effective action. </p>
<p>Otherwise, no matter what administration is in power, climate action will continue to be delayed, and even derailed by the industries that stand to lose.</p><img src="https://counter.theconversation.com/content/124877/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christian Downie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite voting to remain a member of an Australian coal lobby group, there are growing divisions between fossil fuel extractors and the larger energy industry.Christian Downie, Australian Research Council DECRA Fellow, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/959272018-05-02T20:22:36Z2018-05-02T20:22:36ZRio Tinto’s climate resolution marks a significant shift in investor culture<p>What does the advocacy group the Australian Centre for Corporate Responsibility (<a href="http://www.accr.org.au/">ACCR</a>) have in common with the <a href="https://www.lgsuper.com.au/">Local Government Super fund</a>, the <a href="https://www.churchofengland.org/about/leadership-and-governance/church-england-pensions-board">Church of England Pensions Board</a>, and the <a href="http://www.government.se/government-agencies/seventh-ap-fund/">Seventh Swedish National Pension Fund</a>?</p>
<p>Quite a lot, it seems. These three institutional investors joined with the ACCR to co-file a shareholder resolution on climate change at mining giant Rio Tinto’s Australian annual general meeting in Melbourne yesterday. While Rio’s board <a href="https://www.asx.com.au/asxpdf/20180314/pdf/43sf7h344xgrbd.pdf">advised shareholders to vote against the resolution</a>, there was a very healthy showing of <a href="https://www.asx.com.au/asxpdf/20180502/pdf/43tqsy22jfb8xx.pdf">18.3% shareholders voting in support</a> (over 20% including abstentions).</p>
<p>The <a href="http://www.accr.org.au/rio_tinto">resolution</a> called on Rio to review and comprehensively report on its membership of industry associations such as the Minerals Council of Australia (<a href="http://www.minerals.org.au/">MCA</a>). The MCA’s pro-coal political lobbying has been distinctly at odds with the position of companies such as Rio, which publicly support measures to reduce carbon emissions in line with the <a href="https://theconversation.com/the-paris-climate-agreement-at-a-glance-50465">Paris climate agreement</a>.</p>
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<a href="https://theconversation.com/is-bhp-really-about-to-split-from-the-minerals-councils-hive-mind-84407">Is BHP really about to split from the Minerals Council's hive mind?</a>
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<p>This alliance between civil society and institutional investors is significant for several reasons.</p>
<p>Institutional investors (large investors such as superannuation funds which pool money to buy shares and other assets) are increasingly concerned about the long-term resilience of their investments to the business risks posed by climate change.</p>
<p>For an energy-hungry miner such as Rio, these risks include changing energy prices and markets, as well as operational disruptions caused by climate impacts such as storms, floods, and droughts.</p>
<p>Investors want companies to disclose these risks fully and to outline how they will manage them to maintain company value over the long term. As the Rio resolution suggests, they also want companies to be transparent and consistent in their approach to climate change. Paying multimillion-dollar memberships for industry associations that lobby against climate action is inconsistent with the long-term investment goals of such shareholders.</p>
<h2>New phenomenon</h2>
<p>Shareholder resolutions on climate change are a relatively new phenomenon in Australia. In the United States, however, there is a long history of using resolutions to pressure companies to address human rights abuses and change their approach to <a href="https://www.ceres.org/resources/tools/climate-and-sustainability-shareholder-resolutions-database">issues like climate change</a>. </p>
<p>In Australia, advocacy groups such as ACCR (and its counterpart <a href="https://www.marketforces.org.au/">Market Forces</a>) have taken up this tool more recently and lodged <a href="http://www.accr.org.au/australia">resolutions to Australian banks, utilities, oil and gas companies, insurers</a>, and now the big miners, asking for improved disclosure and better management of climate risks. </p>
<p>What’s more, institutional investors are increasingly <a href="https://www.smh.com.au/business/investments/big-investors-take-a-public-stand-on-climate-change-risk-20180215-p4z0gr.html">backing these requests</a>. This latest resolution to Rio Tinto is also reportedly <a href="https://www.smh.com.au/business/companies/super-funds-put-heat-on-rio-tinto-over-lobby-groups-20180424-p4zbfc.html">supported by key voting advisors ACSI and Regnan, as well as other major Australian super funds</a>. </p>
<p>As a result, it marks a significant shift in investor culture in Australia, signalling an increased willingness to engage proactively and publicly on environmental, social and governance issues.</p>
<p>Compared with the US and UK, shareholders in Australia have more limited rights to bring resolutions to an AGM expressing their views or requesting that certain actions be undertaken by company management. <a href="http://www.afr.com/news/cba-wins-shareholder-activism-test-case-against-accr-20160610-gpgb4y">Australian court decisions</a> have upheld a strict division of powers between company management and shareholders. Nonbinding advisory resolutions on matters that interfere with company management are not permitted. This means shareholders must lodge a special resolution to change the company constitution to allow them to put forward an advisory resolution on a substantive matter such as climate change. </p>
<p>This is not only clunky and inefficient, but also acts as a significant deterrent for investors to support a substantive resolution with which they would otherwise concur. There are <a href="https://www.acsi.org.au/images/stories/ACSIDocuments/generalresearchpublic/Shareholder-resolutions-in-Australia.Oct17.pdf">renewed calls for law reform</a>, widely supported by institutional investors and also, increasingly, by some of the <a href="https://www.asx.com.au/asxpdf/20180314/pdf/43sf7h344xgrbd.pdf">companies facing these resolutions</a>, to change the law to allow for a more consistent and orderly approach in Australia.</p>
<h2>Do these resolutions actually change behaviour?</h2>
<p>From their brief history in Australia so far, it appears that shareholder resolutions on climate change, together with a range of other influences, do have the potential to drive change. Many Australian companies that have faced these resolutions so far have responded with significant improvements in climate risk disclosure and management. </p>
<p>Santos recently released its first <a href="https://www.santos.com/media/4323/santos-climate-change-report.pdf">Climate Change Report</a>; AGL has developed a long term <a href="https://www.agl.com.au/about-agl/what-we-stand-for/sustainability/climate-change">energy transition strategy</a>; and BHP Billiton (which <a href="https://theconversation.com/is-bhp-really-about-to-split-from-the-minerals-councils-hive-mind-84407">faced a similar resolution</a> to Rio Tinto on its membership of industry associations in 2017) has announced its <a href="http://www.abc.net.au/news/2017-12-19/bhp-threatens-minerals-council-withdrawal/9271472">withdrawal from the World Coal Association</a> and <a href="https://www.bhp.com/-/media/documents/ourapproach/operatingwithintegrity/industryassociations/171219_bhpindustryassociationreview.pdf?la=en">reviewed its other industry association memberships</a>, including the MCA. </p>
<p>While these developments are undoubtedly the result of many factors – including technology and market developments, behind-the-scenes engagement with investors on climate risks, and increased pressure from financial institutions and regulators – it seems that shareholder resolutions can help to focus a company’s attention on ensuring its climate stance is defensible to shareholders. The impact of these resolutions in Australia may also be a function of their relative novelty compared with other jurisdictions such as the United States.</p>
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<a href="https://theconversation.com/why-has-bhp-distanced-itself-from-legal-threat-to-environment-groups-87093">Why has BHP distanced itself from legal threat to environment groups?</a>
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<p>This week’s resolution at Rio Tinto signals a coming of age for investor engagement on climate change in Australia. Shareholder resolutions have clearly become an important part of the toolbox for civil society in Australia seeking to influence corporate decision making on climate change. </p>
<p>As mainstream investors come on board with these resolutions, their potential impact is heightened considerably. For their part, Australian institutional investors seem to be increasingly willing to stand behind calls for better disclosure and management of climate risks by the companies in which they invest, including by forming new alliances and supporting the use of these more activist tools. </p>
<p>In a country with a relatively conservative approach to investor engagement, these are important cultural shifts. They offer promising signs that Australian businesses and investors are taking a more considered and proactive approach on climate risks.</p><img src="https://counter.theconversation.com/content/95927/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anita Foerster receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Jacqueline Peel receives funding from the Australian Research Council. </span></em></p>The shareholder resolution on climate change at Rio Tinto’s AGM is another indication of how much investor culture is tilting towards demanding that companies take a responsible climate stance.Anita Foerster, Senior Lecturer, Monash UniversityJacqueline Peel, Professor of Environmental and Climate Law, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/777872017-05-19T04:41:35Z2017-05-19T04:41:35ZThe BHP rebrand might be a success even if it doesn’t drive sales<p>Mining giant BHP Billiton has <a href="http://www.bhpbilliton.com/media-and-insights/news-releases/2017/05/bhp-launches-think-big-brand-campaign">finally launched</a> its rebrand - dropping “Billiton”, removing the “four-blobs” from its logo; leaving only an upper-case “BHP” behind. Research shows that rebrands rarely improve profitability. </p>
<p>But the rebrand could still be a success if it improves the company’s image among other stakeholders, such as politicians and voters. </p>
<p>Our <a href="https://link.springer.com/article/10.1057/bm.2015.18">index of brand health</a>, along with <a href="http://journals.ama.org/doi/abs/10.1509/jmkr.47.5.866">other research</a>, show that promotional activity in the short and medium term can have long-term effects on brands and financial performance. But the effect is very small and infrequent. </p>
<p>There’s no reason to think that BHP’s campaign will affect profitability or brand health. This makes it likely there are other motives.</p>
<h2>Why rebrand?</h2>
<p>The common wisdom is that if you have a strong brand then “don’t mess with it” – the brand can only lose. But if you are already in a hole then it can’t hurt. </p>
<p>BHP has had a rough couple of years, with the <a href="https://www.theguardian.com/sustainable-business/2016/oct/15/samarco-dam-collapse-brazil-worst-environmental-disaster-bhp-billiton-vale-mining">Samarco mine disaster</a>, allegations of <a href="http://www.abc.net.au/news/2016-10-13/bhp-billiton-slammed-for-tax-avoidance-by-wayne-swan/7928432">tax avoidance</a>, and <a href="https://www.bloomberg.com/news/articles/2015-01-20/bhp-cuts-u-s-shale-spending-as-oil-to-iron-ore-prices-decline">poor performance from some investments</a>. So it might make sense that the brand needs a refresh.</p>
<p>But <a href="https://link.springer.com/article/10.1057/bm.2015.21">research shows</a> that established brands suffer when they change their logo or core message. Consumers become surprised and confused when an otherwise familiar product is not what they’re used to. </p>
<p>Less-established brands can benefit by creating some novelty with a change in logo and message. It’s not what consumers are used to, so they pay a little more attention. </p>
<p>Here is the first problem with BHP’s rebrand - the research around rebranding is based on consumer goods, usually grocery products. It may not apply to a mining company. </p>
<p>There are relatively few cases where non-consumer goods rebrand, and those are <a href="http://www.emeraldinsight.com/doi/full/10.1108/03090560610670007">often the result of an acquisition or merger</a>.</p>
<p>Another example might be <a href="http://www.broadspectrum.com/we-are-rebranded/we-are-broadspectrum">Transfield Services changing its name to Broadspectrum</a> after the family of the original company <a href="http://www.transfield.com.au/news/189-transfield-holdings-ends-trade-mark-agreement-with-transfield-services">withdrew naming rights</a>, allegedly over Transfield Service’s <a href="https://getpocket.com/a/read/1052182110">controversial management of detention centres</a>. </p>
<p>But if managers at BHP wanted to escape their recent history, then they’d need to change the whole name, not just drop half of it.</p>
<h2>Highlighting Australian origins</h2>
<p>Beyond driving customers, however, rebranding can be aimed at other stakeholders. </p>
<p>The BHP rebrand is accompanied with <a href="http://www.bhpbilliton.com/media-and-insights/news-releases/2017/05/bhp-launches-think-big-brand-campaign">an advertising campaign</a>, which seeks to drive home the Australian origins of BHP. How “some ordinary men in Broken Hill dared to think big” and so we are challenged to “imagine what we could all achieve if we continue to think big”. </p>
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<p>All of this is highlighted in <a href="http://www.bhpbilliton.com/media-and-insights/news-releases/2017/05/bhp-launches-think-big-brand-campaign">the press release</a> sent out about the rebrand:</p>
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<p>“The advertisements will talk about the importance of our Australian heritage, our contribution and our commitment to communities where we operate. The campaign will focus on what people can and should expect of us.</p>
<p>"In launching Think Big, we will take the opportunity to change our logo and move to a brand that Australians have known us by for generations – BHP. This abbreviated simple expression of our organisation is used colloquially around the world.”</p>
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<p>This part of the rebrand makes more sense. BHP is an icon that represents an important era of Australia’s economic and social history. Tapping into this history could help improve relations with other stakeholders - investors, politicians and voters. </p>
<h2>The takeaway</h2>
<p>The research shows it is unlikely the rebrand will do much for long-term profitability, but if aimed at other stakeholders it could still be a success. </p>
<p>It could encourage a favourable attitude among current and potential investors, customers and suppliers. </p>
<p>The rebrand might make executives and employees feel better about the company they work for. It could also feed into other modes of engagement - with political lobbying at state and federal levels, for example. And as the advertising campaign includes television and newspapers, it will also reach voters.</p><img src="https://counter.theconversation.com/content/77787/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>BHP’s rebrand is unlikely to affect the bottom line, research shows. But if it improves relations with politicians and voters, it would still be a success.Chris Baumann, Associate Professor in Business, Macquarie UniversityHume Winzar, Associate Professor in Business, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/737662017-03-03T00:44:38Z2017-03-03T00:44:38ZThree reasons businesses are paying higher dividends rather than investing<figure><img src="https://images.theconversation.com/files/158840/original/image-20170301-29906-5utgwp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">More than A$72 billion has been paid in dividends in 2016-17.</span> <span class="attribution"><span class="source">AAP/Dean Lewins</span></span></figcaption></figure><p>Typically, low interest rates, together with record profits, would create an environment in which businesses would be happy to invest in new projects – providing a boost to economic growth and jobs. Unfortunately, Australians do not appear to be living in “typical” times. Rather than lifting investment, businesses <a href="http://www.afr.com/markets/asx-200-dividend-count-heads-to-record-72bn-on-resources-comeback-20170224-gukd0j">have chosen</a> to return cash to shareholders in the form of <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5676.0Main+Features1Dec%202016?OpenDocument">record dividends</a> and share buybacks.</p>
<p>There are many possible reasons – including political uncertainty – why businesses are seemingly ignoring the supportive economic environment and paying such large dividends (A$72 billion in 2016-17) instead of reinvesting in growth opportunities. </p>
<p>Three likely candidates are firm commitments to set dividend payouts, the sustainability of current commodity prices, and a perceived lack of investment opportunities.</p>
<p>This is not necessarily bad for the economy. Private investors will be happy to have more cash in their pocket, and at least some of the extra cash handed to shareholders will result in increased consumption, which may encourage businesses to invest in the future.</p>
<h2>Three key reasons</h2>
<p>Having come to the end of a major investment cycle, many resources companies are reluctant, for example, to build more mines and create more supply, as this creates downward pressure on prices. These companies have committed to a set dividend payout ratio. Mining giant <a href="http://www.afr.com/business/mining/bhp-billitons-bumper-profit-lifts-dividends-20170221-guhoeu">BHP Billiton</a>, for example, promises to pay its shareholders at least 50% of underlying profits.</p>
<p>The high level of dividends in the mining sector probably says something about the sustainability of current commodity prices. Despite extra supply from a number of additional mines (and increased production from existing mines) being available in 2016, the iron ore price <a href="https://thewest.com.au/business/fmg-rewards-investors-with-sharp-rise-in-profits-ng-b88394202z">has surged</a> to more than US$90 per tonne.</p>
<p>However, for mining companies to justify investing the billions of dollars required for a new mine, they need to have some comfort that such prices will persist. While the majority of forecasters have revised up their estimates, the consensus is still for the price to <a href="http://www.theaustralian.com.au/business/mining-energy/ord-minnett-lifts-2017-iron-ore-price-forecast/news-story/63a174477dda6339e5b876faaf9b57fb">fall below</a> US$60 per tonne by 2018. </p>
<p>The third reason is a perceived lack of investment opportunities. One explanation for this may be a reduction in infrastructure spending by state and federal governments owing to <a href="http://www.investordaily.com.au/markets/40402-lack-of-projects-stifling-infrastructure-investment">fiscal constraints</a>.</p>
<p>If businesses cannot identify a project that provides an adequate return on capital, then they are better off returning cash to shareholders. <a href="http://www.investopedia.com/articles/02/010902.asp">Corporate finance theory</a> would suggest this is good. </p>
<h2>What about political uncertainty?</h2>
<p>Perhaps the largest drag on investment results from the high level of uncertainty about the geopolitical environment. </p>
<p>Domestically, there appears to be little policy direction from a Coalition government wary of a rise in populism. </p>
<p>Regionally, Reserve Bank Governor <a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-02-24.html">Phillip Lowe</a> has identified possible risks in China owing to a continued build-up of debt. </p>
<p>And, globally, the Trump administration is perhaps the biggest cause of uncertainty. </p>
<p>In the months since Donald Trump’s victory in the US presidential election, global sharemarkets have rallied strongly. Australia’s market has been no different.</p>
<p>The All Ordinaries index has risen by 10% in the past quarter. However, the key to maintaining high prices is earnings growth. </p>
<p>The February earnings season did not disappoint in this respect. For the last quarter of 2016, Australian businesses reported the <a href="http://www.afr.com/news/economy/business-profits-shatter-expectations-inventories-hold-ground-20170227-gulzhg?login_token=1UZXumTn4h-43F5vZJ0QD2dus0wdSchPrpvvjWsnDgjG9IGS2VPlyecD1fUk0M1rk4tKscIDnUmbLueM_azPvg&expiry=1488313477&single_use_token=7HtqqeQ2AmYd_v3OsuJ90gZ7G1hInuTHy4c_lhDVCbveVTjHkRY7w3R4tdJkoMM0eNhgv_0IIRkWk3ChkuwBUQ">biggest earnings increase since 2001</a> – well ahead of market expectations.</p>
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<p>The <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5676.0Main+Features1Dec%202016?OpenDocument">strong results</a> have largely been driven by a 21% (A$4 billion) surge in mining industry profits. Thanks to a dramatic increase in commodity prices, tighter cost controls and increased efficiencies, the industry reported gross profits (trend estimate) of more than A$24 billion for the quarter. </p>
<p>Across the board, firm profitability has benefited from below-trend growth in wages.</p>
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<p>Deregulation, infrastructure investment and tax reform could boost global growth and encourage investment by Australian firms in the process. However, negatives resulting from the potential for trade war (or worse) owing to the redrawing of US foreign policy will clearly hold back investment.</p>
<p><a href="https://espace.curtin.edu.au/handle/20.500.11937/38374">My research</a> has shown that political uncertainty is ultimately a negative for sharemarkets. Frictions in the investment decision process act as one mechanism for this relationship. In the meantime, shareholders should enjoy the benefit of higher dividend payouts while they last.</p><img src="https://counter.theconversation.com/content/73766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rather than lifting investment, Australian businesses have chosen to return cash to shareholders in the form of record dividends and share buybacks.Lee Smales, Associate Professor, Finance, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/654702016-10-17T03:50:03Z2016-10-17T03:50:03ZThere is one way to put a stop to BHP’s tax avoidance<p>One of the most common ways multinationals take advantage of current laws to reduce their tax bill is through what’s known as transfer pricing. Former Treasurer Wayne Swan last week <a href="http://www.smh.com.au/federal-politics/political-news/wayne-swan-doubles-down-on-bhp-tax-evasion-accusations-20161012-gs1515.html">accused mining giant BHP of “aggressive transfer pricing,”</a> denying the Australian government A$5.7 billion in tax revenue.</p>
