GLENCORE XSTRATA RESPONSE TO THE BUSINESS, INNOVATION AND SKILLS SELECT COMMITTEE INQUIRY INTO THE EXTRACTIVE INDUSTRIES

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1 GLENCORE XSTRATA RESPONSE TO THE BUSINESS, INNOVATION AND SKILLS SELECT COMMITTEE INQUIRY INTO THE EXTRACTIVE INDUSTRIES 1. Introduction 1.1 Glencore Xstrata ( Glencore ) is one of the world s largest global diversified natural resource companies and is one of the biggest companies within the FTSE 100 Index. The Group s industrial and marketing activities are supported by a global network of more than 90 offices located in over 50 countries. Our diversified operations comprise over 150 mining and metallurgical sites, offshore oil production assets, farms and agricultural facilities. We have approximately 190,000 workers, including contractors. 1.2 Our business model enables us to capture value at every stage of the supply chain from sourcing raw materials deep underground to delivering products to an international customer base. 1.3 We are a major producer and marketer of over 90 commodities that are transformed into products used in everyday life, such as mobile phones, bicycles, cutlery, plastics and electricity, to customers in industries ranging from automotive to food processing and power. 1.4 Glencore is also a significant investor in the sustainable development of the communities in which it operates, spending over $200 million in the last financial year, a sum equivalent to 3.6 per cent of the group s net income. 1.5 Our Group is structured into three distinct business segments: Metals and Minerals: focusing on copper, nickel, zinc/lead, alloys, alumina/aluminium and iron ore. We have interests in both controlled and non-controlled industrial assets that include mining, smelting, refining and warehousing operations; Energy Products: focusing on oil and coal. Our Energy Products businesses include controlled and non-controlled coal mining and oil production operations and investments in strategic handling, storage and freight equipment and facilities; and Agricultural Products: focusing on grains, oils/oilseeds, cotton and sugar. Our Agricultural Products group is supported by both controlled and non-controlled storage, handling and processing facilities in strategic locations. 1

2 1.6 Glencore s customers around the world are active in a wide range of industries, such as automotive, oil, power generation, steel production and food processing. They rely upon the company s established global network for the supply of metals and minerals, energy products and agricultural products. These commodities either originate from Glencore s own production assets or are sourced from third parties. Glencore also provides financing, logistics and other supply chain services to producers and consumers of commodities. 1.7 Glencore owns and operates mines and other industrial facilities throughout the world, including in developing countries across Africa, Asia and Latin America. As a result of these investments Glencore has gained significant knowledge and experience in building sustainable businesses in collaboration with local communities and national governments. 1.8 Glencore is listed on the London Stock Exchange and is a constituent of the FTSE 100. Glencore has a secondary listing on the Stock Exchange of Hong Kong and is in the process of making an application for its shares to be listed on the Johannesburg Stock Exchange. 2. Our perspective on the extractive industries 2.1 The extraction of minerals is the cornerstone of all industrial activities and it underpins the global economy. Without the commodities produced by mining and energy companies the world would not be housed, clothed, fed or transported. Without the extractive industries, there would be no globalisation and sophisticated modern economies, such as the UK, which depend on the supply and trade in commodities, would be unable to function. 2.2 The extractive sector is not merely a collection of mines and oil fields. It is instead a complex global industry that connects resources with customers through a network of transport, supply and logistics. At the heart of the extractive sector is the commodity market which efficiently ensures that consumers worldwide have access to the resources they need, when they need them and at competitive prices. 2.3 Mining is becoming more valuable. According to statistics from the International Council on Mining and Metals, the value of global production of metals rose from $214 billion in 2000 to $854 billion in More importantly, the value of the world s metal output has been rising at a faster rate than the overall increase in global GDP, a consequence of greater demand for metals in the emerging markets. Simply put, mining s contribution to the global economy is becoming more significant. It is generating more wealth for producing countries and for those countries, such as the UK, which support the global trade in commodities with finance, marketing and technical skills. 2

