Local Content Report November 2013 Contents 1. Introduction 3 2. The Resource Sector — Trends and Implications 4 3. State Government Actions: Post Local Industry Participation Framework ,6 4. Liaison with the Commonwealth Government 9 5. Local Content Reporting 10 6. Conclusion 12 7. Appendix 1— Summary of IFSP Reports 13 8. Appendix 2 — Publicly announced, locally awarded, resource sector contracts 14 2 Page 1. Introduction The Western Australian Government continues to pursue as a priority the provision of full, fair and reasonable opportunity for competitive local suppliers to participate in the states mineral and energy projects. To achieve this objective in an increasingly complex environment, in July 2011, the Government introduced the Western Australian Local Industry Participation Framework. The Framework contains a number of initiatives designed to enhance the capacity of the states industries to supply. Framework outcomes are captured in the bi-annual local content reports. This is the sixth report to be tabled by the Minister for Commerce to provide the Parliament and people of Western Australia with a description of contemporary local industry participation trends and issues. The previous five reports can be accessed at the Department of Commerces website: http://www.com merce.wa.gov.a u/Science Innovation/Content/About Us/Key focus areas/Local Indus try Participation/State Government reports.html The Western Australian economy continues to perform strongly and the outlook remains positive. The areas of iron ore and natural gas remain particularly strong points of demand. This ongoing buoyancy in the May 2013 to November 2013 period is demonstrated by the increase from $43 billion to $57 billion in the value of publicly announced, locally awarded contracts, which has occurred since July 2011 (the date of the introduction of the State Governments Local Industry Participation Framework). It is estimated that this aggregated figure represents 202,920 employment positions (direct and indirect) created or maintained. High levels of local content are also a continuing feature of the reports submitted over the last six months by projects operating through State Agreement Acts. Section 5 of this document also outlines examples of other forms of benefit accruing to Western Australia from these resource projects. This local content report also details the impact of the assistance provided by the State Government to local companies aspiring to extend supply to major projects. Sixty eight local companies have provided reports on assistance outcomes through the Industry Facilitation and Support Program of $143 million of contracts won. The value of assistance provided to these companies was $1.4 million thereby representing a leverage ratio of $1: $94. Wage 2. The Resource Sector - Trends and Implications Previous reports have emphasised the direct relationship between global investment and trading conditions and the performance of Western Australias resource sector. Since the downward movement in commodity prices, which began in September 2012, there has been a host of commentary regarding the demise of the so called "resources boom". The Western Australian Government has not subscribed to the "boom" concept and therefore considers that as commodity prices stabilise and Asian economies maintain significant rates of growth the outlook for the State remains positive. Although a number of mineral and energy projects have recently moved from the construction to operational phase there remains $141 billion of projects either committed or under consideration. Projects moving from the construction phase include the North Rankin and Macedon Gas projects and the Tropicana Gold Mine. The prognosis of continued expansion is supported by the Bureau of Resource and Energy Economics September 2013 Quarterly Report. The Bureau believes that capital expenditure is currently peaking and that as it slows there will be a compensatory rise in production and exports. The Bureau has identified LNG, iron ore and coal as the basic contributors to the sectors ongoing expansion. For example, of the 12 LNG projects under construction globally, half are in Australia. The Bureau forecasts that gas production nationally will increase by 22 per cent per annum to 2017/18. In terms of iron ore, the Pilbara region is identified as having particular capacity to take advantage of expansions and demand due to attractive grades, competitive production costs and increasing realisation of advanced technologies. In this latter regard, in July 2013, the Premier opened BHP Billitons Integrated Remote Operations Centre. The Centre will enable real time management of its entire iron ore operations from pit to port encompassing seven mines, 1600 kilometres of rail and two port loading facilities. The company regards the Centre as fundamental to maintaining its international competiveness. At the same time progress continues to be made on the implementation of the $5.2 billion Rapid Growth 5 expansion. The Premier officially opened Cape Lambert B as part of Rio Tintos 290 mt/a expansion celebrations