<p>For most companies, transfer pricing is rational behaviour, driven by the commercial possibilities created by variations in company tax rates across the international economy.</p>
<p>Companies (particularly multinationals) use it to minimise their tax bill by artificially inflating input costs in high tax countries and reporting (and paying tax) profit in low tax countries. </p>
<p>For BHP, this means selling some of its minerals to its Singapore marketing hub, which is then responsible for on-selling them and declaring the profits in Singapore, a low tax country. This activity is legal under current tax law, though <a href="http://www.theaustralian.com.au/business/mining-energy/bhp-faces-775m-in-taxes-charges-over-singapore-hub/news-story/b590587e76c8f9cb037cd231202e6c85">reports suggest</a> the Australian Taxation Office has audited the firm on this activity.</p>
<p>Governments around the world are struggling with the issue of transfer pricing. This often leads to opportunistic and, ultimately self-defeating competition among countries in setting company tax rates. </p>
<p>Former big four accounting firm executive <a href="http://www.abc.net.au/news/2016-07-11/corporate-tax-minimisation-costs-governments-1-trillion/7587092">George Rozvany has estimated</a> tax minimisation schemes, of which transfer pricing is the most important, cost governments US$1 trillion a year. </p>
<p>In Australia alone, transfer pricing among the 300 largest companies is<a href="http://www.abc.net.au/news/2016-07-11/accounting-insider-says-corporate-tax-minimisation-costs-50bn/7587832"> estimated to reduce the income tax take by A$50 billion</a>. In terms of the current total tax revenue, tax policy consultant <a href="http://www.smh.com.au/business/counting-the-cost-of-transfer-pricing-20080422-27xf.html">Martin Feil estimated in 2008</a> that the income tax amount accruing to Australia should be at least three times as big if all the companies were paying tax at the official rate.</p>
<p>The Australian Taxation Office (ATO) is fully <a href="https://www.ato.gov.au/business/international-tax-for-business/transfer-pricing/">aware of this situation</a>. It has made attempts to control transfer pricing by requiring companies to verify that the related-party pricing is at arm’s length and supported by genuine transfer pricing documentation. </p>
<p>Internationally, there has been a rapid introduction of <a href="http://www.oecd.org/ctp/transfer-pricing/">new transfer pricing regulations</a> from the Organisation for Economic Cooperation and Development (OECD), including the Base Erosion and Profit Sharing initiative (BEPS).</p>
<p>Yet it is arguable that these measures are piecemeal and unlikely to be effective. Short of implementing a standardised international system of tax regimes, there will always be room for tax rate arbitrage because of the perverse incentives offered up by taxing profits rather than production. </p>
<p>The current system underwrites inefficiency and encourages firms to minimise net profit by artificial means. </p>
<h2>A possible solution</h2>
<p>All production entails economic cost, through the use of scarce resources. Consequently a tax system should encourage firms to engage in the most efficient use of these resources. Unfortunately the current system does not. </p>
<p>Firms that use resources inefficiently (placing a resource misallocation cost on society) are effectively underwritten by reduced tax bills (or by paying no tax at all) and encouraged to inflate operating costs often by excessive executive salaries (representing an opportunity cost to public revenue). </p>
<p>At the same time, hugely successful companies find it easy to exploit international variations in tax regimes to transfer price and reduce tax payments.</p>
<p>Shifting the tax emphasis from profits to input costs has a number of advantages over the current system. It would create an environment much more like the economic textbook example where firms minimise costs and maximise profit. </p>
<p>It would do this by ensuring:</p>
<ul>
<li><p>All production is taxed, irrespective of the profit and loss outcomes. In this way society gets a return on the use of all scare resources; discouraging inefficient resource use and providing firms with incentives to minimise costs</p></li>
<li><p>The incentive for transfer pricing disappears as firms now want to minimise rather than maximise internal costs of production or operation. One way in which they may do this is to reduce discretionary internal costs such as executive salaries</p></li>
<li><p>The eradication of transfer pricing provides a major boost to tax revenue and opens up the possibility of tax reform and tax reduction at the personal level</p></li>
<li><p>Profits are non-taxed; firms will now have the incentive to maximise profits </p></li>
<li><p>Shareholders will benefit from greater returns and more transparent means of comparing resources</p></li>
<li><p>The number of tax minimisation specialists would be reduced (surely a huge social benefit).</p></li>
</ul>
<h2>The challenges</h2>
<p>The ATO knows that simply changing legislation does not necessarily change attitudes nor stop opportunistic behaviour. </p>
<p>Highly paid corporate tax advisers would immediately seek ways of gaming the system to their advantage. Decisions would need to be made on how the factor cost of production is determined and how the taxes on production would be levied. </p>
<p>There may also be an impact on risk taking and new startups, as under the proposed system even unsuccessful businesses would face a tax bill. However this disincentive effect would be offset by the lure of untaxed profits. </p>
<p>But a shift to this system or a close variant would remove the perverse incentives of the current system. As it stands, people are encouraged to artificially reduce taxable income by transfer pricing, underwriting inefficient production and resource misallocation.</p><img src="https://counter.theconversation.com/content/65470/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Mangan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Transfer pricing is a common form of legal tax avoidance, and it’s costing governments millions.John Mangan, Professor and Associate Dean, Faculty of Business, Economics and Law, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/658832016-09-25T19:28:08Z2016-09-25T19:28:08ZAustralian companies have more work to do on tax transparency<p>A number of big Australian companies have started to publicly release tax reports recently, such as ANZ, BHP Billiton, AMP and the National Australia Bank. This follows intense scrutiny of tax minimisation and evasion from the Australian government.</p>
<p>It may be an attempt to prevent more rigorous mandatory tax regulation given the Federal government has started down this path with the <a href="https://www.ato.gov.au/Business/Large-business/In-detail/Tax-transparency/Tax-transparency--reporting-of-entity-tax-information/">“tax transparency framework”</a>, that requires the ATO to publicly disclose largest companies’ taxable income and tax payable. However the details available in the latest public tax reports are still not transparent, as the reports are relatively new and in some cases unaudited.</p>
<p>One example is BHP Billiton, which released its second ever audited <a href="http://www.bhpbilliton.com/%7E/media/bhp/documents/investors/annual-reports/2016/bhpbillitoneconomiccontributionandpaymentstogovernments2016.pdf?la=en">Economic Contribution and Payments to Governments</a> report, to comply with United Kingdom tax regulations. This regulation requires large businesses to publicly disclose details of their tax strategies. Large Australian companies with a permanent establishment in the UK are included. </p>
<p>BHP reports that it has paid US$3.7 billion globally in taxes, royalties and other payments. That is down from the US$7.3 billion it reported in 2015. In 2016, about US$2.5 billion was paid to governments in Australia (2015 US$5.24 billion), with US$1 billion paid as taxes. The remainder is primarily made up of US$1.5 billion in royalties and US$230 million in “other” payments. </p>
<p>Although these figures may be large by Australian standards, the disclosures themselves provide little to no additional information than the company’s financial statements. The real value in the disclosures is the total taxes and royalties payments by country, level of government and project.</p>
<p>However, there are some limitations to the disclosures as well. While all these disclosures are consistent with the UK legislation and have been independently audited, the report includes little analysis and contains no comparable figures in the same report, such as those for previous years.</p>
<p>The figures for 2016 show a substantial decrease in contributions to governments from the previous year’s report. This is attributed in the report to lower global commodity prices. </p>
<p>Although that may be correct to some degree, the report does not discuss the annual change in the specific categories of payments to governments or in different countries. For example, the UK is the only country that has a net benefit in contributions. That means BHP receives more in refunds and tax offsets than it paid in taxes in either 2015 or 2016. </p>
<p>Additionally, the business segments for projects within each country have changed substantially from 2016 to 2015, making comparisons difficult. Although there may be legitimate reasons for that, no explanations are given in the “Basis of Report” section. This raises more questions than answers and reduces the usefulness of these reports.</p>
<p>The report also indicates an adjusted effective tax rate (ETR) of 35.8% globally and 30.3% in Australia. These are significantly higher than the average ETR <a href="http://www.unitedvoice.org.au/news/who-pays-our-common-wealth">for companies on the ASX 200 of around 22%</a>, and of the 100 largely privately owned <a href="http://www.getup.org.au/caribbean-connection-summary">corporate tax payers of around 16.2%</a>. </p>
<p>So on a global basis and in Australia, BHP Billiton does not appear to be avoiding tax especially given a statutory corporate tax rate of 30% in Australia. Only the global and the Australian ETRs are presented so we cannot establish whether this is the case in other jurisdictions.</p>
<p>The report also indicates that “once royalties are included, this rate (presumably the ETR of 35.8%) increases to 58.6% (globally)” and 56.6% in Australia. BHP has been including royalties in its publicised ETR for some years now. As the royalties the company pays to governments are consistently high, it automatically increases the rate it prefers to quote when discussing its tax affairs. </p>
<p>However, for financial accounting and tax purposes, royalties are not defined and recorded as taxes of any sort and those unaware of this may misinterpret the 58.6% as BHP’s ETR. It is not.</p>
<p>In addition to this, unlike the 35.8% ETR, the 58.6% (royalty inclusive) figure is not reconciled in the report. So it is not obvious to as to how it was calculated in the first place. In fact, in all our attempts to do so using the royalty payments information provided in the report, we failed to reconcile the 58.6% to any other figure.</p>
<p>The consistent disclosure and emphasis by BHP on a royalty inclusive rate is puzzling. There is also no need for BHP to inflate its ETR as there is little to no indication of tax avoidance on a global scale or in Australia. A further puzzle is that the raw figure for royalties would have produced a higher rate.</p>
<p>Finally, for the first time the report discloses the names and some very basic information about 10 BHP subsidiaries incorporated in low-tax jurisdictions as defined by the European Commission in 2015. Although, the inclusion of subsidiaries in low tax jurisdictions is an important step, the European Commission definition of “low-tax jurisdictions” is a very narrow definition in comparison to that of the OECD. </p>
<p>For example, it excludes Singapore which is a jurisdiction that has caused <a href="http://www.smh.com.au/business/singapore-tax-sling-actually-good-for-australia-says-bhp-20160919-grjebz.html">problems between BHP and the ATO with respect to transfer pricing</a>. Other than providing very basic information on each of the 10 companies there is no commentary as to why BHP has a need for these subsidiaries in the first place and what they have been used for. This also doesn’t include subsidiaries which BHP has in other tax-havens, such as those that are not on the European Commission’s list.</p>
<p>These reports by Australian companies with a permanent establishment in the UK contain tax payments information on a country-by-country, level of government and on a project basis. This is relevant and necessary for tax transparency purposes, and in particular the evaluation of corporate tax avoidance, both in Australia and globally.</p>
<p>The report still has significant inadequacies, but we still advocate that all large Australian companies be obliged to produce such as report on an annual basis. It is a step in the right direction compared to current requirements. The Federal government should be called on to introduce tax transparency legislation similar to that which came into effect this year in the UK.</p><img src="https://counter.theconversation.com/content/65883/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A number of Australian companies have released tax reports to the public in a bid to show transparency, however those reports are still incomplete.Roman Lanis, Associate Professor, Accounting, University of Technology SydneyRoss McClure, PhD Candidate, casual academic, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/645422016-09-07T20:09:00Z2016-09-07T20:09:00ZCompany results wrap: is the resources downturn structural or cyclical?<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.</em></p>
<hr>
<p>Some well known resource stocks in Australia have reported major losses, including <a href="http://www.bhpbilliton.com/investors/reports/bhp-billiton-results-for-the-year-ended-30-june-2016">US$6.38 billion for BHP Billiton</a> over the past year and <a href="https://www.santos.com/investors/company-reporting/">US$1.1 billion for Santos</a> over the past six months. These losses have largely been driven by lower commodity prices, which in turn is the result of a slowing Chinese economy and weak global growth rates. But the bigger question is whether this most recent downturn is heralding a long term decline in mining activities.</p>
<p>Commentators throughout history have predicted that minerals and energy production would eventually decline because of resource depletion and rising costs. One of the most well-known theories is Peak Oil, <a href="https://www.princeton.edu/hubbert/the-peak.html">originally developed by King Hubbert in the 1950s</a>. This theory explained how many oil fields have a bell-shaped production function from discovery through to exhaustion. This was used to predict the year and level of when the industry would hit maximum supply. Since then this same concept of an inevitable ‘peak’ has been widely applied to other commodities, to describe when global production might reach maximum levels.</p>
<p>However these predictions of maximum production outputs continue to be surpassed. Hubbert’s original projections were that global oil production would peak in 1995 when actual annual production has continued to grow steadily since then <a href="http://www.bgs.ac.uk/mineralsuk/">to be about 55% higher</a>. In fact the slump in oil prices since 2014 have largely been caused by excess supply (together with the effects of lower growth in China and other economies).</p>
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<p>Understanding why resource production continues to grow even when depletion must be occurring, provides some hints as to the future of commodities. The first is that mineral commodities tend to be driven by long term cyclical forces, particularly on the supply side. </p>
<p>Higher resource prices, as seen in the 2003-2012 resources boom, drove huge investments into new production, both in Australia and overseas. That growth in supply is now maturing because of the long lead time to get new projects developed, with virtually no new projects approved since 2012. Oversupply causes lower prices and shuts off new projects; there is often a long hiatus until the next boom because of an expanding supply base and the buffering effects of inventories. </p>
<p>The second pointer is that there are a variety of structural factors that shift both supply and demand. The key factors on the supply side are new discoveries and better technologies; these increase potential supply over time. </p>
<p>On the demand side, increased development of renewables and more efficient energy systems can systematically lower fossil fuel demand, while countries typically have lower metals requirements once industrialisation has been achieved. It was the combination of cyclical forces, such as lower economic growth, and structural changes in both supply and demand factors that led to the post-2012 slowdown in commodity prices.</p>
<p><a href="https://theconversation.com/chinas-energy-transition-effects-on-global-climate-and-sustainable-development-30883">Some analysts</a> have focused on the structural changes, arguing for example that greater generation of renewable energy and improved productivity will lower fossil fuel demands permanently. However it is unlikely that structural changes have been enough to date to outweigh increases in demand when the economic cycle moves more strongly into a growth phase. </p>
<p>For example the <a href="http://www.worldenergyoutlook.org/media/weowebsite/2015/WEO2015_Factsheets.pdf">International Energy Agency in 2015 predicted</a> that world energy demand would grow by nearly one-third between 2013 and 2040, and even though renewables will be the fastest growing sector there is still likely to be some growth in coal and oil consumption to meet the balance of needs.</p>
<p>The third pointer is that the major slump in commodity prices over the past three years has focused the minerals sector on cost-cutting and efficiency. This has been more intense than in previous downturns, but the end result is that production costs are much lower than in 2012. </p>
<p>As a result, any rebound in resource prices, as has occurred across some commodities this year, will not have to be as large for operations to be profitable. In essence the cyclical downturn has forced a structural reduction in operating expenses that will make the industry more resilient to future commodity cycles.</p>
<p>This broad summary papers over a number of factors that influence individual commodities; these include government regulation, exploration policies, controls on supply, market access, taxation and support policies, infrastructure access and charges, labour markets and technology drivers. While those factors help to explain movements between sectors, it is the cyclical forces of global demand and global supply that drive prices and returns for Australian companies. </p>
<p>Analysts should also keep in mind that the company accounting systems do not fully reflect all environmental costs; for example responsibilities for mine rehabilitation <a href="https://www.qao.qld.gov.au/reports-parliament/environmental-regulation-resources-and-waste-industries">tends to be underestimated</a> and there is no current system to internalise the spillover costs of greenhouse emissions. Regulatory and accounting systems need to be improved so that all environmental impacts and liabilities are fully recorded, particularly if a cyclical upturn in the future stimulates growth again in the sector.</p><img src="https://counter.theconversation.com/content/64542/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rolfe currently leads a research project on mine closure with funding from the Australian Coal Association Research Program.</span></em></p>The mining industry is more resilient because of the recent downturn and it will be global supply and demand that will affect these companies in the future.John Rolfe, Professor of Regional Economic Development, School of Business and Law, CQUniversity AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/559382016-03-17T19:19:59Z2016-03-17T19:19:59ZMining outlook: volatility will force cuts to operations and jobs<p><em>It’s reporting season, and over the past few weeks some of Australia’s biggest companies have been releasing information on how they’re travelling. These reports reflect key themes of how things are going in key sectors of the economy. Over the coming days we’re going to report on the results a handful of major companies in key sectors, transport, construction, retail, mining, insurance and banking. Today we look at the mining sector.</em></p>
<hr>
<p>The global economic environment has generated a number of significant challenges for the Australian mining industry. Slowing economic growth particularly in China has softened demand; while the <a href="http://useconomy.about.com/od/commoditiesmarketfaq/f/oil_prices.htm">oil price war involving Opec nations</a> have resulted in lower prices than projected.</p>
<p>The mining industry’s contribution to the Australian economy is more than $121 billion a year. In terms of export income, it generates $138 billion per annum, which represents <a href="http://www.thisisourstory.com.au/our-contribution.aspx">over half (54%) of total goods and services</a>.</p>
<p>Australia’s two largest mining companies (and second and third largest in the world), <a href="http://www.bhpbilliton.com/">BHP Billiton (BHP)</a> and <a href="http://www.riotinto.com/">Rio Tinto</a>, contribute a combined 79.4% of the Australian mining sector total revenue base (BHP at 44.6% and Rio Tinto at 34.8%).</p>
<p>But both Rio Tinto and BHP face a number of financial and operational challenges.</p>
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<p>BHP extract and process minerals, oil and gas from their production operations located primarily in Australia and the Americas. The company sells their products globally with sales and marketing activities channelled principally through Singapore and Houston, United States. In 2015, the <a href="http://www.marketwatch.com/investing/stock/BHP/financials/balance-sheet">company demerged a number</a> of BHP’s alumina, aluminum, coal, manganese, nickel, silver, lead and zinc assets into a new company, <a href="https://www.south32.net/">South32</a>. </p>
<p>Rio Tinto is one of the largest diversified resource firms in the world; the company locates, mines and processes various types of mineral resources across several continents. </p>
<h2>Issues affecting the sector</h2>
<p>The sector is facing one of the toughest periods in history, with 2016 being defined by weak domestic opportunities and falling commodities prices forcing companies to reexamine the costs structures of operations. </p>
<p>The Australian mining sector is under structural pressure largely due to its inability or <a href="http://www.zeal.com.au/documents/Whitepaper-MiningYourBusiness.pdf">unwillingness to adjust quickly enough</a> to the changing market demand and circumstance. Its failure to change its operational and businesses practices developed during the mining boom has translated in 2015 in significant losses across the sector. </p>