3 2.4 We believe that sustainability must be central to the operations of extractive companies, not least because the source of many vital minerals is now mainly to be found in the developing world. Due to the nature of the business, extractive companies must acknowledge the significant impact of their operations on the environment and local communities. At the same time, extractive companies have a distinct opportunity to render assistance to communities and governments in poorer countries. Mining companies, such as Glencore, have exceptional skills in project management as well as access to knowhow and resources. The best operators in the extractive sector are aware that their licence to operate depends on their good relations with local communities as well as national governments. 2.5 At Glencore we constantly strive to find new ways to improve how we manage our health, safety and environmental practices, the welfare of all our workers and our support for the development and well-being of the communities in which we operate. We are open and transparent in our engagement with our stakeholders. Respect for human rights is fundamental to all our activities. 2.6 Glencore plays a unique role in the extractive sector bringing together mining assets, refining, transportation, logistics and marketing. Arguably no other company in the extractive sector has the breadth of expertise and skills in extractive technologies, commodity trading and transportation/logistics. 3. Our response to the Committee s question areas 3.1 What is the contribution to the UK economy of extractive industries in the UK? Britain has been a centre for the extractive industries for thousands of years. Tin was mined in Cornwall during the Bronze Age and a thriving trade in metal then extended as far as the Mediterranean. During the 18 th and 19 th centuries coal and iron ore mines provided the raw materials for the Industrial Revolution. In the second half of the 20 th century, the development of offshore oil and gas production in the North Sea made Britain again the focus of a technological revolution that provided new sources of energy for the world, which are still being exploited and developed today. North Sea oil and gas is in decline and large-scale mining is no longer conducted in Britain but the UK still plays a pivotal role in the extractive industries as a centre of trading, technology, finance and knowhow. Britain s role as a trading hub for commodities is not an accident. It is a consequence of centuries of investment by businesses in the development of networks of commerce linking Britain to Asia, Africa and the Americas. Many of these British enterprises remain among the world s top companies. 3

4 Trade in commodities has been supported by the parallel development of banking and financial markets that enable the expansion of trade. These developments have been made possible through the strategic policies of successive British governments which encouraged trade and allowed it to thrive. It is worth remembering that one of the world s largest oil companies was founded in the late 19 th century in London as a trader in exotic seashells. Glencore, too, was founded as a marketing business, initially trading oil and then extending its reach into metals and other commodities. Since then it has expanded into a global enterprise: Glencore links copper mines in Zambia to factories in Asia and it brings wheat from the Canadian prairies to flour mills in the Middle East. Glencore has mining and industrial activities on every continent. Although it has a relatively small industrial presence in the UK, Glencore has a significant trading activity in Britain and it is our view that the UK can ill afford to ignore the vital role played by a trading and financial hub as important as the City of London. Without networks of trade and finance, the extractive industries would be nothing more than stranded mines and oil wells. According to ONS figures, the extractive sector accounts for 2.3 per cent of the UK s gross domestic product. According to figures from HM Revenue and Customs, the annual taxation revenue from the UK oil and gas sector over the last five years has ranged between 5 billion and 12 billion, with the fluctuations being due to changes that include tax rates, investment levels and production. London-listed extractive companies account for 21 per cent of the FTSE350 index, the largest sector by value. These figures do not take account of the large indirect contribution to the UK economy made by the activity of companies in the extractive sector in terms of the purchase of financial, business and professional services and technological procurement. In addition, extractive companies with a headquarters or major office presence in the UK provide high value employment. From our perspective, value is generated by linking mines to mills and, in turn, to consumers. Without efficient markets and sound finance, the extractive industries would struggle to satisfy the world s hunger for raw materials and, ultimately, the cost of consumer goods would rise significantly. 4