in October. The 290 Mt/a milestone was reached ahead of schedule and under budget. Studies to further expand Pilbara capacity beyond 290 mt/a are still underway, a number of options for mine capacity growth are under evaluation, including incremental tonnes from further low-cost productivity improvements, expansion of existing mines and the potential development of new mines. Rio Tinto has become the worlds largest owner and operator of autonomous haulage system (AHS) trucks.At the Yandicoogina mine Rio Tinto has 13 Komatsu AHS trucks in operation moving both ore and waste in the Junction South East pit. During 2013 17 autonomous trucks were introduced at the Nammuldi operation and a further three are being utilised to trial the latest version of the AHS system. Hope Downs 4 is also gearing up to commence autonomous operations in 2014. These technologies are revolutionising the way large-scale mining is done, creating attractive hi-tech jobs, and helping to improve safety and environmental performance and reduce carbon emissions 4 Page Further, in May 2013, Fortescue Metals Group opened its Firetail iron ore mine representing the first stage of the Solomon project which will provide an output of 20 million tonnes per annum (mt/a). The second stage of the project, entailing 40 mt/a, should be completed by the end of 2013. FMG also in August 2013 opened its US$2.4 billion expansion of facilities in Port Hedland. Roy Hill is letting a range of major contracts related to its $10 billion project which will see production of 55 mt/a of iron ore with first shipment scheduled for late 2015. A mine life of more than 20 years is anticipated. Atlas Iron has also been active with the opening of the Abydos Mine in June 2013 which is the companys fourth in the Pilbara. When the above activity is combined with the ongoing construction of the Gorgon and Wheatstone projects and the commencement of the Prelude project, the basis for forecasts for ongoing expansion by the Western Australian economy is apparent. Western Australia is also estimated to have the fifth largest resource of shale gas in the world. While significant build-up and investment in equipment and infrastructure will be required, there is potential for a new energy source for the State. For instance, a State Agreement Act has been ratified between the State and Buru Energy Limited, Diamond Resources (Fitzroy) Pty Ltd, Diamond Resources (Canning) Pty Ltd and Mitsubishi Corporation relating to the evaluation, development and exploitation of natural gas resources in the Canning Basin region of the State, and for incidental and other purposes. Amongst other obligations, the Act includes a future requirement for the project proponents to produce a Local Industry Participation Plan that will articulate avenues for prospective local supply. The States economy grew by 4.9 per cent in 2012/13 with economic commentators including the Chamber of Commerce and Industry of Western Australia predicting further growth of 5 per cent for 2013/14. This contrasts markedly with national trends. For example, Westpac anticipates Australian economic growth of 2.5 per cent in 2013 falling to 2.3 per cent in 2014. However, as has been noted in previous reports, Western Australias integration into the global economy also presents stringent challenges. The companies investing and operating in the resource sector utilise international best practices and benchmarks in undertaking research, selecting technologies and engaging with suppliers. The advent of modular construction, entailing utilisation of global centres of excellence for engineering and design and Asian manufacturing for the supply and fabrication of steel, is a pervasive example of this aspect of the relationship. The Bureau of Resource and Energy Economics has pointed to floating LNG and remote and automated mine management as further illustrations of this theme. The role of Western Australian industry in the development and application of these advanced technologies will be a crucial determinant of the type and level of future stimulus derived from our resource developments. It can also be argued that the traditional relationship between government and developer in terms of the benefits generated in return for access to a non-renewable asset has been disrupted and a readjustment of this relationship is thereby required. The work undertaken by the Industry Participation Branch of the Department of Commerce in the period covered by this report has continued to highlight the need for close and effective communication 51 Page between project proponents and their Tier 1 contractors and local suppliers if optimal contract outcomes are to be achieved. There is a significant diversity in approach to procurement by project proponents. Variations can include the degree to which purchasing is retained in-house or contracted out, the extent of local purchasing autonomy, the location of decision makers for different aspects of the construction and operation of complex projects and to the extent to which qualitative factors such as safety and quality management are emphasised.