<p>Typically in this stage of the industry cycle it would be expected that there would be significant industry consolidation either through strategic alliances or mergers and acquisitions. Risk adverse investors in global financial markets however are looking <a href="https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/gx-er-tracking-the-trends-2016.pdf">to avoid under performing commodities such as iron ore and coal</a>, as well as some base metals like nickel.</p>
<p>The likelihood of raising equity or debt capital via bank loans to finance the merger and acquisition process is difficult. Given the volatility in the energy markets further reduce the strategic options available to mining companies. <a href="http://www.ey.com/Publication/vwLUAssets/EY-MandA-and-capital-raising-in-mining-and-metals-emailable/$FILE/EY-MandA-and-capital-raising-in-mining-and-metals-emailable.pdf">Industry experts project</a> that a number of mining companies will go out of business and a huge number of assets will be put up for sale at bargain prices. </p>
<p>The recent strategic focus of management has been adopting a quick fix strategy, that is getting cheaper by cutting costs of their operations by reducing the head count of their workforce, rather than focusing on being more productive. Employment in the Australian mining industry <a href="http://www.australianmining.com.au/features/peak-jobs-australian-mining-employment-half-year-2">decreased by 2.2% (4,170 people) between 2013 and 2014</a>, so far in 2016 over 2000 mining jobs have been cut and many more are forecast to go in the sector. </p>
<p>Anglo American recently announced their intention to reduce their workforce by two thirds and Glencore has <a href="http://www.australianmining.com.au/features/peak-jobs-australian-mining-employment-half-year-2">announced its closure of its zinc mines</a> and implemented production and workforce reductions at its coal operations. Cost of labour however is <a href="https://theconversation.com/in-the-mining-industry-skilled-local-labour-remains-an-untapped-resource-7407">only one aspect of the challenge</a> when competing in a global market. The need for management to focus on the pursuit of operational excellence, via benchmarking and learning across industry boundaries processes remain imperative. </p>
<p>The <a href="https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/gx-er-tracking-the-trends-2016.pdf">key message for BHP and Rio</a> is that the mining industry is at a ‘tipping point’ and their focus must be to identify strategies to make innovation deliver bottom line value.</p>
<h2>BHP and Rio Tinto results</h2>
<p>In 2014 BHP made a profit of US $4.26 billion however in 2015, following the collapse of commodities prices and BHP’s failed investment in the US shale industry, <a href="http://www.bhpbilliton.com/investors/reports/bhp-billiton-results-for-the-half-year-ended-31-december-2015">half year results</a> showed its depressed financial performance of a net loss of US $5.67 billion. </p>
<p>Overall revenue fell to US $44.6 billion down from US $56.7 billion in 2014. Profit also decreased by 21% to US $8.6 billion and capital expenditure was reduced by US $4 billion to US $11.5 billion in 2015. </p>
<p>The company expects to incur significant costs from <a href="https://theconversation.com/how-bhp-and-vale-react-next-to-brazilian-dam-failure-will-be-critical-50405">a dam disaster in Brazil</a> at its Samarco joint venture with Vale, which killed 17 people. It made an after-tax charge of $858m relating to the accident. The adverse impact on BHP reputation and the direct cost of rebuilding a safe and sustainable operations are potentially significant. </p>
<p>While BHP has allocated A$363 million for the rebuilding project, had the appropriate preventative costs been incurred in advance, thereby ensuring safe and sustainably engineered dam sites the tangible (materials and labour) and intangible (reputational) <a href="https://theconversation.com/samarco-mine-costs-will-make-for-more-than-one-difficult-year-at-bhp-50961">costs would have been significantly lower</a>.</p>
<p>Rio Tinto’s <a href="http://www.riotinto.com/documents/160211_Rio%20Tinto%202015%20full%20year%20results.pdf">full year results</a> showed revenue was down by 27% in 2015 to US $34.8 billion resulting in a reduced bottom line of US $4.5 billion down some 51% compared to 2014. Capital expenditure was US $5 billion.</p>
<p>Competitive threats from the companies’ rivals have exposed both Rio Tinto and BHP to the risks of market share loss and the management have chosen to respond to their competitors threats by adopting price-cutting strategies. However as they increased production they contributed to an already oversupplied market and led to increased industry rivalry. </p>
<p>These strategic choices have further impacted Rio Tinto and BHP bottom line performance, cash flows, and dividend policy and subsequently their share prices. Given the volatility in their financial performances both companies have had to adopt a new dividend policy and capital allocation framework.</p>
<p>These companies are also spending less on maintenance and investing in less capital expenditure rather than investing resources in being more productive. BHP for example reduced their capital expenditure by US $4 billion between 2014 and 2015. RIO Tinto has also announced further cuts to its capital expenditure budget by <a href="http://www.riotinto.com/investors/results-and-reports-2146.aspx">US $1.5 billion over the next two years</a>.</p>
<h2>What’s in store for the sector</h2>
<p>Continued development of emerging economies particularly, Chile and Peru, and the emerging markets in Central Asia and Russia are likely to provide a platform for long-term demand growth for commodities.</p>
<p><a href="http://www.austmine.com.au/News/articleType/ArticleView/articleId/2933/2016-The-Year-Ahead-for-Mining-and-METS">Industry insiders suggest</a> that the commodities most likely to provide opportunities are nickel and copper because they have good medium term (5 - 10 years) prospects. Nevertheless weaker commodity prices and higher volatility will be the norm for the near future. </p>
<p>This observation seems to align with most commodities forecast reports, reflecting the current and immediate future state of the mining sector. <a href="http://www.australianmining.com.au/features/2016-the-year-ahead-for-mining-and-mets">The forecast of a weakening Australian dollar</a> and late 2016 recover of the oil price provides some reasons to be slightly optimistic, however subdued investment throughout the industry will continue, as will financial pressures on many mining organisations. </p>
<p><a href="http://www.australianmining.com.au">Industry experts project</a> that a number of mining companies will go out of business and a <a href="http://www.ipaustralia.gov.au">large number of assets will be put up for sale</a> at bargain basement prices.</p>
<p>The Australian mining industry will continue to face many more economic and competitive challenges in the future. Mining companies need to find new and innovative ways to add value, whether through technology, innovation, or design thinking problem-solving approaches.</p>
<p>The Australian mining sector needs to recognise for it to achieve global competitiveness it is critical that they reinvest once more on making their assets more productive. In the intervening period retaining existing clients and broadening customer base; as opposed to even further, unsustainable cost cutting and market shrinkage; is critical for mining companies sustainability.</p><img src="https://counter.theconversation.com/content/55938/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antoine Hermens does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Increased competition and weak commodities prices will pressure to the mining sector to cut costs.Antoine Hermens, Associate professor Head of Management Discipline Group UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/555042016-03-01T23:13:10Z2016-03-01T23:13:10ZCEOs emerge unscathed by environment lawsuits<p>Images of environmental damage caused by large corporations certainly stir public outrage; but new research shows that the chief executives of companies sued for environmental wrongdoing commonly suffer little reputational damage. </p>
<p>Every corporation has a legal personality in the eyes of the law, which means it can be sued just like any individual person. However, unlike a person, a corporation cannot think or act of its own accord. Its actions are controlled by the chief executive officer and directors responsible for making its decisions. </p>
<p>So when a corporation is accused of breaching the law, it raises an intriguing question: does the CEO – the brain behind the corporate machine – suffer personal penalties for the company’s alleged wrongdoing?</p>
<p>We investigated this issue in the context of the US market, examining the change in CEO reputation following over 9,900 US Federal Court lawsuits filed between 2000 and 2007. </p>
<p>The findings, now published in the Journal of Contemporary Accounting and Economics, show that CEOs face more grim re-employment prospects in the wake of contractual lawsuits; whereas following intellectual property disputes, CEOs of sued companies – far from being penalised – tend to receive more invitations to join outside boardrooms. </p>
<p>Market-based penalties for executives of sued companies is an important issue. Serious violations of the law can attract civil lawsuits or criminal prosecutions against the individual officers. However, financial penalties in civil lawsuits could be covered by the CEO’s directors and officers (D&O) liability insurance, resulting in limited out-of-pocket expense to the CEO. </p>
<p>Criminal prosecutions are rare as they require a higher standard of proof. Given these limitations in the legal penalties for corporate executives, researchers have turned their attention to market-based penalties – those imposed by the collective actions of corporations in the executive labour market. </p>
<p>Until now, the reputational flow-on effects in relation to environmental lawsuits has been unknown.</p>
<h2>CEO reputation unimpeded by environmental lawsuits</h2>
<p>Motivated by the case of BP’s CEO Tony Hayward, who lost his job after an unprecedented public backlash over the Gulf of Mexico oil spill in 2010, our six-year research project has examined the repercussions of environmental lawsuits on the CEOs of the sued companies. </p>
<p>Since losing his job as the CEO of BP following the Deepwater Horizon oil spill, Hayward continues to experience negative publicity. His new job appointment as the Chairman at Glencore Xstrata in 2014 – four years after his departure from BP – was fraught with opposition from shareholders. </p>
<p>But this appears the exception. We found no evidence that CEOs are punished by market-based reputational damage following environmental allegations, regardless of whether they retain their CEO positions or leave the sued companies.</p>
<p>The research evidence shows that CEOs, in general, survive environmental lawsuits with their reputations unharmed and their career prospects unimpeded. </p>
<p>These sobering findings raise concerns over corporate environmental responsibility. Despite the increasingly scrupulous corporate rhetoric in recent years, there is no evidence to suggest that individual CEOs are punished by impaired reputation, when their companies have been embroiled in environmental allegations. </p>
<h2>BHP and Samarco – a case closer to home</h2>
<p>The collapse of a dam at the Samarco mine in Brazil last year, killing 17 people, amply illustrates the significant and potentially catastrophic impacts that large corporations can have on communities. The mine was a joint venture between BHP Billiton and Brazilian resources giant, Vale.</p>
<p>Our research cannot shed light on the fate awaiting BHP’s CEO, Andrew Mackenzie; our work is based on US evidence, whereas the joint venture owners are currently facing lawsuits in the Brazilian jurisdiction. However, if Anglo-Australian corporations react in the same way as their US counterparts, then it would not be surprising, based on these research findings, to see no significant reputational consequences for the CEO following the environmental allegations. </p>
<h2>Looking into the Future</h2>
<p>Whether Australian corporations do exhibit the same reactions as US companies would be an interesting question.</p>
<p>Given the shift in public opinion around climate change-related issues and the importance of environmental protection, corporate responses to allegations of environmental violations may have evolved accordingly since 2007, which marked the end of the sample period in this study. </p>
<p>Further research will provide new evidence as to whether corporations today remain as unresponsive to environmental allegations as they appeared to be some nine years ago. In the absence of market-based penalties for CEOs, there would be a serious question about whether sufficient disincentives are in place to deter environmental violations.</p><img src="https://counter.theconversation.com/content/55504/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chelsea Liu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research indicates that senior corporate leaders largely escape negative consequences when their companies are involved in environmental breaches.Chelsea Liu, Lecturer, Adelaide Business School, University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/552272016-02-24T00:42:03Z2016-02-24T00:42:03ZSay what you like about BHP, it didn’t squander the boom<p>During the commodity price boom from 2004-2011 BHP Billiton’s board raised the firm’s dividend to an unsustainable level. Now, in the commodity bust, the board has been forced to cut it by 75%.</p>
<p>The board has been heavily criticised for its conduct of dividend policy. Critics have focused mainly on the type of dividend policy and timing of dividend changes. But that misses the big picture in a cycle of boom and bust.</p>
<p>The performance of BHP’s board and its management should be measured by the amount of shareholder value created, after controlling for factors beyond their control. Was the windfall of cash generated in the mining boom either invested wisely or paid out to shareholders, or was it wasted on bad investment and value-destroying acquisitions? The latter has been the historical normal for global resource companies through resource boom and bust cycles.</p>
<h2>The windfall</h2>
<p>BHP’s operating cash flows grew from US$5 billion in 2004 to US$30 billion in 2011. BHP’s board responded by increasing dividends nearly sixfold, from 9.5 to 55 US cents per share in just the seven years from 2004 to 2011 (29% annual growth). In the following four years dividends grew only another 7 cents per share (3% annual growth).</p>
<p>After 2011 the price of all of BHP’s commodities fell – first slowly and then quickly. Cash flow shrank to the point that BHP’s board was forced to choose between its “progressive” dividend policy and its “A” credit rating. The credit rating prevailed.</p>
<p>Before being too critical of the BHP board for not implementing its own dividend policy, we should consider the whole picture of how BHP used its cash flows in the 2004-2011 period.</p>
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<p>What does this table above tell us about BHP’s management of its cash flows?</p>
<p>Debt reduction, share buybacks, dividends: US$25 billion of the windfall of cash was used for debt reduction. Another US$44 billion was returned to shareholders in the form of share buybacks (US$22 billion) and dividends (US$22 billion) – a total of US$69 billion. Thank goodness for that.</p>
<p>Acquisitions: BHP spent “only” US$11 billion of its cash flows on acquisitions in this period: US$6 billion on Western Mining in 2005 and US$5 billion on the Fayetteville gas assets. Another US$15 billion was spent on the Petrohawk gas assets only days after the end of this period. </p>
<p>Unfortunately, the first half earnings announcement included a write-down of the US gas assets by US$7.2 billion. But criticism of the purchase of those assets relies mainly on the advantage of hindsight.</p>
<p>Nonetheless, it is by good luck rather than good management that more was not wasted on expensive acquisitions – especially in BHP’s failed bid for Rio Tinto when then CEO Marius Kloppers offered to pay at least US$20 billion over the odds for Rio. This assessment does not rely on hindsight. It is based on the increase in the BHP share price and decline in Rio Tinto’s share price at the time the BHP bid was withdrawn.</p>
<p>Capital expenditure: BHP spent the largest part of its extra cash flow on expanding production. There is always a danger that firms that receive cash windfalls will waste the cash on low-return investment projects. For the most part BHP has not done that in this cycle – although the plans for the US$20 billion expansion of the harbour in Port Hedland were a very worrying sign.</p>
<p>After considering how BHP’s windfall of cash flow was used in the boom period of 2004-2011, is it right to criticise the BHP board for paying out a large amount of cash as dividends, even if that made dividends unsustainable?</p>
<h2>The verdict</h2>
<p>The board might have made greater use of buybacks, especially to buy back more shares in London where BHP shares traded at a large discount to the same share on the ASX. It might also have declared “special dividends”, but that would have signalled they did not believe the cash flows were permanent.</p>
<p>But those considerations about how cash should be paid out of the firm are not the first-order issue when an unanticipated surge of cash flows occurs. The total volume of cash paid out is what shareholders should focus on. BHP’s board should be applauded for raising dividends during the boom. That proved unsustainable, but so what?</p>
<p>Overall, BHP’s board has done a reasonably good job of not squandering the proceeds of the mining boom. The fact that its dividend policy proved unsustainable is simply not the main issue.</p><img src="https://counter.theconversation.com/content/55227/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sam Wylie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>BHP’s board has navigated well through mining’s highs and lows and still passed the shareholder value test.Sam Wylie, Principal Fellow, Melbourne Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/509612015-11-20T00:38:15Z2015-11-20T00:38:15ZSamarco mine costs will make for more than one ‘difficult year’ at BHP<p>It is now two weeks since the Samarco tailings dam failure in Brazil and speculation is rife as to the resultant costs and liabilities. Indeed, although the Mayor of Mariana declared a state of emergency for the city immediately after the accident, an <a href="http://www.skynews.com.au/news/world/sthamerica/2015/11/18/brazil-declares-emergency-after-mine-spill.html">expanded state of emergency</a> has only this week been announced. </p>
<p>Dam tailings have spread over 440 kilometres, triggering a deluge of economic, social and environmental problems. BHP Billiton and Vale, co-owners of the Samarco joint venture, and their shareholders are now looking for answers.</p>
<p>In Australia commentators differ on the mining giant’s response to the disaster. The Australian Financial Review proclaims “<a href="http://www.afr.com/opinion/editorials/bhp-has-done-right-things-in-brazil-20151118-gl1wm4">BHP has done the right thing in Brazil</a>” while The Age asserts “<a href="http://www.theage.com.au/comment/brazilian-dam-disaster-shows-bhp-falls-short-of-global-expectations-20151118-gl2i8c.html">Brazil mine disaster exposes BHP’s failures</a>”.</p>
<h2>Environmental costs</h2>
<p>Brazilian President Dilma Rousseff has described the dam failure as one of the world’s biggest environmental disasters. Putting a cost on it is not easy, however, with the trail of destruction spreading as far as the Atlantic Ocean.</p>
<p>Brazil’s environmental agency, the Brazilian Institute of Environment and Renewable Natural Resources (IBAMA), has already fined the joint venture R$250 million (A$92 million). A lawyer representing a community association in another state has filed a case demanding 10 billion reais <a href="http://www.smh.com.au/business/mining-and-resources/bhp-vale-faces-369b-civil-case-over-samarco-mine-disaster-20151117-gl1klq.html">(A$3.69 billion) in compensation</a> for environmental damages.</p>
<p>Deutsche Bank estimates clean-up costs could exceed US$1 billion (A$1.4 billion). But differences between the parties are great as Samarco has so far only pledged to pay US$260 million <a href="http://www.news.com.au/finance/business/breaking-news/samarco-says-other-dams-at-risk/news-story/f6d249c158e959b880eddf55228a8af6">(A$365 million) in damages</a> as a “preliminary commitment” toward clean-up and compensation. </p>
<p>Notwithstanding assertions the spilt material is non-toxic, Samarco has appointed independent contractors to test soil and water samples from the affected regions. IBAMA is undertaking a similar process. Yet even before these results are known some experts are <a href="http://www.afr.com/business/mining/iron-ore/fine-bhp-billiton-for-scene-from-hell-but-dont-shut-samarco-plead-residents-20151115-gkzez3">suggesting</a> it will take the environment more than 50 years to recover.</p>
<h2>Social costs</h2>
<p>Corporate and industry reputations are big losers. It is estimated the disaster has affected 15 million people. </p>
<p><a href="http://www.perthnow.com.au/news/western-australia/bhp-billiton-cancels-wa-christmas-parties-in-wake-of-samarco-mine-disaster-in-brazil/news-story/748768ef9e952913fe81086b62635a9f">The deaths of 11 workers</a> and community members when the dam burst is the first and foremost cost of concern. Samarco, Vale and BHP have policies where worker and community safety is espoused as the number one value. Their policy lies broken.</p>
<p>The loss of 600 properties and destruction of water supplies to <a href="http://www.smh.com.au/business/mining-and-resources/bhp-vale-faces-369b-civil-case-over-samarco-mine-disaster-20151117-gl1klq.html">more than 260,000 people</a> in the downstream communities could lead to devastation of livelihoods and disease. The costs to address these for the more than 200 communities affected could be great. The disaster has <a href="http://www.news.com.au/finance/business/breaking-news/samarco-says-other-dams-at-risk/news-story/f6d249c158e959b880eddf55228a8af6">destroyed crops and killed fish, turtles and other animals</a> important to community survival.</p>
<p>Activists are <a href="http://www.businessspectator.com.au/news/2015/11/19/resources-and-energy/samarco-protest-planned-bhp-agm">accusing</a> the companies of “token sympathies” and have suggested <a href="http://www.perthnow.com.au/news/western-australia/activists-protest-over-samarco-mine-disaster-in-brazil-outside-bhp-billiton-agm-in-perth/news-story/8df8093a388db98625a7d8f7fb28d6fb">they pay billions of dollars</a> in compensation. The only unknown is where and when possible class actions will appear to claim these billions – Brazil, Australia, or both. </p>
<p>BHP has the Ok Tedi experience under its belt and could be better prepared this time for what is to come, but with Vale on board Samarco will officially have responsibilities in Brazil. BHP will be unable to walk away from these and has an opportunity to adopt a business case this time that looks after the vulnerable affected parties. </p>
