Enabling Resource–Based Industry Development Don Scott-Kemmis December, 2012 Page | 2 Contents Preface ........................................................................................................................................ 4 Executive Summary ...................................................................................................................... 5 1. Introduction ......................................................................................................................... 9 Resource-Based Development and Capability Building .................................................. 9 The Resources Curse and the Dutch Disease .......................................................................... 9 Beyond the Resource Curse .......................................................................................... 11 Policy Foundations ............................................................................................................. 13 The Overall Study .......................................................................................................... 15 2. Developing Suppliers for Major Resource Projects ............................................................... 16 Local Content ................................................................................................................ 17 What is Local Content? ....................................................................................................... 17 Supplier Development in Resource Based Regions and Economies ............................. 20 Sweden and Finland............................................................................................................ 20 Norway .............................................................................................................................. 21 Canada ............................................................................................................................... 25 Chile ................................................................................................................................... 28 South Africa........................................................................................................................ 29 Other African Countries ...................................................................................................... 31 Brazil .................................................................................................................................. 33 Key Lessons of Capability Development ............................................................................... 34 3. The Australian Mining Industry ........................................................................................... 41 Characteristics of the Australian Mining Industry ................................................................. 41 4. Australian Suppliers to the Resource Industries: Sectoral and Firm Development ................. 50 Australian METS Sector ................................................................................................. 50 Major Segments of the METS Sector .................................................................................... 50 The Evolution of Mining and the Growth of Australian METS Firms ...................................... 53 Characteristics of the METS Segments ......................................................................... 56 Service Companies .............................................................................................................. 56 Suppliers of Specialised Equipment, Software and Related Services (Table 4.9) .................... 60 Case Studies of METS Firms: Formation, Growth, Capability Development and Internationalisation....................................................................................................... 61 Patterns of METS Development - Summary ................................................................. 71 Market Entry ...................................................................................................................... 71 2 Page | 3 Growth and Development ................................................................................................... 74 Corporate Development: Transformation, Acquisitions and Investment ............................... 76 5. Building Industry Clusters from Resource Development ....................................................... 80 Introduction ....................................................................................................................... 80 Demand Side Drivers– Backward Linkages and Clusters ....................................................... 82 Scandinavia ........................................................................................................................ 86 Canada ............................................................................................................................... 88 Latin America ..................................................................................................................... 91 Chile ................................................................................................................................... 92 South Africa........................................................................................................................ 94 Frameworks for Cluster Development ................................................................................. 99 METS-Related Industry Development Initiatives in Australia ..................................... 105 The METS-Related Knowledge Infrastructure............................................................. 106 Evidence of ‘Cluster’ development ............................................................................. 109 6. Identifying Capability Gaps and Capability Building Opportunities ..................................... 111 7. Conclusions ...................................................................................................................... 114 Summary of Key Points ............................................................................................... 114 Policy Options .................................................................. Error! Bookmark not defined. Sources .................................................................................................................................... 122 Appendix 1: Individuals Interviewed or Consulted for the Study ......................................... 136 Appendix 2: Reviews of Australian Participation in the North West Shelf. ........................... 138 Appendix 3: Resource Project Stages and Equipment and Service Requirements ................. 142 3 Page | 4 Preface This study was supported by the Department of Industry, Innovation, Science, Research and Tertiary Education. This support is warmly acknowledged. Siobhan Heatwole and Shane Shergill from DIISRTE have provided continuous support and guidance throughout the ambitious and wide ranging study. Many individuals from the METS and Mining sectors have given their time to discuss the issues explored in the study. The interest and insight of these individuals -listed in Appendix 1 – has been an essential and greatly valued contribution to the report. 4 Page | 5 Executive Summary The mining industry in Australia is becoming increasingly knowledge intensive and this trend will continue as the industry faces new challenges and greater competition. After a decline in profitability through the 1970s and 1980s, the mining industry is in a phase of expansion. The key driver of that expansion is rising demand from the emerging economies of Asia. The overall growth of demand is likely to be sustained for decades, although the inevitable growth of supply is likely to limit price rises. Nevertheless, both the growth of mining (and other resource projects) in Australia and the growth of global opportunities for Australian mining and mining supplier firms are of great significance for Australia. That significance is not adequately appreciated. Policies to respond these opportunities remain underdeveloped. Resource development has been central to the economic and industrial evolution of several countries, including the United States, Canada, South Africa, Sweden, Finland and Norway. Given this context, four questions are the focus of this study. What lessons can we learn from how have other resource-based economies or regions developed the firms and industries that supply mining equipment, technology and services (METS)? Those countries that had a strong initial foundation of capability have been best able to pursue the opportunities for broader industrial development from resources projects. Opportunities for new firm development are clearly greatest when new challenges and new technologies erode the competitive strengths of established global suppliers - many of which developed from exactly such opportunities in an earlier era – and open new paths of capability development. Nevertheless, there are high barriers to entry in many segments of the resource project supplier sectors – and the role of mining firms and higher tier project managers is significant in maintaining or reducing those barriers. It is reasonable to expect that international investors and their project managers will actively seek to use local suppliers and actively support (possibly with additional government support) their development – as long as these