<p>Greenpeace is actively involved in gathering data and monitoring the situation, while the Krenark Indian tribe has blocked iron ore shipments along a key rail line owned by Samarco hundreds of kilometres downstream. BHP CEO Andrew Mackenzie has committed his company to supporting the regions affected. He has said BHP will continue to “play our part in helping Samarco reconstruct homes, community and spirit”. </p>
<p>An external investigation will be conducted, with the results released to the public. For the people of Brazil, actions will speak louder than words.</p>
<h2>Economic costs</h2>
<p>BHP chairman Jac Nasser told shareholders at this week’s BHP Billiton AGM: “This year will go down as one of the most difficult in [BHP’s] 130 years.” Not only is BHP facing vastly reduced commodity prices, since the disaster investors have heavily sold down BHP shares to the level of ten years ago. </p>
<p>Dividends are of major concern for shareholders. BHP has maintained a progressive dividend policy, but this may not be able to be sustained. It seems clear volatility in the industry will increase over the years ahead.</p>
<p>Part of shareholder concern is the direct cost of rebuilding. BHP has committed A$363 million for this purpose and does not plan to abandon its investment.</p>
<p>The costs associated with sustainability of operations are potentially enormous. It could be argued preventative costs incurred in advance, such as more securely engineered dam sites and warning mechanisms for downstream communities, would have been much lower.</p><img src="https://counter.theconversation.com/content/50961/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With costs set to run into the billions, the Samarco mine disaster will hang over BHP for some time to come.Roger Burritt, Professor of Accounting and Sustainability, Macquarie UniversityKatherine Christ, Researcher in Accounting and Sustainability, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/509242015-11-18T23:07:59Z2015-11-18T23:07:59ZUltimate responsibility for Samarco dam disaster will haunt BHP<p>With 11 Brazilian villagers confirmed dead and <a href="http://www.wsj.com/articles/samarco-to-pay-262-million-for-initial-dam-cleanup-efforts-1447711797?alg=y">reports of up to 15 still missing</a> - presumably buried under an avalanche of red mud - principles and profit at BHP Billiton have come into harsh collision with each another. </p>
<p>It is hard not to be left with the feeling that the BHP Billiton Annual General Meeting in Perth will mainly be about well-paid, smooth talking, business types in very expensive suits trying to provide the best possible spin on a terrible mining disaster. </p>
<p>This is not the first time in recent history BHP Billiton has had to defend its safety record.</p>
<p>The full facts of the dam burst at the Samarco mine - a joint venture between BHP and Brazilian resources giant, Vale - are not yet known. But recent corporate environmental disasters, like the BP Deepwater Horizon oil spill, have had their genesis in a culture of risk taking and cost cutting, combined with a plain old bit of bad luck. </p>
<p>Time will tell whether there may turn out to be similarities with the BP oil spill, which involved a contracted oil rig owned and leased by another company. </p>
<p>In that case the investigating US Safety Board Managing Director, Daniel Horowitz found that <a href="http://www.theguardian.com/business/2012/jul/24/bp-missed-hazards-deepwater-horizon">“BP applied lesser process safety standards”</a> to rigs contracted out than it did to its own facilities. The safety board said when BP looked at offshore projects it “focused on financial risks, not process safety risks”.</p>
<p>If the Samarco incident had happened in Australia and a torrent of sludge destroyed an Australian town and killed Australians, what action would we all be demanding? If the right risk management systems where not in place then who is responsible and who should be held accountable?</p>
<p>Mining investments are often structured as joint ventures because it allows both partners to share both the risks and the rewards. Indications are BHP will support the Samarco joint venture to meet both its legal and importantly its ethical obligations arising from the dams bursting. </p>
<p>However the final legal outcome will not be known for many years to come. If the joint venture partners can simply walk away from the risks involved then the structure appears to offer mainly upside with no equivalent downside. </p>
<p>The Mayor of Mariana, one of the effected villages, Duarte Gonçalves, summed it up when he said he sees Samarco’s parent companies as ultimately responsible for the catastrophe. “Samarco is a fantasy name,” he said.</p>
<p>The Samarco JV did have an independent local management team and the local executives who are the key decision makers would clearly have the most direct culpability in the event of any wrongdoing. An interesting ethical question if any of the local key decision makers had lived in the affected villages below the dams, how might this have changed their decision making process?</p>
<p>If Samarco is found to be more than just an accident, does the chain of culpability extend back to senior management in Australia including BHP’s Australian CEO Andrew Mackenzie? Most corporate cultures necessarily have a hard driven profit aspect, but when does that step over the line and become unethical?</p>
<p>It is certainly not hard to work out who pays the price for environmental disasters. In the case of Samarco primarily it’s the people who lie dead in the mud and whose homes have been swept away. The other stakeholders include shareholders, creditors and the affected communities, some many hundreds of kilometres away.</p>
<p>From a purely financial perspective in many respects it is the creditors who are the worst affected because they have suffered a double loss. Samarco’s publicly traded bonds initially lost nearly 50% of their value, so the creditors lost a large portion of their capital without ever having had any prospect of an equivalent gain and with the benefit of hindsight they also accepted a rate of return that was clearly not commensurate with the risks involved.</p>
<p>That may turn out be a particular problem for BHP Billiton which needs to foot the damages bill and fund its dividend policy - increasingly seen by <a href="http://www.ft.com/cms/s/0/7bb30832-889f-11e5-90de-f44762bf9896.html#axzz3rpyW9xvQ">some professional fund managers</a> as unsustainable without loading up on debt.</p>
<p>But whatever happens all these people will want answers.</p>
<p>There is an important distinction between responsibility and accountability. The CEO of a large organisation is accountable for pretty much everything which goes both right and wrong in their organisation, with the exception of events classed force majeure (or “superior force”). </p>
<p>The extractive industries are by definition difficult, dirty and dangerous businesses, yet they produce essential commodities we all use. In many respects it is a testament to the professionalism of the people in the industry that more people are not hurt or injured.</p>
<p>Responsibility is a harder thing to pin down, but corporate culture and therefore responsibility starts at the top, with the CEO. In the worst case of corporate governance failures the organisations risk management systems have simply become a rubber stamping paper trail which provides a cover for a profit at any price culture.</p>
<p>With respect to the Samarco incident justice or fairness to the people that lost their lives and homes demands BHP Billiton apply the same standard of accountability as if the incident had happened here in Australia. </p>
<p>Fiona Reynolds, the managing director of <a href="http://www.unpri.org/">Principles for Responsible Investment</a> has suggested that executive pay and bonuses of resource companies such as BHP Billiton and Vale should be linked to their safety record – which to some extent in the case of BHP Billiton it already is.</p>
<p>In 2015 a large factor in the 43% pay cut that BHP Billiton chief executive Andrew Mackenzie took was that [five workers (some Australian) lost their lives while doing their jobs. (In BHP’s annual report, Mackenzie described FY2015 safety performance as <a href="http://www.bhpbilliton.com/%7E/media/bhp/documents/investors/annual-reports/2015/bhpbillitonannualreport2015.pdf?la=en">“disappointing”</a>). An unfortunate set of circumstances that cost him 20% of his short-term bonus. </p>
<p>This year the dual effect of depressed commodity prices and the recent crash in BHP’s share price, helped along by the Samarco incident, is likely to almost guarantee a substantial adverse impact on the vesting of his long term performance incentives as well. </p>
<p>It will be interesting to see whether the Samarco incident, which relates to an independent overseas joint venture, will reduce the vesting of his 2016 short term bonus.</p>
<p>Whatever the pecuniary outcome of the Samarco incident on Australian-based BHP executives, it is likely to be relatively insignificant in view of the size of the remuneration packages involved. But when people lie dead in the mud it may be principles that matter the most.</p><img src="https://counter.theconversation.com/content/50924/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Leslie Goldmann does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How culpable should BHP executives be for the deaths caused by the Samarco dam burst disaster in Brazil?Leslie Goldmann, Accounting and Business Ethics Lecturer, International College of ManagementLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/505212015-11-12T03:24:47Z2015-11-12T03:24:47ZWho should we blame for the Brazil mining dam disaster?<p>The catastrophic collapse of the Samarco iron ore tailings dam in Brazil that flooded the small town of Bento Rodrigues with mud last week is a sobering reminder that mineral extraction is a perilous business. At least <a href="http://www.theage.com.au/business/mining-and-resources/bhps-deepening-crisis-in-brazil-20151111-gkwm86.html">six people are dead</a> with more than 20 still missing. </p>
<p>The <a href="http://www.bhpbilliton.com/investors/samarco-updates">Samarco iron ore mine</a> is a joint-venture between Brazilian mining company Vale and Australian company BHP. </p>
<p><a href="http://www.theage.com.au/business/mining-and-resources/bhps-deepening-crisis-in-brazil-20151111-gkwm86.html">Fresh reports</a> indicate that Brazilian researchers had reported on the risk the Samarco dam collapsing two years ago. BHP has not commented on whether it was aware of the report. </p>
<p>When such disasters happen our first impulse is often try and ascribe culpability. No doubt there must be accountability if any confluence of human errors was involved in this failure. </p>
<p>However, in the rush to blame we must consider the complexity of how such failures might occur. </p>
<h2>Ruling out natural causes</h2>
<p>Seismic events and excessive rain and wind can be the natural triggers of what might be a chain of human errors in disaster prevention and response. </p>
<p>The US Geological Survey (USGS) did not record any major earthquake in the region at the time and this part of Brazil is not prone to large tremors. <a href="http://www.dpa-international.com/news/international/authorities-earthquakes-preceded-double-levee-break-in-brazil-a-47221303.html">Some reports suggested a very small tremor on a scale of 2.6 on the Richter scale</a> but <a href="http://www.cbc.ca/news/world/brazilian-village-mudslide-1.3308417">USGS has noted that dam failures can usually not be attributed to any quake below 4.5.</a></p>
<p>Minas Gerais state in Brazil is known for its rainfall. However there was no abnormal rainfall <a href="http://www.wunderground.com/history/airport/SBCF/2015/11/5/DailyHistory.html?req_city=Belo+Horizonte&req_state=&req_statename=Brazil&reqdb.zip=00000&reqdb.magic=1&reqdb.wmo=83587">or major storm system at the immediate time of the event. </a></p>
<p>Once we rule out direct natural factors the investigation must focus on the human factors which could have led to this disaster. </p>
<p>We also need to consider separately warning systems that could have prevented deaths and injuries. </p>
<p>The current interviews from the survivors suggest that <a href="https://www.washingtonpost.com/world/the_americas/dam-bursts-at-mine-in-southeastern-brazil-submerging-homes/2015/11/05/12935a34-841a-11e5-8bd2-680fff868306_story.html">the only warning they got of the tsunami of mud heading their way was the sheer sound of the collapse. </a></p>
<p>A good emergency response system would automatically trigger warning alarms, mobile text messages and other radio or TV system alerts. Why did that not happen?</p>
<h2>Diagnosing disaster</h2>
<p>The “<a href="http://www.risktec.co.uk/media/43535/introduction%20to%20bow-tie%20method%20-%20dubai.pdf">bowtie method</a>” is often used to analyse both the prevention and the response of such calamitous events. </p>
<p>This method will likely be followed to identify all the possible ways in which this tragedy could have been triggered. A detailed investigation of this kind can take several months. </p>
<p>Last year, The <a href="https://en.wikipedia.org/wiki/Mount_Polley_mine_disaster">Mount Polley spill in Canada </a> caused a major environmental hazard but thankfully there was no direct loss of human life, although drinking water quality for around 300 people was affected. The investigative panel which was set up following the spill <a href="https://www.mountpolleyreviewpanel.ca/">took a year to issue its report</a>.</p>
<p>The panel concluded that the tailings dam collapsed in that case because its engineering plan had neglected a layer of glacial till underneath the dam body. Fortunately there were no human habitations downstream of the spill path. </p>
<p>In Brazil though there were people living beneath the dam. The community residents cannot be blamed for living where they did. The planning process for the mine is the responsibility of the companies and the government collectively.</p>
<p>If there was a preexisting settlement in harm’s way of a tailings dam, what community engagement was undertaken by the company and the government to configure the facility to minimise harm and dislocation? Were adequate resettlement options provided? These are all essential questions which must be answered.</p>
<h2>Mining dam disasters on the rise</h2>
<p>There is a long history of dam failures and calamitous events from hydropower stations. The worst loss of life in this regard occurred in <a href="https://en.wikipedia.org/wiki/Banqiao_Dam">China when the Banqiao dam collapse in 1975 killed more than 170,000 people.</a> </p>
<p>However, while hydropower dam breaches and deaths have been decreasing in recent years, mining tailings dam breaches have been on the rise. These failures are not just occurring in developing countries. </p>
<p>The US has endured massive failures, including the <a href="https://en.wikipedia.org/wiki/Church_Rock_uranium_mill_spill">Church Rock uranium mine spill in 1972 on Navajo indigenous lands</a> and the 2012 spill in Finland which prompted the establishment of a <a href="http://www.sitra.fi/en/ekologia/responsible-mining">“Network on Responsible Mining.” </a></p>
<p>In July 2015, <a href="http://csp2.org/files/reports/Bowker%20%26%20Chambers%20-%20Risk-Public%20Liability-Economics%20of%20Tailings%20Storage%20Facility%20Failures%20%E2%80%93%2023Jul15.pdf">the Centre for Science in Public Participation issued a comprehensive report</a> that found 33 of 67 of all serious tailings dam failures in the last 70 years occurred in the 20 years between 1990 and 2009. <a href="http://www.icold-cigb.org/">The International Commission on Large Dams</a> has even had a specialised working group on mining dams for the past several years but clearly more concerted efforts are needed.</p>
<p>The United Nations Environment Program and the mining industry have developed guidelines for disaster preparedness, including <a href="http://www.icmm.com/document/123">comprehensive monitoring</a>. </p>
<p>Up-to-date
<a href="http://www.icmm.com/document/8">guidelines</a> published in 2005 include a need to monitor:</p>
<blockquote>
<p>the probability of individual events; the probability of simultaneous events (such as an earthquake resulting in
rupture of a pipeline); and complications from unique environmental considerations, such as severe terrain,
location on a major river, frozen conditions and so on.</p>
</blockquote>
<p>Blame for the current disaster will partly depend on whether guidelines such as these have been followed. </p>
<h2>Assuming responsibility</h2>
<p>There was initially some speculation about whether Vale and BHP would be responsible for the spill since their joint venture Samarco (established 40 years ago) that operated the mine is “a limited-liability company”. Joint venture companies can be a risk management mechanism but as the Wall Street Journal recently noted, <a href="http://www.wsj.com/articles/vale-says-company-it-jointly-owns-is-legally-responsible-for-dam-breach-1447245510">current regulations will not protect BHP and Vale from responsibility</a>.</p>
<p>The research process to investigate the spill has begun by independent experts, including the <a href="http://blogs.agu.org/landslideblog/2015/11/10/fundao-dam/">American Geophysical Union which has set up an online blog to consider causality.</a> </p>
<p>At the end of the day companies like BHP and Vale should approach this matter with humility. If there is blame to be ascribed they should accept and learn from any lapses. </p>
<p>Broader questions of why best practice guidelines and voluntary industry covenants are not adequate to prevent such massive failures must also be asked. Most mining companies <a href="http://www.ft.com/intl/cms/s/0/899c377e-4afc-11e5-b558-8a9722977189.html">remain profitable despite a decline in the level of profits during industry downturns</a> and yet <a href="http://voices.nationalgeographic.com/2015/10/14/mining-downturns/">social and environmental performance budgets are often the first to be cut.</a> </p>
<p>Whether or not culpability in such disasters is assumed, companies and governments should take the moral high ground and assume responsibility for ensuring such calamities become far less likely to repeated.</p><img src="https://counter.theconversation.com/content/50521/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saleem H. Ali receives funding for research from a variety of public and private sector organizations, none of which have any influence on the content of this article.</span></em></p>Six people are dead and more than 20 missing following the Samarco mine disaster in Brazil. But in the rush to blame we must consider the complexity of such failures.Saleem H. Ali, Chair in Sustainable Resource Development, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/487332015-11-10T19:22:50Z2015-11-10T19:22:50ZThe danger of stranded assets lurks for unwary coal producers<p>The prevailing mainstream commentary of the Australian coal sector is that its future is secure.</p>
<p>Any lost demand from China for Australian exports will be replaced by demand from India. Other growth markets such as South East Asia will also fill the gap. Shifts in demand for renewable energy are not material to the outlook. </p>
<p>But some key trends sketch out a different story.</p>
<p>In 2014, thermal coal use in China fell 2.9% on the previous year’s consumption. In 2014, the Chinese economy grew 7.4% and electricity production grew 3.8% via everything but coal: solar, wind, hydro, nuclear and biomass. In <a href="http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/12/CL-1.pdf">fact</a>, China’s coal fired power generation was down 3%.</p>
<p>Chinese coal imports dropped by 11% over 2014 and a further 38% in the first four months of 2015 due to the government prioritising sourcing coal domestically to assist local producers who are losing money, as well as the contractionary cycle. </p>
<p>Australian coal producers <a href="http://www.minerals.org.au/news/global_coal_boom_to_continue_says_minerals_council_of_australia">remain optimistic</a> though that demand from India will compensate. However this demand is unlikely to eventuate. In just a few years, India’s coal demand will be met by domestic sources and by 2017 they expect to stop importing coal altogether. They are also ramping up production of their renewable energy industry to transform the way India sources electricity. It is also important to note that many regional areas in India do not have grid infrastructure, and are therefore unable to benefit from coal-fired power generation without significant capital investment.</p>
<p>The recent International Energy Agency (IEA) <a href="http://www.iea.org/publications/freepublications/publication/WEO2015_SouthEastAsia.pdf">report</a> predicts South-East Asia coal demand will triple in the next 25 years and <a href="http://www.afr.com/business/mining/coal/australias-coal-exports-set-to-rise-as-southeast-asia-demand-surges-20151013-gk7sms?stb=twt">commentators are suggesting</a> that this changes the outlook for Australian producers. But South-East Asia represents 6% of world traded coal in 2014, so finding a small growth market will do nothing to offset the collapse in price in the main markets. Further, China, Japan and India are 50% of the world traded coal market and all three have peaked. That is why the coal price is down a further 20% this year.</p>
<p>Only a few companies are undertaking assessments of the risk of stranded assets, to understand the potential implications on their business. In October 2015, BHP Billiton produced a detailed <a href="http://www.bhpbilliton.com/%7E/media/5874999cef0a41a59403d13e3f8de4ee.ashx">analysis</a> assessing the possibility for reduced demand of their resources due to the transition to clean technology and the risks that climate change pose to its asset portfolio. </p>
<p>The report predicts the continuing climb of the world’s energy demand, in line with GDP growth. While this is historically the case, <a href="http://www.carbontracker.org/wp-content/uploads/2014/09/Coal-Demand-IEEFA.pdf">many countries are beginning to decouple</a> the two indexes. If these emergent trends continue, energy demand will still rise, but not as significantly as predicted.</p>
<p>BHP asserts that its coal assets will be safe due to their high quality and low price. This is also true, but the assessment doesn’t take into account the potential for governments to protect their domestic coal industries, avoiding imports, as China and India are doing.</p>
<p>BHP’s analysis of renewables is based around the assumption that uptake of renewables will be forced by government policy. The report does not consider that the continued drop in renewable technology prices will see deployment grow independent of subsidy and potential increase in growth rates, beyond historic trends. There is growing analyst consensus that there will be mass-market uptake of battery storage over the next five years. This is also predicted to dramatically increase the growth rate for deployment of renewables.</p>
<p>Last month, Bank of England governor Mark Carney <a href="http://www.bankofengland.co.uk/publications/Pages/speeches/2015/844.aspx">warned</a> that the vast majority of the world’s fossil fuel reserves could become stranded assets if scientist’s estimates on how we cannot afford to burn these reserves proved approximately correct. Many were surprised that a mainstream banker was articulating the view that this has the potential destabilise existing energy markets and shake up countries’ economies.</p>
<p>Mining and energy companies are starting to feel the pinch. Glencore is the story of the Titanic. In May 2015, they <a href="http://www.glencore.com/assets/sustainability/doc/sd_reports/2014-Sustainability-Report.pdf">assessed</a> their stranded-asset-risk at zero. Not 10%, or 1.5%, but no chance whatsoever. </p>
<p>Glencore is <a href="http://www.wsj.com/articles/glencore-shares-regain-more-lost-ground-1443688643?alg=y">now in financial trouble</a> due to a combination of too much debt, off balance sheet leverage and low resource prices, particularly coal. Six months ago the company told investors at the Annual General Meeting that there was “<a href="http://www.glencore.com/investors/shareholder-centre/agm/">no risk</a>” that its assets would become stranded. </p>
<p>Glencore’s grim financial situation and reasons for it shares some <a href="http://www.bloomberg.com/news/articles/2015-08-26/peabody-said-to-hire-lazard-as-adviser-for-debt-restructuring">similarities</a> to that of US coal mining company, Peabody Energy Corporation.</p>
<p>These company’s often irreverent attitude towards the risk posed by both climate change and renewable energy could be seen by investors as a proxy for how it approaches risk in all other aspects of their business.</p>
<p>In Queensland, the Adani Carmichael coal mine that has just been <a href="http://www.dilgp.qld.gov.au/assessments-and-approvals/carmichael-coal-mine-and-rail-project.html">approved</a> is another example of a coal project that is struggling with finance. Both <a href="http://www.smh.com.au/business/mining-and-resources/national-australia-bank-rules-out-funding-adanis-carmichael-coal-mine-20150902-gjdsfl.html">NAB</a> and the Commonwealth Bank <a href="http://www.smh.com.au/business/mining-and-resources/adani-and-commonwealth-bank-part-ways-casting-further-doubt-on-carmichael-coal-project-20150805-gisd1l.html">backed out</a> of funding roles in the project, and other big multinational financiers, such as JP Morgan, Deutsche Bank, Morgan Stanley and Citibank have said they will not invest. Many see the project as <a href="http://www.smh.com.au/business/mining-and-resources/adanis-carmichael-mine-is-unbankable-says-queensland-treasury-20150630-gi1l37.html">commercially unviable</a> and that given the macro trends around thermal coal, the sector is in structural decline.</p>
<p>It is understandable that companies want to keep their business outlooks positive and not spook their shareholders. It makes sense that they don’t wish to include the complex, knotty issues.</p>
<p>But these issues are why you employ sophisticated risk analysts and they make for a more balanced approach. These recent cases show that ignoring them doesn’t make them disappear.</p>
<p>The hope is that the industry will mature and start thinking in a more nuanced way about these risks. BHP Billiton’s report on this is a good start.</p><img src="https://counter.theconversation.com/content/48733/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jemma Green is a board director at Future Super and on the advisory board of Carbon Tracker.</span></em></p>Only a few coal producers are undertaking risk assessments about the danger of coal assets becoming “stranded”, or unviable.Jemma Green, Research Fellow, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/504052015-11-10T02:48:37Z2015-11-10T02:48:37ZHow BHP and Vale react next to Brazilian dam failure will be critical<p>Two of the world’s largest miners, Australia’s BHP and Brazil’s Vale have been rocked by last Friday’s dam burst at the jointly-owned Samarco iron ore mine in Brazil, as efforts to recover the bodies of 28 missing people continue and estimated costs climb.</p>
<p>BHP Billiton has announced its iron ore production guidance for the 2016 financial year is now under review, while the dual-listed miner’s Australian share price dropped 8% on news of the accident, contributing to ongoing share price pressure on the group. </p>
<p>Management of dam failure risks from these two companies should be world’s best and all eyes will be on what Vale and BHP do next. </p>
<p>Recovery teams are searching for 28 people missing after mine waste swept through the Bento Rodrigues district in Minas Gerais state, following the cascade failure of two dams, <a href="http://www.samarco.com/?lang=en">Fundão and Santarém</a>. A third dam, Germarno, is being monitored. </p>
<p>More than 60 million cubic metres of red muddy iron ore tailings <a href="http://www.smh.com.au/business/mining-and-resources/bhpvale-brazil-dam-was-upgraded-with-first-rubber-top-20151106-gkt5st.html">have flooded downstream</a> for almost 80 kilometres of the Rio Doce. The impact on other communities nestled downstream will also be significant.</p>
<h2>What led to the disaster?</h2>
<p>Although the causes of failure are yet to be established, Santarém is the first dam in Brazil to have the latest inflatable <a href="http://www.smh.com.au/business/mining-and-resources/bhpvale-brazil-dam-was-upgraded-with-first-rubber-top-20151106-gkt5st.html">rubber top technology</a> installed and approved by engineers and safety officers to allow storage of additional volume of tailings. </p>
<p>Management will now be examining the technology to see if it had an impact on the cause and scale of the disaster; whether the location of waste storage piles close to the dams were involved; and the adequacy of warning systems in place for local communities.</p>
<p>The risk from cascade dam failures is not new. Large mining tailings systems are often designed in sequence and so the chance of multiple failures is increased. Cumulative dam failures have caused <a href="http://www.sciencedirect.com/science/article/pii/S0264837712002566">disasters around the world</a> often in unregulated agricultural settings. </p>
<p>Perhaps the worst was in 1975 when 230,000 Chinese died after the Shimantan and Banquia dams burst, triggered by the failure of 60 upstream farm dams. </p>
<p>In 1989 in the United States, the Evans and Lockwood dams both collapsed in a cascade manner, killing two people; Bulgaria in 2012 experienced cumulative failure of farm dams resulting in nine deaths. Five years ago in Brazil a cumulative series of private dams burst leaving 50 people dead and warnings of another 200 dams reported to be at high risk of cumulative failure. Now we have deaths from the Fundão and Santarém disaster in Brazil to add to the list.</p>
<h2>Balance between transparency and security</h2>
<p>So far, there has been a marked difference in the way the two companies have reacted to the disaster. BHP has moved quickly into damage control, with chief executive Andrew Mackenzie <a href="http://www.bhpbilliton.com/investors/news/ceo-statement-on-samarco">expressing sympathy</a> for the workers and communities and making a site visit. Samarco mine management has placed an <a href="http://www.samarco.com/?lang=en">“Announcement to Society”</a> on its website outlining its commitment to transparency and emergency plans under way.</p>
<p>In contrast, Vale, placed a <a href="http://www.vale.com/brasil/EN/aboutvale/news/Pages/nota-acidente-samarco.aspx">small notice on its website</a> recognising the quick initiation of the emergency plan and confirming that it would work with Samarco. </p>
<p>The joint venture partners will now need to weigh the issues of transparency for affected workers and community against its desire to secure the dam failure sites and assess the insurable risks. </p>
<p>There is a real risk to reputation here. It is to be expected that Samarco, with BHP Billiton and Vale will want to seal off the sites and gather evidence for its own purposes, and restrict access to insurers, local authorities, and regulators, who have their own procedures to consider. </p>
<p>But they also face a fine balance between being seen to cover up a larger disaster and being transparent about what happened. Effective management in these circumstances is essential; perceived mismanagement is a real possibility. One only has to look at the consequences for BP in dealing with the 2010 Gulf of Mexico oil spill to understand the flow-on consequences of disaster mismanagement.</p>
<p>In the background, BHP and Vale will have to consider the direct costs of rescheduling iron ore production and shipping which may not recommence for <a href="http://www.afr.com/business/mining-and-resources/bhp-billitons-burst-brazilian-dam-likely-to-stay-shut-for-years-20151109-gkucid">another three years</a> with cleanup costs of $1.4 billion based on preliminary analysis, the impact on its share price, the additional costs of regulation to avoid repeat disasters, educating workers and communities, and possible upgrading of real time information flows about production, waste and seismic activities. </p>
<p>In addition there is likely to be an industry effect whereby the credibility of mining is reduced and costs of capital reassessed, in line with increased insurance premiums. </p>
<h2>Loss of trust</h2>
<p>But perhaps one of the biggest risks is the loss of trust by workers and communities: this is something that requires an <a href="http://link.springer.com/article/10.1007/s10551-015-2938-0">ethical and empathetic approach</a> that reflects concern for vulnerable people and the environment - beyond profit and risk management. </p>
<p>The question is whether multinational managers are capable of such leadership in times of disaster and can they translate this concern into business as usual. The future of the mining industry depends on such a shift in thinking.</p><img src="https://counter.theconversation.com/content/50405/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>BHP and Vale are under intense scrutiny following the failure of two dams associated with a joint venture iron ore mine in Brazil. It is believed 28 people have died.Roger Burritt, Professor of Accounting and Sustainability, Macquarie UniversityKatherine Christ, Researcher and Tutor in Accounting and Sustainability, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/422532015-05-28T20:13:11Z2015-05-28T20:13:11ZFactCheck: Is BHP Billiton Australia’s largest taxpayer, averaging $8-10b in tax a year?<blockquote>
<p>We pay on average $A8 billion to $10 billion of tax in Australia every year… We are Australia’s biggest taxpayer by far, we have an effective tax rate of 45%… – <strong>Andrew Mackenzie, Chief Executive of BHP Billiton, interview with Fran Kelly on ABC radio RN Breakfast, May 19, 2015.</strong></p>
</blockquote>
<p>After years of flying under the radar, company income tax is suddenly headline news in Australia. </p>
<p>Andrew Mackenzie’s comments on BHP Billiton’s tax affairs came in the wake of a parliamentary committee into corporate tax avoidance, new multinational <a href="http://www.alp.org.au/fairshare_oldsajdhk">tax</a> policy <a href="http://mobile.abc.net.au/news/2015-05-11/hockey-outlines-plans-for-tax-avoidance-crackdown-netflix-tax/6460848?pfm=sm&section=business">announcements</a> from both major parties and <a href="http://www.theage.com.au/federal-politics/political-news/bhp-billiton-reveals-minuscule-singapore-tax-bill-as-ato-chases-it-for-500m-20150427-1muetk.html">several</a> high profile <a href="http://www.afr.com/news/policy/tax/atos-chris-jordan-contests-bhp-rio-apple-microsoft-google-on-tax-20150422-1mqglk">investigations</a> by the Australian Tax Office into some of the biggest firms operating in Australia. </p>
<p>There are three statements of fact contained in Mr Mackenzie’s recent quote:</p>
<ul>
<li>That BHP Billiton is by far and away Australia’s largest taxpayer</li>
<li>That BHP Billiton pays an average of $A8 billion to $10 billion of tax in Australia every year</li>
<li>That BHP Billiton has an effective tax rate of 45%</li>
</ul>
<p>When asked for a data source to substantiate his claims, a spokeswoman for BHP Billiton sent The Conversation a <a href="http://www.aph.gov.au/DocumentStore.ashx?id=c3fbd854-c1cf-4230-a535-be25a721a456">copy</a> of BHP’s answers to questions on notice from a public hearing of the recent Senate Inquiry into corporate tax avoidance. </p>
<p>That statement also noted that the Australian Tax Office is chasing BHP for $522 million (being primary unpaid tax of $301 million, interest of $145 million and penalties of A$76 million). BHP Billiton has objected to these assessments.</p>
<p>We checked Mr Mackenzie’s statement using data from the <a href="http://datanalysis.morningstar.com.au/af/dathome?xtm-licensee=datpremium">Morningstar DatAnalysis</a> financial database, a subscription-only database that logs information on companies listed on the Australian Securities Exchange.</p>
<p>We cross-checked the BHP information we found on Morningstar with data from BHP Billiton’s <a href="http://www.bhpbilliton.com/home/investors/reports/Pages/default.aspx?report=Financial%2BResults">financial statements</a>.</p>
<p><br></p>
<iframe src="https://d1umsnw3kzdhxo.cloudfront.net/tVF0q/2/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="580"></iframe>
<p>Here’s what we found.</p>
<h2>Is BHP Australia’s biggest taxpayer?</h2>
<p>Yes. According to the data collated by Morningstar, BHP has paid the highest amount of consolidated company tax in total between the financial years 2005 to 2013. BHP paid almost $54.4 billion in consolidated tax over that time, with Rio Tinto in second place with almost $39 billion, and the Commonwealth Bank of Australia is in third place, paying almost $20 billion.</p>
<p><br></p>
<iframe src="https://d1umsnw3kzdhxo.cloudfront.net/UubgF/2/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="450"></iframe>
<h2>Does BHP Billiton pay an average of $8 billion to $10 billion of tax in Australia every year?</h2>
<p>BHP paid above $8 billion in consolidated company income tax in 2012 and 2013. But the <em>average</em> consolidated company income tax paid by BHP over 2005 to 2014 is $5.85 billion.</p>
<p><br></p>
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<p>According to Morningstar, the firm paid an average of just over $6 billion in consolidated company income tax between 2005 and 2013. In 2014, BHP paid $5.937 billion in consolidated company income tax.</p>
<p>In a statement to the Senate Inquiry into tax avoidance, BHP said:</p>
<blockquote>
<p>BHP Billiton paid A$4.9 billion of corporate tax in Australia last year. When royalties and resource rent taxes are taken into account, BHP Billiton paid more than A$8.7 billion in Australia last year.</p>
</blockquote>
<p>But paying royalties on a resource owned by the Australian people is not company income tax.</p>
<h2>Does BHP Billiton have an effective tax rate of 45%?</h2>
<p>Morningstar data showed that the consolidated effective tax rate (ETR) for BHP was above 45% in 2013, based on the cash ETR measure (cash tax paid /total pre-tax profit) and in 2009 based on the GAAP ETR measure (total tax expense /total pre-tax profit).</p>
<p><br></p>
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<p>However, the <em>average</em> ETR for BHP between 2005 and 2014 is almost 31% based on GAAP ETR and 28.1% based on cash ETR. The ETR based on the most recent available figures is 31.2% (GAAP ETR) and 25.15% (based on cash ETR). </p>
<p><br></p>
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<h2>Verdict</h2>
<p>The first fact that BHP is by far and away Australia’s largest tax payer is correct.</p>
<p>The second statement is correct only for company income tax paid in 2012 and 2013. The average company income tax paid by BHP is closer to $6 billion a year. That figure inflates if you count royalties and resource rents as taxes.</p>
<p>Unless Mr Mackenzie was referring specifically to 2014 or 2009, BHP does not have a 45% effective tax rate and certainly not an average effective tax rate of 45% over the years 2005 to 2014. In fact, on average, Rio Tinto has a higher effective tax rate than BHP. </p>
<h2>Review</h2>
<p>This is a sound and deliberately constrained analysis. </p>
<p>Measuring a company’s “effective tax rate” (how much tax they pay as a percentage of profits) and comparing effective tax rates across companies is a challenge for two reasons.</p>
<p>The first is that large multinationals such as BHP divert some profits to low tax jurisdictions. In BHP’s case, this includes a diversion to Singapore, currently the subject of ongoing <a href="http://www.smh.com.au/federal-politics/political-news/bhp-billiton-reveals-minuscule-singapore-tax-bill-as-ato-chases-it-for-500m-20150427-1muetk.html">disputes</a> with the ATO. In BHP’s company accounts, the profits diverted to tax havens or low tax jurisdictions are treated as expenses, so the “taxable income” is reduced by the diverted profits. So the tax paid worldwide by BHP is reduced. </p>
<p>The second is the unique nature of BHP’s trading stock. While most businesses manufacture from raw materials they buy from other businesses or sell goods they acquire from wholesalers or manufacturers, BHP buys its trading stock from State governments, with the purchase cost of the materials called a “royalty”. In many of their public <a href="http://www.aph.gov.au/DocumentStore.ashx?id=c3fbd854-c1cf-4230-a535-be25a721a456">statements</a>, BHP treats this as a tax and as a result shows its total effective tax rate is higher than the company tax rate. To compare rates properly, we should either deduct the royalties from the total taxes paid or allow all other businesses to deduct all the cost of their trading stock when calculating their effective tax rates. – <strong>Rick Krever</strong></p>
<hr>
<p><div class="callout"> Have you ever seen a “fact” that doesn’t look quite right? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.</div></p><img src="https://counter.theconversation.com/content/42253/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rick Krever has received external research donations and from public sector and private sector donors and the Australian Research Council. He provides assistance and advice to the Australian Council of Social Services.</span></em></p><p class="fine-print"><em><span>Roman Lanis and Ross McClure do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>BHP Billiton’s Andrew Mackenzie says his firm is Australia’s largest taxpayer, pays an average of $8 - $10 billion of tax in Australia every year and has an effective tax rate of 45%. Is that right?Roman Lanis, Associate Professor, Accounting, University of Technology SydneyRoss McClure, PhD Candidate, casual academic, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/420472015-05-19T20:06:11Z2015-05-19T20:06:11ZIron ore miners should leave the market if they can’t compete<p>Iron ore prices are plummeting, federal budget tax receipts are shrinking and Fortescue Metals Group chairman, Andrew “Twiggy” Forrest, <a href="http://www.dailytelegraph.com.au/news/opinion/big-miners-bhp-billiton-and-rio-tintos-flood-the-market-tactics-threaten-australias-prosperity/story-fni0cwl5-1227349418669">reckons</a> he knows who is to blame: BHP Billiton and Rio Tinto.</p>
<p>Forrest <a href="http://www.dailytelegraph.com.au/news/opinion/big-miners-bhp-billiton-and-rio-tintos-flood-the-market-tactics-threaten-australias-prosperity/story-fni0cwl5-1227349418669">says</a> these competitors drove down prices by flooding the market with product and has pushed for a federal parliamentary inquiry into their actions – a prospect Prime Minister Tony Abbott is said to be <a href="http://www.abc.net.au/news/2015-05-17/ministers-oppose-iron-ore-inquiry/6476176">considering</a>.</p>
<p>Forrest told <a href="http://www.abc.net.au/radionational/programs/breakfast/">ABC RN Breakfast</a> last week that </p>
<blockquote>
<p>When the chief executives of two of the most important companies to Australia both talk the market down, both say they’re going to oversupply the market there’ll be a lot of collateral damage to the Australian economy, employees by the tens of thousands, companies, and we no longer have a free market. </p>
</blockquote>
<p>On Tuesday, BHP Billiton CEO Andrew Mackenzie <a href="http://www.abc.net.au/radionational/programs/breakfast/">responded</a> by saying his firm has been a “very responsible fair producer” that had already partially slowed production, adding that:</p>
<blockquote>
<p>… it’s a normal free market; if you allow it to remain free, it will allow the customer to enjoy the lowest cost of supply and therefore the most sustainable price and that stimulates demand and it’s good for the world economy… our prime customers in north Asia will be extremely disappointed that they paid high prices for iron ore to stimulate new production and then they expected of course that the price would come back to normal. </p>
</blockquote>
<p>Mackenzie has a point. It seems sensible for high cost producers to either reduce their costs or leave the market if they cannot compete. </p>
<h2>Playing a long game</h2>
<p>It would appear that both Rio and BHP Billiton are making production decisions that are consistent with very long term, low cost operations. The astronomical prices of the last 10 year mining boom were a pleasant aberration, and many see the current lower prices as a price correction.</p>
<p>Commodity projects involve numerous checks for feasibility prior to construction, during construction and once the project starts producing. </p>
<p>Some projects, like the BHP Billiton <a href="http://www.bhpbilliton.com/home/investors/news/Pages/Articles/BHP-Billiton-Opens-Jimblebar-Iron-Ore-Mine.aspx">Jimblebar Mine</a> expansion project (completed in 2014) have contributed to BHP’s increasing output. Yet there has also been a raft of improvements to BHP’s supply chain over the years as the company works to increase efficiency. Each of these decisions are carefully weighed against current iron ore prices and expected future iron ore prices. Each decision step is inherently uncertain and projects can, and do, fail from time to time. </p>
<p>Huge companies like BHP Billiton and Rio exist because of their ability to deal with shocks and their ability to plan for the long term.</p>
<p>These companies have planning horizons of 50 years or longer for many of their projects. A serious error in the supply chain or in the assessment of the quality of the resources at an early stage can lead to disaster once production starts. These companies have extensive quality control systems in place to minimise the chance of these errors occurring. </p>
<p>Rio Tinto established a <a href="http://www.riotinto.com/ironore/mines-9939.aspx">presence</a> in Western Australian iron ore with the Mount Tom Price mine in 1966 and the Channar mine in 1990.</p>
<p>Similarly, BHP Billiton established Mount Whaleback in 1968. Its Jimblebar project was recently expanded, resulting in increased production as noted in its 2014 annual report, yet this project was initially established 25 years previously. These projects are not driven by short term price movements. The investments are huge and the risks substantial.</p>
<h2>Relative newcomers</h2>
<p>Many of the smaller Australian producers grew rapidly to deal with the increasing world demand and dramatic increases in prices that took place in the mid-2000s. </p>
<p>For example, Fortescue Metals Group was formed in 2003. Its <a href="http://www.fmgl.com.au/our_business/Chichester_Hub">Cloud Break Mine</a> construction began in 2006, with first production shipped in 2008. Output was further increased with the development of the <a href="http://www.fmgl.com.au/our_business/Solomon_Hub">Solomon Hub</a>, completed in 2014.</p>
<p>Fortescue <a href="http://www.fmgl.com.au/people_and_careers/Working_with_Fortescue">says</a> it is currently the fourth-largest iron ore producer in the world. There are a raft of other iron ore producers that have been created over the last 10 to 15 years, including Atlas Iron, which was listed in 2004. These miners have not seen the long periods of low-to-decreasing prices that have characterised the last 25 years.</p>
<p>Iron ore prices have changed rapidly over the last 10 years and this has wreaked havoc with development decisions. In 2004, the iron ore <a href="http://www.indexmundi.com/commodities/?commodity=iron-ore&months=180">price</a> in US dollars per dry metric tonne was around $USD16 per tonne. </p>
<p>This price would have supported a very different project to that which might be considered in 2006, when the price was $USD33 per tonne. And again, decisions might be different in 2010, when prices exceeded $USD100 per tonne. </p>
<p>Many of the large BHP and Rio projects currently in play were developed during periods when prices were around $USD13 per tonne. These companies have long memories and very restrained development decision making processes. </p>
<p>In a free market, they should not be punished for planning ahead or expected to operate at less-than-optimum efficiency just because their competitors cannot keep up.</p><img src="https://counter.theconversation.com/content/42047/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Heaney receives funding from the ARC. BHP Billiton, Rio Tinto and Fortescue Metals Group have made donations to Richard Heaney's employer, the University of Western Australia.</span></em></p>High cost iron ore producers should either reduce their costs or leave the market if they cannot compete.Richard Heaney, Winthrop Professor, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/418142015-05-18T03:49:44Z2015-05-18T03:49:44ZCompetition the wrong test for iron ore inquiry<p>Fortescue Metals Group Chairman Andrew Forrest has <a href="http://www.afr.com/business/mining/iron-ore/andrew-forrests-iron-ore-campaign-against-bhp-billiton-and-rio-tinto-goes-grassroots-20150517-gh3qzv">stepped up</a> his campaign against competitors Rio and BHP, after gathering the support of independent Senator Nick Xenophon who is pushing for an inquiry into competition in the iron ore sector.</p>
<p>Forrest <a href="http://www.dailytelegraph.com.au/news/opinion/big-miners-bhp-billiton-and-rio-tintos-flood-the-market-tactics-threaten-australias-prosperity/story-fni0cwl5-1227349418669">claims</a> the miners are harming the Australian economy by flooding the market with iron ore, driving lower prices with a <a href="http://www.abc.net.au/news/2015-05-04/andrew-forrest-renews-attack-on-rio-bhp-iron-ore-supply/6444014">“predatory volume strategy”</a>. Australian Competition and Consumer Commission Chairman Rod Sims says it’s hard to make a claim of predatory behaviour given the miners are still making a margin on their product.</p>
<p>Prime Minister Tony Abbott has said an inquiry <a href="http://www.news.com.au/national/breaking-news/decision-on-iron-ore-inquiry-soon-hockey/story-e6frfku9-1227357805095">“could make sense”</a> in order to “get to the bottom on claim and counter-claim about what’s happening inside the iron ore industry at the moment”.</p>
<h2>How we got here</h2>
<p>Most Australians would know by now that the price of iron ore has fallen substantially over the last year. To get a sense of the decline, the benchmark price has fallen by more than 60% from around US$135 per tonne at the beginning of 2014 to below US$50, recovering to above US$60 recently.</p>
<p>This fall has been driven by two main factors. First, iron ore is essentially used for the production of steel. In turn, the demand for steel is typically driven by construction activity. New residential building construction starts in China, the biggest buyer of iron ore, declined by 14.4% in 2014.</p>
<p>Second, there has been an expansion in production by the world’s three largest miners: Rio Tinto, BHP and Brazil’s Vale. Together these three companies represent more than 60% of the international iron ore market. Moreover, all three major mining companies have plans to further increase supply.</p>
<p>Vale, for example, <a href="http://www.vale.com/EN/investors/home-press-releases/Press-Releases/ReleaseDocuments/PREPORT1T15_i.pdf">increased production</a> by nearly 11% or about 12 million tonnes between the first and last quarters of 2014. BHP <a href="http://www.theaustralian.com.au/business/mining-energy/bhp-lifts-wa-iron-ore-forecasts-increases-march-quarter-output/story-e6frg9df-1227314701106">produced 59 million tonnes</a> of iron ore in the first quarter of 2005, representing a 20% increase on quarter 1 2014, and approximately 77% of Vale’s production in the same period. Similarly, Rio Tinto increased iron ore production by 11% in 2014, to a total of over 300 million tonnes.</p>
<p>Collectively, the world’s largest iron ore producers (Vale, Rio Tinto, BHP Billiton, and the smaller Anglo American and FMG), <a href="http://static.ourstatebudget.wa.gov.au/15-16/factsheets/ironore.pdf">increased sales</a> by more than 140 million tonnes, around 10% of the total seaborne market, in 2014.</p>
<h2>The market adjustment</h2>
<p>The demand for iron ore is derived from the demand for steel, which in turn is derived from the demand for construction. This suggests the elasticity of demand ought to be fairly low. <a href="http://econ.duke.edu/uploads/media_items/thesis-zhirui-zhu.original.pdf">One estimate</a> of the world’s elasticity of demand for iron ore suggests that a 1% drop in price leads to an increase in demand of only 0.24%. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=571&fit=crop&dpr=1 600w, https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=571&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=571&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=717&fit=crop&dpr=1 754w, https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=717&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/81972/original/image-20150518-25422-gp9sio.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=717&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reserve Bank of Australia.</span>
</figcaption>
</figure>
<p>The low elasticity of demand suggests that the market will primarily adjust through changes in supply, with high cost suppliers being displaced by low cost producers and revenue falling. The chart to the right, reproduced from an <a href="http://www.rba.gov.au/publications/smp/boxes/2015/feb/a.pdf">RBA report</a>, is helpful in understanding which miners will be displaced as a result of the drop in prices.</p>
<p>Indeed, this adjustment is already in motion. For example, China now imports more than 80% of the iron ore it needs compared to 70% two years ago. China’s iron-ore output has <a href="http://www.businessspectator.com.au/news/2015/4/30/china/iron-ore-price-war-has-chinas-miners-reeling">decreased by 9%</a> in the first quarter of 2015. The impact is also being felt by smaller miners in Australia and in other parts of the world.</p>
<p>Moreover, the impact on revenue is also as predicted. While Australia’s exports of iron ore to China increased by 18% on a yearly basis, iron ore export earnings <a href="http://www.industry.gov.au/industry/Office-of-the-Chief-Economist/News/media-releases/Pages/Increasing-supply-and-slowing-economic-growth-in-China-contributes-to-weaker-commodity-prices-14-May-2015.aspx">declined by 31%</a> due to the fall in prices. </p>
<p>In a nutshell, while the larger miners are gaining market share, they are doing so at the expense of high cost miners and it is adversely affecting earnings. The diagram above also helps us understand why the ACCC has said that this process of high cost suppliers being replaced by low cost suppliers simply reflects the workings of a competitive market.</p>
<h2>Where will it end?</h2>
<p>The <a href="https://hbr.org/2000/03/how-to-fight-a-price-war">example of the airline industry price wars</a> in the US following the 1992 deregulation is instructive. As a result of the price war, the industry lost all the profits that had been earned in its entire history.</p>
<p>Why would the large miners engage in a price war?</p>
<p>Andrew Forrest’s central idea seems to be that by increasing production, and causing such a large decrease in prices, large, low cost miners would be able to exclude small, high cost miners from the market. Presumably, once these high cost miners exit the market, the large miners would then recoup any profit sacrifices by using their market power to increase prices and profits.</p>
<p>Given large miners are not pricing below production cost, this is not your standard <a href="https://www.accc.gov.au/business/anti-competitive-behaviour/predatory-pricing">predatory pricing</a> - and why the ACCC apparently has no concerns with the conduct. However, it’s not clear that production/extraction costs are the relevant costs for a predatory pricing test. As resources are finite, a tonne of iron ore sold today is one tonne less of iron ore sold tomorrow at likely a higher price. This is the opportunity cost of the resource and it is not clear why this should not be included in a predatory pricing test. These are complex issues that a parliamentary inquiry could independently look at.</p>
<h2>Why it’s a policy issue</h2>
<p>One may be tempted to think that this is essentially a business issue and that, in the absence of any anti-competitive implications, governments should simply stay out of it. This would be a costly public policy mistake as it would ignore the impact the price war has had, and will have if it continues unabated, on the value of the resources for owners.</p>
<p>The key is that because iron ore resources are finite, a lower price today may result in a reduction in their total value over the lifetime of a mine. The only case when this wouldn’t happen is if future demand for iron ore were to fall. This is unlikely as any decline in the demand from China, as it moves to its next stage of development, will be replaced by new demand derived from development efforts in India, Africa and the less developed countries of South East Asia.</p>
<p>In Australia, the Crown owns the resources and their value is captured both through state royalties, which directly benefit Western Australia where the bulk of iron ore resources are, and through corporate tax, which benefits both Western Australia and the country as a whole. The industry also has a significant impact on the broader economy.</p>
<p>The 2015 federal <a href="http://www.budget.gov.au/2015-16/content/overview/html/overview-04.htm">budget papers estimate</a> that, since the last budget, the value of forecast iron ore exports has been downgraded by around A$90 billion. This has contributed to lower nominal GDP and has reduced forecast tax collections by around A$20 billion. This is roughly 57% of the public deficit in 2015-2016.</p>
<p>In Western Australia, the general government revenue estimates to 2017-2018 have been revised down by an unprecedented A$10.2 billion since the 2014-15 budget, driven by sharp declines in iron ore and crude oil prices. The revenue write-down in 2015-16 alone is A$3.9 billion, equivalent to 13% of the state’s total revenue base.</p>
<p>As the elasticity of demand for iron ore is low, this foregone revenue, or a return on ownership of mineral rights, is unlikely to be recovered in the future. It is essentially a transfer from the owners of the resources to buyers.</p>
<h2>Will the price war end by itself?</h2>
<p>Rio Tinto, Fortescue Metals Group, Arrium Limited, Grange Resources, and Vale’s production and exports of iron ore were <a href="http://www.smh.com.au/business/mining/vales-slower-growth-to-trigger-iron-ore-rally-20150430-1mxenu.html">reportedly lower</a> in the March 2015 quarter than the December 2014 quarter. Vale, for example, decreased its output by 10% from the previous quarter and has announced it could temporarily decrease supply by 30 million tonnes. This, alongside an increase in Chinese demand for iron ore (despite a fall in its demand for steel), can possibly explain the recent partial recovery in the price of iron ore.</p>
<p>Given the expansion plans of the three large miners, and demand conditions, it seems the restraint shown by some of the miners in Quarter 1, 2015 may end, resulting in further downward pressure on iron ore prices. The Western Australian government budget papers, for example, assume a $47.5 price per tonne of iron ore for 2015-2016 and an increase in volume of 4.4%, on top of an increase of 13% in 2014-2015.</p>
<p>So what can a government inquiry accomplish? The inquiry is likely to focus on whether the conduct of the large miners is anti-competitive. The arguments I presented above suggest that the issues goes beyond competition law, or at least the ACCC’s interpretation of it, when examining <a href="https://theconversation.com/iron-ore-race-to-the-bottom-not-in-the-interests-of-australians-33685">finite resources owned by the Crown</a>.</p>
<p>A second possible avenue for investigation, which could be pursued by the parliamentary inquiry, involves considering adding a public benefit test to any new production licence approvals or changing <a href="https://theconversation.com/why-twiggy-forrest-should-have-got-behind-a-super-profits-tax-39422">taxation arrangements</a> to reflect the impact of business conduct on the value of the resources. For example, a tiered royalty regime could be set so that rates increase for very high volumes.</p><img src="https://counter.theconversation.com/content/41814/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Flavio Menezes participated in a press interview organised by the Minderoo Group (<a href="http://www.minderoo.com.au/">http://www.minderoo.com.au/</a>) to support the establishment of a parliamentary inquiry into iron ore prices. Flavio Menezes received no financial benefit from participating in the press interview. </span></em></p>While it’s easy for the large miners to argue increased iron ore production is business as usual, the overall cost to the sector warrants a closer inspection.Flavio Menezes, Professor of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/137522013-04-26T01:56:35Z2013-04-26T01:56:35ZCorporate accountability and gutting the US Alien Tort Statute<figure><img src="https://images.theconversation.com/files/22878/original/62cqqrst-1366940240.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A US Supreme Court decision last week damaged the legal options for holding corporations to account for human rights and environmental abuses.</span> <span class="attribution"><span class="source">Philosophicalswag</span></span></figcaption></figure><p>The US Supreme Court has handed down a landmark <a href="http://www.supremecourt.gov/opinions/12pdf/10-1491_8n59.pdf">decision</a> that will have drawn sighs of relief from corporate boardrooms in Australia and around the world.</p>
<p>Kiobel v. Royal Dutch Petroleum was brought by Nigerian citizens (now residing in the United States), alleging that Royal Dutch Petroleum, Shell and their <a href="http://www.shell.com.ng/aboutshell/shell-businesses/e-and-p/spdc.html">local subsidiary</a> aided and abetted the Nigerian government to commit serious human rights abuses against the local Ogoni people of the oil-rich Niger Delta in the 1990s.</p>
<p>The case was brought under the Alien Tort Statute (ATS) – an obscure law that was passed by the first US Congress in 1789 in an effort to combat piracy. The ATS <a href="http://www.law.cornell.edu/uscode/text/28/1350">states</a> that US courts: </p>
<blockquote>
<p>have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.</p>
</blockquote>
<p>In the past two decades, human rights activists rediscovered the little-used ATS and employed it as a means to hold large multi-national corporations accountable for human rights abuses committed in far-flung countries.</p>
<p>Australian companies have not been immune from this wave of ATS litigation. One of the highest-profile ATS cases in the US involved <a href="http://opiniojuris.org/2011/10/26/sarei-v-rio-tinto-the-ninth-circuit-tackles-the-alien-tort-statute-again/">allegations against Australian mining company</a>, Rio Tinto, for environmental destruction of Bougainville’s environment and complicity in serious human rights abuses committed by the Papua New Guinean government when it used military force to quell an island uprising.</p>
<p>Rio Tinto had appealed to the US Supreme Court, but the appellants in Kiobel beat them to the punch. And so it was Kiobel that became the vehicle for the US Supreme Court to consider the limits of the ATS. Now, due to their decision, it <a href="http://www.upi.com/Top_News/US/2013/04/22/Court-reinforces-pro-multinational-decision/UPI-34231366642844/">seems highly unlikely</a> that Rio Tinto will ever need to plead their case before the US Supreme Court.</p>
<p>The US Supreme Court decided that the “presumption against extra-territoriality applies” to claims brought pursuant to the ATS. In simple terms, the court has decided that you cannot employ the ATS to sue foreign companies for conduct in foreign lands in US courts any longer.</p>
<p>A key plank in the court’s reasoning was its wariness to entangle US courts in matters with “direct foreign policy consequences” for the US government. Incidentally, in reaching their decision the court relied upon their own 2010 decision in <a href="http://www.supremecourt.gov/opinions/09pdf/08-1191.pdf">Morrison v. National Australia Bank</a> – yet another case involving an Australian-based corporate defendant.</p>
<p>In the months to come, as human rights activists and victims of atrocities come to grips with the shutting down of one promising legal avenue in which to pursue justice, they will necessarily be searching for another forum in which to do so. And they just might find it here in Australia.</p>
<p>Indeed, Australia may very well become the epicentre of the next round of corporate accountability trials.</p>
<p>Australian courts are a potentially fertile, but largely untested, ground for pursuing human rights litigation against corporations, Australian or foreign. Nevertheless, potential criminal and civil legal claims are foreseeable in Australian courts against today’s corporate wrongdoers.</p>
<p>Australia is a signatory to the <a href="http://untreaty.un.org/cod/icc/statute/romefra.htm">Rome Statute</a> that established the International Criminal Court and as such has incorporated international crimes into Australian criminal law. Under these criminal laws domestic Australian courts have the authority to prosecute people and corporations for international crimes, including crimes against humanity, war crimes and genocide. Importantly, companies could be held to account for complicity in any such crimes committed by governments or militaries of countries where they operate.</p>
<p>There is also potentially a range of civil claims that victims of such heinous crimes could bring against any alleged corporate bad actors, seeking monetary compensation from them. While Australia does not have a statute equivalent to the ATS, ordinary tort law might be utilised.</p>
<p>Many of the judicial hurdles to succeed in an ATS claim are not applicable to the Australian legal scene. Australian has a looser notion of <a href="http://www.law.cornell.edu/wex/forum_non_conveniens">forum non conveniens</a>, a principle that requires a claim to be brought in the most appropriate forum, which makes it more amenable to cases involving misconduct in foreign countries.</p>
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<img alt="" src="https://images.theconversation.com/files/22876/original/vqxmfvry-1366939177.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/22876/original/vqxmfvry-1366939177.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=364&fit=crop&dpr=1 600w, https://images.theconversation.com/files/22876/original/vqxmfvry-1366939177.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=364&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/22876/original/vqxmfvry-1366939177.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=364&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/22876/original/vqxmfvry-1366939177.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=458&fit=crop&dpr=1 754w, https://images.theconversation.com/files/22876/original/vqxmfvry-1366939177.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=458&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/22876/original/vqxmfvry-1366939177.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=458&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Could the Australian system present a new legal avenue for corporate accountability?</span>
<span class="attribution"><span class="source">AAP/Lee Besford</span></span>
</figcaption>
</figure>
<p>The presumption against extra-territoriality that the US Supreme Court has employed to gut the ATS of much of its force, is turned on its head in the Australian context. That is, the relevant provisions of the Australian criminal code are explicitly extra-territorial in nature. The intent behind their incorporation was precisely to proscribe certain conduct wherever it may occur on the globe in Australia or elsewhere, unbounded by Australian territorial jurisdiction. Although there is a question of whether Australian courts can exercise universal jurisdiction, <a href="http://www.austlii.edu.au/au/cases/cth/HCA/1991/32.html">existing case law</a> suggests there can be a strong presumption for the prosecution of grave international crimes.</p>
<p>Therefore, it is possible that foreign-based multinational companies such as Shell and Royal Dutch Petroleum, as well as Australian-based companies such as Rio Tinto, could face the prospect of legal action against them in Australia for the very same sorts of alleged misconduct that they have had to defend in US courts.</p>
<p>Australia has not experienced waves of human rights litigation against corporations to date. The sole Australian case against a corporate defendant alleging human rights and environmental abuses abroad was <a href="http://www.abc.net.au/pm/stories/s353175.htm">launched against BHP Billiton in the 1990s</a> related to its operations of the Ok Tedi mine in the Fly region of Papua New Guinea. The case was settled out of court.</p>
<p>Last week’s US Supreme Court judgment in Kiobel v. Royal Dutch Petroleum has greatly narrowed the scope of the ATS to be employed as an effective means of legal redress for victims of corporate misconduct. With this renewed motivation for victim groups to consider the alternatives, as well as Australia’s permissive legal environment, this may mean that such cases may be heading to our shores in the not too distant future.</p><img src="https://counter.theconversation.com/content/13752/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Kolieb does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US Supreme Court has handed down a landmark decision that will have drawn sighs of relief from corporate boardrooms in Australia and around the world. Kiobel v. Royal Dutch Petroleum was brought by…Jonathan Kolieb, PhD candidate in Law and Sessional Lecturer in American Politics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/123412013-02-20T06:14:39Z2013-02-20T06:14:39ZChange at the top: what next for BHP Billiton?<figure><img src="https://images.theconversation.com/files/20463/original/qcnwzbc2-1361336544.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Outgoing BHP Billiton CEO Marius Kloppers shakes hands with his successor, Andrew Mackenzie.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The board of BHP Billiton Limited today announced the <a href="http://www.bhpbilliton.com/home/investors/news/Documents/2013/130220_BHP%20Billiton%20CEO%20Retirement%20and%20Appointment.pdf">retirement of chief executive officer and inside director Marius Kloppers</a>. </p>
<p>Dr Kloppers is a 20-year veteran of the company, serving 12 years as a senior executive. He was appointed CEO in October 2007. Dr Kloppers’ retirement from the CEO role will be effective 10 May 2013, and from the group effective 1 October 2013.</p>
<p>BHP Billiton chairman Jac Nasser praised the efforts of his retiring CEO in today’s board announcement. Mr Nasser drew attention to Dr Kloppers’ steady stewardship of the company in the global financial crisis environment, driving new investments, and delivering strong shareholder returns during his tenure, with the group outperforming its peers.</p>
<p>The decision has been taken that Dr Kloppers will be succeeded by Andrew Mackenzie, currently BHP Billiton’s chief executive non-ferrous.</p>
<p>Dr Kloppers described working for BHP Billiton as a “privilege”, paying tribute to current and former colleagues, in particular former chairman Don Argus and former CEOs Paul Anderson and Chip Goodyear.</p>
<p>Media reporting in recent weeks has focused on the need for the group to rework its strategy. The commodity price boom encouraged strong spending from mining companies to increase productive capacity. Federal Minister for Resources and Energy Martin Ferguson is on the record in 2012 as saying the mining boom is over, so times have changed.</p>
<p>Big miners such as BHP Billiton set the tone for strategy in their industry. In 2012, BHP Billiton communicated to the market that their strategy focus for the current year is on reducing operating costs and non-essential expenditure. There has been suggestion of a slowdown or stop of some development programs, closure of higher cost operations and a significant targeted cost reduction program across the group. However, there have been few specifics provided to the investment community on details of this cost-cutting program.</p>
<p>The financial result presented today was in line with analyst forecasts, but a little disappointing. First half total revenue was down 14% at US$32.2 billion with net profit down 58% at US$4.24 billion.</p>
<p>Against the backdrop of these announcements there has been some media and shareholder chatter on succession planning at BHP Billiton in recent months.</p>
<p>Not all media commentators have seen Dr Mackenzie as a clear choice for the prized position of BHP Billiton CEO. Names including Marcus Randolph, Alberto Calderon and Michael Yeager have been suggested in the Fairfax media, with the view that a CEO with a strong operations background may be best suited to the role.</p>
<p>Dr Mackenzie has occupied a variety of roles in oil and gas, petrochemicals and minerals with organizations including BP and Rio Tinto, as well as enjoying a distinguished academic career. Dr Mackenzie joined BHP Billiton in 2007.</p>
<p>Dr Mackenzie will join the BHP Billiton board in May. BHP Billiton pride themselves on succession planning, though none of the contenders for the CEO succession currently are on the board of the world’s biggest miner. A small number of quality inside directors balanced by a strong chair and a majority of outside directors can make a strong and sound contribution to organisation strategy. Such an environment can also help to prepare senior executives for succession.</p>
<p>Looking to the future, the challenge for BHP will be to reduce costs, develop the right growth assets, and deliver strong returns to shareholders. Investors have become more vocal on the need for mining companies to improve their yield to investors, which are a fraction of what financial services companies can deliver.</p><img src="https://counter.theconversation.com/content/12341/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy (Tim) O'Shannassy does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The board of BHP Billiton Limited today announced the retirement of chief executive officer and inside director Marius Kloppers. Dr Kloppers is a 20-year veteran of the company, serving 12 years as a senior…Timothy (Tim) O'Shannassy, Senior Lecturer, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/117312013-01-23T19:33:32Z2013-01-23T19:33:32ZDespite tough lessons for Australian miners, transparency should still be a goal<figure><img src="https://images.theconversation.com/files/19499/original/25v9kp5w-1358906676.jpg?ixlib=rb-1.1.0&rect=20%2C10%2C970%2C558&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The replacement of Tom Albanese by Sam Walsh as Rio Tinto chief following write-downs on Riversdale Mining in Mozambique indicates some of the continuing difficulties of working in developing countries.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Two recent events have highlighted the potential pitfalls of miners doing business in developing states.</p>
<p>The first was the departure of Tom Albanese as Rio Tinto’s Chief Executive following a $13.3 billion write-down that included $3 billion impairment charges on its Mozambique coal investment, Riversdale Mining. The other was the resignation of Professor Ross Garnaut (discussed in detail <a href="http://www.radioaustralia.net.au/international/radio/program/pacific-beat/extended-interview-ross-garnaut-former-png-development-fund-chair/1076028">here</a>) as Chair of the PNG Development Fund after a public disagreement with Prime Minister Peter O'Neill. </p>
<p>Mining companies, including those based in Australia, have long been attracted to developing states, and as a result face problems unique to an industry in which the most lucrative finds are often found in the most risky operating regions. These firms, driven by the necessity to add new and proven and probable reserves to their balance sheets, will continue to face significant levels of sovereign risk.</p>
<p>In addition to the risk-reward payoff for firms, growth in the mining sector presents both positives and negatives for developing states. Multinational mining firms such as Rio Tinto bring with them a level of legitimacy and authority over areas such as environmental practices and development of local communities. </p>
<p>An emerging area of scholarship highlights the role firms play in setting the rules and regulations within developing states. Known as private governance, this area of research suggests that firms will self-regulate, often going above and beyond what is required by the state. Furthermore, these regulations may positively influence other firms operating in similar areas, or may even be adopted by host governments. </p>
<p>The idea of promoting regulation appears incongruent with the aims of mineral extractive firms who, like all corporations have a responsibility to shareholders to maximise profits. However, the evolution of the <a href="http://eiti.org/">Extractive Industries Transparency Initiative</a> (EITI) shows us that firms can indeed be dually motivated by profit and an acceptance of the norm of transparency. </p>
<p>The initiative is entirely voluntary and yet it currently has 70 corporate supporters, all of whom support the initiative’s core goals of disclosure and improved governance of mining industries in developing states. However, it should be noted that there is no requirement for these firms to disclose payments to governments, with this only occurring when the state is an EITI Compliant Country.</p>
<p>While the EITI is not perfect – its reliance on transparency as a norm results in several weaknesses – it is a way in which firms can contribute positively to the development goals of host states. Mozambique is a Compliant Country within the EITI, meaning the country’s ability to reconcile taxation from its emerging mining industry revenues has been deemed to be adequate. </p>
<p>In addition the country ranks 123rd of 176 countries included in <a href="http://www.transparency.org/cpi2012/results">Transparency International’s 2012 Corruption Perception Index</a>. This ranking places the country on par with Vietnam and Sierra Leone, and suggests that while taxation from the country’s mining industry can be accounted for, there remains a distinct lack of transparency elsewhere in the economy. </p>
<p>Rio Tinto participated in the most recent EITI reporting round in Mozambique, released in 2012, with the discrepancy between taxation declared as paid by Rio Tinto, and what was received by the government lower than the 3% threshold set by the EITI. </p>
<p>Overall, the Mozambique EITI team found that taxation payments from all companies largely reconciled, finding only minor discrepancies. As a leading multinational company operating in Mozambique, Rio Tinto’s support for the initiative is important in affirming the initiative’s legitimacy.</p>
<p>While Rio Tinto’s experience participating in reconciliation process was a positive one, it unfortunately did not reflect a strong relationship with the Mozambique government. Upon the announcement of Albanese’s departure, it was revealed that a disagreement with the government over plans to barge coal down the Zambezi (contrary to the government’s wish that it be transported by rail) and a lack of Portuguese speakers amongst Rio’s in-country staff had strained relations with the government, contributing to the firm’s huge writedowns.</p>
<p>Conversely, Papua New Guinea is yet to join the EITI. As recently as September last year the government showed interest in applying for membership and appeared openly committed to transparency in its mine licensing process. Unfortunately the implementation of any transparency measure in Papua New Guinea - including the EITI - would be hampered by pervasive corruption which sees Papua New Guinea ranked 150th on Transparency International’s Corruption Index.</p>
<p>The recent departure of Professor Ross Garnaut, a long-time Papua New Guinea watcher, as head of the PNG development fund was a result of the decision by PNG Prime Minister Peter O’Neill to effectively ban Professor Garnaut from entering PNG. </p>
<p>At the time, Professor Garnaut was Chair of the $1.4 billion PNG Sustainable Development Program, a development fund established by BHP as a response to the Ok Tedi environmental disaster. The dispute arose from comments by Professor Garnaut, which were interpreted as offensive by Mr O’Neill and resulted in a travel ban and eventual resignation. </p>
<p>This reminder of the sovereign risk that Australian mining companies face in return for lucrative mineral deposits should, however, not overshadow the ability Australian firms have to lead the way in contributing to improved mining industry governance in our nearest neighbour. </p>
<p>Australia has signed a memorandum of understanding with the Papua New Guinea government supporting its aims to eventually join the EITI. This is an important step, but also needs to be accompanied by pressure on Australian mining firms to exercise private governance and lead on the issue of transparency and disclosure – as well as on important environmental considerations arising from mineral extraction. </p>
<p>While it’s been a tough week for Australian mineral extractive firms operating overseas, we should not lose sight of the benefits these firms can bring to host states. Research on private governance tells us that firms can both increase profitability and contribute to positive development outcomes – often through voluntary membership of initiatives such as the EITI. </p>
<p>The promotion of transparency and a focus on disclosure can not only assist citizens of developing states in holding their governments to account, it can also benefit the firms involved. Firms operating in EITI countries are likely to engage in less corruption and graft as well as meeting shareholder expectations of best-practice social responsibility. </p>
<p>As Rio Tinto’s experience in Mozambique shows us, while private governance is not a panacea for the potential downside risks of mining in the developing world, it remains one important piece of the puzzle. </p><img src="https://counter.theconversation.com/content/11731/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ainsley Elbra does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Two recent events have highlighted the potential pitfalls of miners doing business in developing states. The first was the departure of Tom Albanese as Rio Tinto’s Chief Executive following a $13.3 billion…Ainsley Elbra, PhD candidate, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/116272013-01-15T23:16:53Z2013-01-15T23:16:53ZA rebound in iron ore prices? Who knows?<figure><img src="https://images.theconversation.com/files/19238/original/r87k94cx-1358290689.jpg?ixlib=rb-1.1.0&rect=11%2C10%2C982%2C646&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Iron ore prices have rebounded: but forecasting prices is a tricky business.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Forecasting commodity prices is like buying a second hand car. Only the car’s previous owner and perhaps the dealer really know what the car is actually like. In contrast you, the buyer, are an outsider with very limited insight and can only judge the car’s true value by what you see in the car yard. Second hand cars, and iron ore, are classic cases of asymmetric information at work, pioneered by <a href="http://elsa.berkeley.edu/%7Eakerlof/">George Akelof</a>’s 1970 study on <a href="https://www.iei.liu.se/nek/730g83/artiklar/1.328833/AkerlofMarketforLemons.pdf">the market for lemons</a>.</p>
<p>In 2008 BHP Billiton grew tired of the practice of selling iron ore to China at an annually negotiated and hard fought fixed price of around $120 per tonne only to see its competitors in India selling iron ore in the spot market at prices of $300 per tonne. </p>
<p>The company was selling iron ore directly to many of the large and some smaller steel makers in China at annually agreed benchmark prices, only to see them sell it on to other producers at much higher spot prices. Steel producers could now make more money from trading iron ore than making steel. Many smaller steel producers simply shut down their blast furnaces, traded iron ore and retreated to the local tea house to watch the money rolling in.</p>
<p>Iron ore was one of the last of the heavily traded commodities that could not be readily bought and sold by intermediaries. So BHP Billiton got serious. BHP Billiton jump-started the market started by donating around two million tonnes of iron ore to form a spot market to entice a limited number of “informed” (sanctioned) intermediaries (not speculators) to provide liquidity and establish a floating price index against which their contracts could be priced.</p>
<p>The dominant iron ore producers desire a floating price index for iron ore that reflects global steel demand. But they also want to sell iron ore directly to steel producers, and avoid pesky brokers, traders and speculators in between. These intermediaries are regarded by the producers as market parasites latching on to their hugger-mugger marketplace to undercut prices and destroy value. </p>
<p>A floating index is only effective if such intermediaries are present and are freely allowed to trade. Traded volumes of iron ore barely reach 80% of the total global volume of iron ore produced. This is better than zero, as it was prior to 2008. But compared with copper and other metals, whose traded volumes in futures and other derivatives often exceed 100 times their production volume, the iron ore market is stale. The iron ore price index relies upon buyers and sellers to report their transactions to a data compiler, and only a few transactions are ever reported. This is unlikely to improve.</p>
<p>An efficient market is regarded as one where prices reflect prevailing demand and supply conditions. There will naturally be price volatility. Prices for copper or bananas are generally seen as the squiggly line of a random walk and contain inherent volatility, with some price jumps. In contrast, iron ore prices exhibit a volatility all of their own and are capricious in a different way. Instead of a large number of minor price changes with a few large price jumps reflective of normal market activity, iron ore prices are not continuous and mostly only jump up or down. Sometimes the prices changes are quite extreme, taking the market by surprise even though this type of behaviour is expected in a market with limited trades.</p>
<p>This is largely a function of the commodity itself. Iron ore is sold in large parcels to buyers and supply interruptions can trigger price changes as demand spikes. But critically, the fact that the dominant producers have elbowed speculators out of the market, while reluctantly acknowledging their necessity to maintain market liquidity, has created a volatile iron ore price index of questionable relevance to market observers.</p>
<p>This does two things. First, forecasting iron ore prices becomes tricky. Most of the forecasts will be wildly wrong because of the jumpy and largely opaque nature of how the price series is generated. And second, because forecasts are difficult, the Federal Treasurer and his Treasury have no idea how much tax revenue is due to them from iron ore sales, either through normal corporate tax receipts or via the MMRT because the forecasts will be wrong.</p>
<p>Squeezing speculators from the iron ore market has allowed the dominant producers to maintain market secrecy under the guise of price discovery. Until speculators penetrate the iron ore trade, forecasting prices in the market for lemons (and iron ore) will remain a mystery.</p><img src="https://counter.theconversation.com/content/11627/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jason West does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Forecasting commodity prices is like buying a second hand car. Only the car’s previous owner and perhaps the dealer really know what the car is actually like. In contrast you, the buyer, are an outsider…Jason West, Associate Professor, Griffith Business School, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/90632012-08-27T04:07:20Z2012-08-27T04:07:20ZHow China drives the Australian iron ore boom (and bust)<figure><img src="https://images.theconversation.com/files/14635/original/jjy2fr8g-1346027878.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Chinese investment in smaller iron-ore suppliers in Western Australia not only presents challenges for the market power of the Big 3 mining companies, but also for the viability of iron ore projects in Australia.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>With several major mining projects being put on ice this week, talk has quickly turned to whether the Australian mining boom is about to go bust.</p>
<p>Jumping on comments by the Resources Minister that “<a href="http://www.businessspectator.com.au/bs.nsf/Article/Cabinet-ministers-at-odds-over-mining-boom-XEVSE?OpenDocument&src=hp34">the resource boom is over</a>”, the federal opposition has blamed the government’s mining and carbon taxes for <a href="http://www.smh.com.au/opinion/politics/abbott-having-it-both-ways-on-bhp-20120823-24nle.html">BHP’s recent decision</a> to shelve its $30 billion Olympic Dam extension project.</p>
<p>However, developments in the all-important iron ore industry suggest the drivers of the boom – and possible impending bust – lie not in Australia, but China.</p>
<p><strong>A China-driven iron ore boom</strong></p>
<p>Recent growth in the Australian iron ore sector has been driven by the rapid industrialisation of the Chinese economy.</p>
<p>China has, is recent years, begun the transition from “light” to “heavy” stages of industrialisation, with a focus on manufacturing industries such as machinery, ships and automobiles. To supply the raw materials required to accommodate these steel-consuming industries, the predominantly state-owned Chinese steel sector has almost quadrupled in size over the last decade.</p>
<p>Due to China’s lack of access to self-produced, high quality iron ore, its steel firms have had to look abroad in order to source their principal mineral inputs. Iron ore imports soared from 70 million tonnes in 2000, to 685 million tonnes in 2011. As a result, Chinese investment now accounts for close to 80% of the Asia-Pacific steel market market.</p>
<p>However, investments in the mining industry traditionally have very long lead times. Consequently, global supply failed to keep pace with Chinese demand</p>
<p>By mid-2011, the value of iron ore had increased nine-fold in comparison with prices in the year 2000.</p>
<p><strong>China’s resource security strategy</strong></p>
<p>Heightened iron ore prices caused major <a href="http://english.caijing.com.cn/2005-07-28/100013812.html">anxiety in China</a> over resource security – would the steel industry be able to survive this “iron ore crisis”?</p>
<p>Given the high levels state-ownership in the Chinese steel sector, it was the government who led the response to the shortage. In 2005, it issued a new policy which laid out a national strategy for <a href="http://www.sciencedirect.com/science/article/pii/S0301420712000128">iron ore resource security</a>.</p>
<p>This strategy had two distinct elements. Firstly, it proposed the development of a Chinese import cartel to challenge the dominant market power of the <a href="http://afr.com/p/national/video_big_three_iron_ore_production_fjIr1H1eoPI73wtmuZe8fM">Big 3 iron ore firms</a> (BHP Billiton, Rio Tinto and Vale) during annual price negotiations. Secondly, it aimed to promote Chinese investment into new entrants in the Asia-Pacific iron ore market, thus increasing available supply.</p>
<p>The cartelisation strategy ultimately proved disastrous. After several years of arduous talks, annual price negotiations between firms broke down following the <a href="http://asaa.asn.au/ASAA2010/reviewed_papers/Leaver-Richard.pdf">Stern Hu Affair</a> of 2009-10. Their replacement with a <a href="http://www.businessspectator.com.au/bs.nsf/Article/WRAPUP-1-BHP-Vale-shift-to-quarterly-iron-ore-pric-426DD?OpenDocument">quarterly index pricing system</a> has done little to soften China’s pain, with iron ore prices still well above their level five years ago.</p>
<p><strong>Investing to break the Big 3</strong></p>
<p>The Chinese investment strategy, however, may prove successful where the cartelisation strategy failed. With government support, Chinese firms have invested $29 billion in sponsor of <a href="http://www.sciencedirect.com/science/article/pii/S0301420712000128">thirty-five new entrants</a> to the regional market, the majority of which are based in Western Australia. These investments were expressly designed to <a href="http://www.chinadaily.com.cn/business/2011-03/25/content_12225742.htm">“break the monopoly”</a> of the Big 3 and lower world iron ore prices.</p>
<p>While most of these projects are still in the “development” stage, they collectively plan to produce some 425 million tonnes of iron ore annually. When added with expansions planned by the Big 3, almost 900 million tonnes of new capacity is currently on the drawing board.</p>
<p>This will go a long way in levelling out the imbalance between regional supply and demand and in response, iron ore prices are <a href="http://ideas.repec.org/p/eab/wpaper/23293.html">certain to fall in the coming years</a>.</p>
<p>The magnitude of the effect of this strategy remains debated, with some predicting only <a href="http://www.theaustralian.com.au/business/mining-energy/iron-ore-prices-to-remain-firm-says-macquarie-analyst/story-e6frg9df-1226078956615">moderate falls</a> while others have forecast a <a href="http://www.smh.com.au/business/iron-ore-price-train-is-coming-to-a-stop-20110313-1bsxn.html">halving of prices</a>. But in either scenario, the <a href="http://afr.com/p/national/resources_boom_is_over_ferguson_8lUAkfoHJuGhTqmxT6hAfJ">federal Resources Minister</a> is correct in claiming the boom times for iron ore investment are now over.</p>
<p><strong>Lean times ahead?</strong></p>
<p>What does this mean for the Australian iron ore sector? Will the boom turn to bust?</p>
<p>Probably not - but the boom is unlikely to be as big as many have predicted.</p>
<p>Price falls will prove a difficult obstacle for the new iron ore players. Nearly all of the China-sponsored projects are modest in size, planning for production of between five and fifteen million tonnes of iron ore annually.</p>
<p>In comparison to the Big 3 – who produce between <a href="http://www.bhpbilliton.com/home/investors/reports/Documents/110720_BHP%20Billiton%20Production%20Report%20for%20the%20Year%20Ended%2030%20June%202011.pdf">155</a> and <a href="http://www.texreport.co.jp/xenglish/eng-genryou/201202/201202171022Fri-2.html">323</a> million tonnes per year – these companies are perilously small. In the scale-dependent iron ore industry, many will prove uncompetitive in the wake of reduced prices and are likely to be abandoned. Sinosteel Midwest’s <a href="http://au.news.yahoo.com/thewest/a/-/newshome/9695769/oakajee-in-doubt-as-sinosteel-pulls-mid-west-project/">shelving of its Weld Range project</a> last year may prove to be just the tip of the iceberg in terms of project cancellations and roll-backs.</p>
<p>However, some new entrants – such as Fortescue Metals Group – have managed to make the transition from small development project to large-scale export operation. So there is still space for new players, even if it is unlikely that all those planning new mines will ultimately succeed.</p>
<p>In the meantime, Australia’s iron ore juniors are now “racing to market” in the hope of avoiding the fate of Olympic Dam and Weld Range. While the China-driven iron ore boom is far from over, it will likely prove more modest than prior expectations.</p><img src="https://counter.theconversation.com/content/9063/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeffrey Wilson does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.</span></em></p>With several major mining projects being put on ice this week, talk has quickly turned to whether the Australian mining boom is about to go bust. Jumping on comments by the Resources Minister that “the…Jeffrey Wilson, Fellow of the Asia Research Centre, Murdoch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/90122012-08-23T00:49:32Z2012-08-23T00:49:32ZOlympic Dam delay is not the end of the world for South Australia<figure><img src="https://images.theconversation.com/files/14544/original/3fw9byhf-1345679592.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">BHP has blamed capital costs and market conditions for its decision to delay expansion of the Olympic Dam project.</span> <span class="attribution"><span class="source">AAP Image/BHP</span></span></figcaption></figure><p>The prospect of a four kilometre long and one kilometre deep open pit mine captures the imagination. Think about a chasm as deep as Mount Everest is high. It was going to take years to remove the overburden hiding the precious minerals in what was to become the largest mine in the world.</p>
<p>Hopes were understandably high in South Australia that the Olympic Dam expansion would get the green light by the BHP-Billiton Board. </p>
<p>Those hopes have been dashed, <a href="http://www.abc.net.au/news/2012-08-23/blame-game-heats-up-over-olympic-dam-delay/4216720">at least in the short term</a>. The disappointment was palpable across the State. Premier Jay Weatherill was quick to acknowledge this, putting BHP-Billiton on notice that they have some ground to make up. </p>
<p>He said that he would be bringing community and industry concerns about the cost of not proceeding to future negotiations. The benefits to South Australia from thousands of hours of investment in the development of the project needed to be realised in a significant way in the future, was his message.</p>
<p>The stakes were high. The $20 billion project would have generated more than 10000 jobs in the early phases of development, providing a significant boost to the State’s ailing construction sector and creating opportunities for well positioned engineering, manufacturing and service companies. Mining royalties would have risen significantly once the mine was operational.</p>
<p>So what went wrong? Was the project scuttled by the carbon tax or the mining tax? Did the South Australian and Australian governments do enough to secure it? In short, no, government action cannot be blamed. </p>
<p>Announcing a sharp fall in profitability, BHP-Billiton CEO Marius Kloppers made it clear that it was “subdued commodity prices and higher capital costs…that had led to the decision”. </p>
<p>The Leader of the Opposition in South Australia, Isobel Redmond declared that the mining and carbon taxes were the cause. The State and National Governments had blundered, she claimed, resulting in a disaster equivalent to the collapse of the State Bank. Tony Abbott agreed. </p>
<p>BHP Billiton Senior Executive, Andrew Mackenzie said otherwise. He was full of praise for the South Australian Government. They “have been fully supportive of Olympic Dam” and have “created an environment that is highly conducive to business development and the Olympic Dam expansion project”, he said.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/14545/original/qbxhzscv-1345681454.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/14545/original/qbxhzscv-1345681454.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/14545/original/qbxhzscv-1345681454.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/14545/original/qbxhzscv-1345681454.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/14545/original/qbxhzscv-1345681454.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/14545/original/qbxhzscv-1345681454.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/14545/original/qbxhzscv-1345681454.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Tony Abbott and the Coalition blame Labor for the Olympic Dam delay.</span>
<span class="attribution"><span class="source">AAP/Lukas Coch</span></span>
</figcaption>
</figure>
<p>BHP Billiton’s short-term decision regarding the expansion of Olympic Dam has its roots in the global financial crisis which put downward pressure on unsustainably high commodity prices. All of this is a reminder that mining booms invariably falter in the face of global economic crises. The millions of tonnes of minerals that lay deep underground at Olympic Dam are not going to go away. BHP-Billiton knows this and will wait for the right time to exploit the rich deposits that are available to them.</p>
<p>With declining commodity prices, the costs of removing billions of tonnes of overburden at Olympic Dam would have become less attractive to the profit hungry mining giant. Finding solutions to getting the minerals out more efficiently is now the priority. The expansion plan won’t go ahead as planned but it will go ahead in some form. </p>
<p>Rising commodity prices in a post GFC environment where India and China resume their spectacular growth will breathe new life into further development of Olympic Dam. In the meantime it will continue to be one of South Australia’s major mines, employing over 2500 people.</p>
<p>Will the BHP-Billiton decision lead to terminal decline in the South Australian economy as the South Australian Opposition Leader claims? Unlike Western Australia and Queensland, South Australia is not a mining state. It has experienced an exploration boom but not a mining boom. Most of its jobs are in the manufacturing and service sectors. </p>
<p>Mining employment represents a little over 1 percent of total employment. The sector is a major generator of exports, rising and then falling on the back of fluctuating commodity prices. South Australia is not dependent on mining and therefore less vulnerable, during difficult times like these, to the destabilising impact of a sharp decline in demand for minerals. </p>
<p>While the GFC continues to make life difficult for sections of the Australian and South Australian economy, unemployment remains low by international and historical standards. There will be no significant dis-investment associated with the BHP-Billiton decision on Olympic Dam and a very high chance that an investment program will be announced over coming years. So, it is not a question of if the expansion of Olympic Dam will proceed, but rather when and in what form it will proceed. All of this will be determined by commodity prices, the ongoing impact of the GFC and technological considerations about how to mine more efficiently at Olympic Dam.</p>
<p>The silver lining in the dark cloud that was the BHP-Billiton decision is that there is now an opportunity to get a better deal from the project than was locked into the Olympic Dam Indenture Bill. </p>
<p>Surely minimum local content provisions can be included in any future deal.</p><img src="https://counter.theconversation.com/content/9012/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Spoehr does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The prospect of a four kilometre long and one kilometre deep open pit mine captures the imagination. Think about a chasm as deep as Mount Everest is high. It was going to take years to remove the overburden…John Spoehr, Associate Professor , University of AdelaideLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/88172012-08-22T04:51:11Z2012-08-22T04:51:11ZJames Price Point: environmental significance ignored in failed impact assessment<figure><img src="https://images.theconversation.com/files/14444/original/xwbv8qdp-1345478522.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">James Price Point's monsoon vine thickets are culturally and ecologically important, and undervalued in assessments of environmental impact.</span> <span class="attribution"><span class="source">Artist and botanist Jeanne Brown</span></span></figcaption></figure><p>The proposed Browse Liquefied Natural Gas Hub at James Price Point (known locally as Walmadany), 50km north of Broome, has created one of the most fiercely fought environmental and indigenous battles currently occurring in Australia. Despite the existence of alternative brown field sites (such as Karratha), the State Government prefers James Price Point even though it is likely to be a far more expensive option (an estimated <a href="http://www.abc.net.au/news/2012-07-20/future-of-kimberley-gas-hub-may-be-a-question-of-viability/4144676">$15 billion</a>) for joint venture partners Woodside, BP, BHP, Shell and Mitsui/Mistubishi, and <a href="https://www.tai.org.au/index.php?q=node%2F19&pubid=1026&act=display">tax payers</a>. </p>
<p>The James Price Point option is also far more pristine, biodiverse and ecologically significant, with a rich indigenous connection to country. The area is abundant with indigenous songcycle pathways, burial grounds, the <a href="http://www.goolarabooloo.org.au/lurujarri.html">Lurujarri Heritage Trail</a>, calving Humpback whales, dugongs, dolphins, abundant fishes, coral reefs, seagrass, remnant rainforest, dinosaur trackways and breeding bilbies. The area is so ecologically and culturally rich that it was recommended for National Park protection by the Australian Academy of Sciences and the National Parks Board of WA in 1962; the WA Environmental Protection Authority in 1977 and 1993; the WA Department of Conservation and Land Management in 1991; the Broome Shire, Department of Land Administration and WA State Cabinet in 2000; and the Broome Planning Steering Committee in 2005. </p>
<p>This is all at odds with the state premier Colin Barnett’s description of the area as an “unremarkable” piece of coastline.</p>
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<a href="https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1153&fit=crop&dpr=1 600w, https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1153&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1153&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1449&fit=crop&dpr=1 754w, https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1449&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/14442/original/7h4vj55k-1345477663.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1449&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A young green turtle takes a breath in front of the iconic red pindan cliffs of James Price Point.</span>
<span class="attribution"><span class="source">Rod Hartvigsen, Murranji Photography</span></span>
</figcaption>
</figure>
<p>Despite all the recommendations for protection, James Price is the state government’s preferred option. It therefore requires an environmental impact assessment of whether the gas hub could proceed without significant, severe and long lasting impacts on the local environment. </p>
<p>The WA Environmental Protection Authority (EPA) recently completed an initial assessment. A further assessment is due from the Federal Environment Minister at the end of the year. The WA EPA based their assessment on the <a href="http://www.dsd.wa.gov.au/8249.aspx">Strategic Assessment Report</a> (SAR) prepared by the state government for the project, giving the project the green light. </p>
<p>As the proposed gas hub is one of the largest industrial projects in Australia’s history and will become the largest gas hub in the world, one would expect the environmental impact assessment to be well considered, comprehensive, robust and based on sound science. Unfortunately the EPA’s assessment fell far below these expectations.</p>
<p>Major issues occurred in the assessment process itself. The state government recognised that - due to the scale and complexity of the project - they’d need a high level of confidence in the science underpinning the SAR. They recommended establishing a peer review process. This didn’t happen: only the minority of the science was scrutinised and only when major inadequacies were revealed by <a href="http://www.news.com.au/breaking-news/experts-to-review-wa-dinosaur-footprints/story-e6frfku0-1226137790717">independent and citizen scientists</a>. </p>
<p>This leaves little confidence and much uncertainty in the quality of the SAR’s science on which the EPA based their assessment. When the assessment was undertaken, four out of five EPA board members had to be excluded due to conflicts of interest, leaving a “quorum” of <a href="http://newmatilda.com/2012/07/17/oneman-environmental-approval">one</a>. As three of these conflicted members were excluded only months before the completion of the five year assessment, there was ample opportunity for their conflicts to influence the process.</p>
<p>Despite these procedural issues, how did the EPA justify impacts to the significant ecological communities and species of James Price Point? For brevity I will focus on two of the most significant ecological features of the area.</p>
<p>One of the most striking and significant ecological features of the James Price Point area is the monsoon vine thicket that occurs behind the coastal dunes. This little-studied remnant rainforest is incredibly diverse, containing 25% of all plant species from the Dampier Peninsula and up to <a href="http://www.abc.net.au/local/stories/2012/02/01/3420715.htm">70 species of ants</a>. This rainforest also contains one of the highest densities of bush tucker and medicinal plants in Australia and is therefore critically significant to the local indigenous people. Poor fire management, weeds and land clearing have led to fragmentation and declines in these communities. The communities are currently under assessment for federal listing as a <a href="http://www.environment.gov.au/biodiversity/threatened/communities/monsoon-vine-thickets.html">threatened ecological community</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=417&fit=crop&dpr=1 600w, https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=417&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=417&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=525&fit=crop&dpr=1 754w, https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=525&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/14445/original/3zr24c76-1345479887.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=525&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Aerial photo of proposed gas hub site with cleared grid for Woodside’s geotechnical surveys. All clearing was done before any state or federal environmental approval. Note band of dark green monsoon vine thicket running adjacent to and along the coastal dunes.</span>
<span class="attribution"><span class="source">Rod Hartvigsen, Murranji Photography</span></span>
</figcaption>
</figure>
<p>The James Price Point area contains one of the peninsula’s largest and most diverse vine thicket patches (19% of all Dampier Peninsula vine thicket). The gas hub will lead to a direct clearing of 132 ha of this vine thicket (or 5% of all peninsula vine thicket). Wider impacts are highly likely, due to fragmentation and major changes to the groundwater which sustains it. </p>
<p>On two previous occasions (1990 and 1991) the EPA recommended that no clearing of monsoonal vine thicket should occur due to its ecological significance. Yet for the gas hub, the EPA have allowed 132 ha to be cleared with no scientific justification of why this is not considered a significant impact or why their opinion has changed.</p>
<p>Out in the ocean, extending from Broome north to Camden Sound, is the calving ground of the world’s largest humpback whale population. Whales migrate up from the Antarctic to calve, rest and play in these waters, part of the <a href="http://www.sciencemag.org/content/319/5865/948.short">most pristine tropical waters</a> on the planet. Into this calving ground, the gas hub will impose a ~3km long jetty, a ~7km dredged channel and shipping traffic of ~1300 a year. Impacts from the port facilities (e.g. dredging, smothering etc.) will create what the SAR calls a “marine deadzone”, 50 km2 in size. </p>
<p>The EPA believe the hub will not cause significant impacts to whales. This belief is based largely on the SAR’s whale research. After reviewing the same whale research, the Cetacean Research Group at Murdoch University <a href="http://mucru.org/latest-news/submission-of-appeal-against-the-report-and-recommendations-of-the-epa-for-the-browse-liquefied-natural-gas-precinct/">concluded</a> that they had “very little confidence in the scientific integrity of the report and this is evidenced by the unfounded conclusions reached within”. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=369&fit=crop&dpr=1 600w, https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=369&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=369&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=464&fit=crop&dpr=1 754w, https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=464&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/14443/original/ft7zhszb-1345477907.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=464&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A whale plays offshore of James Price Point and one of Woodside’s jack up barges used in their preliminary geotechnical surveys.</span>
<span class="attribution"><span class="source">Annabelle Sandes, Kimberley Media</span></span>
</figcaption>
</figure>
<p>Among its weaknesses, the SAR suggests the James Price Point area is not part of the main calving ground, in direct conflict with the Federal Department of Environment’s definition and other <a href="http://issuu.com/kimberleymedia/docs/2011_whale_survey_-_small?mode=window&backgroundColor=%23222222">scientific reports</a> largely overlooked by the EPA. </p>
<p>The SAR also suggests that only a small number of whales (1000 in 2012) pass within 8km of the coastline where the major impacts will occur. Yet a community science whale survey currently underway has shown that these estimates are <a href="http://www.theaustralian.com.au/news/health-science/woodsides-whale-count-is-way-too-low-say-gas-hub-opponents/story-e6frg8y6-1226447088992">far too low</a>, with estimates of over 8600 more realistic. </p>
<p>These are only two examples of important ecological features threatened by the gas hub yet not adequately represented by the SAR or assessed by the EPA. The SAR has also been shown to be inadequate for <a href="http://www.theaustralian.com.au/news/features/come-in-spinner/story-e6frg8h6-1226370208772">dolphins</a>, <a href="http://www.abc.net.au/local/stories/2012/05/28/3512658.htm">dinosaur trackways</a>, <a href="http://www.broomenogas.org/backgroundinfo/JPPTurtles.pdf">turtle nesting</a>, <a href="http://www.broomenogas.org/backgroundinfo/JPPBilby.pdf">bilbies</a>, <a href="http://au.news.yahoo.com/thewest/a/-/wa/13352234/alarm-raised-over-impact-of-gas-hub-dredging/">dredging</a> and <a href="http://www.watoday.com.au/wa-news/woodside-premier-reject-browse-fears-20120412-1wwf0.html">social impacts</a>. Decisions regarding large scale industrial projects should be well considered and based on sound science: this has not occurred for the James Price Point Gas Hub. </p>
<p>There are alternatives to the James Price Point option, such as piping the gas and oil down to existing facilities in Karratha. These are cheaper for the <a href="http://www.abc.net.au/news/2012-07-20/future-of-kimberley-gas-hub-may-be-a-question-of-viability/4144676">companies</a> and <a href="https://www.tai.org.au/index.php?q=node%2F19&pubid=1026&act=display">tax payer</a>, and will create fewer environmental and cultural impacts. This seems like a win-win situation for all. </p>
<p>Unfortunately, James Price Point is the preferred option of the state government as it’s the thin edge of the wedge, providing port facilities and energy sources for the further industrialisation of the Kimberley. If this hub goes ahead, the environmental and cultural repercussions will not just be felt at Walmadany but throughout the whole of the Kimberley for decades to come.</p><img src="https://counter.theconversation.com/content/8817/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Malcolm Lindsay received funding from the Australian Research Council and Parks Victoria for his doctoral research. His ecological work regarding the James Price Point Gas Hub has been conducted on a purely volunteer basis. </span></em></p>The proposed Browse Liquefied Natural Gas Hub at James Price Point (known locally as Walmadany), 50km north of Broome, has created one of the most fiercely fought environmental and indigenous battles currently…Malcolm Lindsay, PhD Candidate, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.