5 3.2 How do the UK based extractive industries support employment a) in the UK and b) for UK citizens overseas? While the physical mining sector in Britain is now relatively small, the employment opportunity presented overseas and among ancillary service providers in the UK due to the presence of international mining groups is significant. The UK is an important source of professional staff in the areas of finance, accountancy and law as well as engineering skills, project management, marketing and trading. In addition to direct employment opportunities in the UK and ancillary services overseas, the UK is a global centre for the procurement of mining finance and business services which in turn creates indirect employment in Britain. Britain also benefits from the contribution made by major extractive companies in the sponsorship of graduates and in grants to educational institutions. BRM, our lead and zinc smelter in the UK, has recently developed several apprenticeship programmes to address the sudden acceleration in the UK s youth unemployment rate and worsening skill shortages as a result of Britain s deindustrialization. In addition to programmes for accountants and electrical engineers, we have tailormade programmes for process operators and refactoring apprentices. Apprentices will represent almost 10% of the workforce in 2014, up from less than 1% in In addition, Glencore is currently sponsoring three Undergraduate Mining Engineers at the internationally renowned Camborne School of Mines. Three UK Students have also completed 12 weeks of paid Vacation Work Placements from June September 2013 at the Rolleston Coal Mine and Mount ISA Copper and Zinc Mine, both of which are in Australia. GLENCORE IN THE UNITED KINGDOM Glencore employs directly 564 people in the UK. Our London office, which employs 373 staff is home to our oil and sugar trading activity and our shipping business. London is also the headquarters of our upstream oil exploration business, an area of significant expansion for Glencore. Since 2004, Glencore has drilled 39 wells within the West and Central Africa region with one producing asset and further significant production growth to follow in BRM, our lead and zinc smelter, employs 155 staff and 16 contractors at its site in Kent. A further 36 staff are employed at our grain business in Thame. 5

6 3.3 Does UK industry benefit more widely from the UK s position as a centre for extractive industries i.e. In sales of machinery and services to international businesses in the sector? Glencore actively seeks to purchase products and services locally as far as possible, according to specific need. Typically we purchase maintenance services, catering supplies, transportation and basic construction materials locally, amongst a range of other items depending on local availability. Local purchasing provides quick access and also reduces the costs and environmental impact associated with transporting materials. In addition, our support of the local economy helps to fund local services including those that meet health and education needs. In 2012, Britannia Refined Metals, our lead refinery in north Kent, spent 9 million on procurement, of which less than 4% was with non-uk suppliers. Of its total 218 suppliers, only 8 were non-uk companies. 3.4 Has the boom in London-listed extractive companies with businesses overseas over the last two decades resulted in a strengthening in the UK s competitive position in this sector? The relationship of Glencore to the UK is primarily through the financial and commodity trading markets and the company s activity in these markets and through the purchase of ancillary services and equipment. Glencore is listed on the London Stock Exchange because it is a global market of superior standing that attracts a very wide community of international investors including many with a focus on natural resources. London-listed extractive companies provide numerous benefits to the UK including employment and procurement. 3.5 What are the corporate governance concerns raised by the number of extractive industries companies listed in the UK? Are there reputational risks for the UK and UK financial institutions in being a centre for such businesses? Glencore believes that high corporate governance standards are a pre-requisite for properly functioning financial markets. Meeting the listing and corporate governance requirements of the London market may be a challenge for some companies but such hurdles provide comfort and protection for investors and, ultimately, benefit the reputation of the City of London and the UK, generally. Extractive companies are not, in themselves, a reputational risk. Glencore and other companies of similar stature in the mining and energy sectors are required to comply with extensive regulation in numerous jurisdictions relating to health, safety, the environment, the control of industrial processes as well as tax and corporate 6

7 governance matters. Glencore is scrupulous in its adherence to all relevant legislation. Reputational risk typically arises where businesses suffer from weak management, the failure of individuals and where there is poor internal and external oversight of corporate governance standards. The corporate governance concerns which have been raised do not apply to the main FTSE 100 resources companies such Shell, BP, Glencore, BHP Billiton, Rio Tinto and Anglo American. Rather these concerns have been raised in respect of the small number of companies with a dominant or very significant shareholder or shareholders based in jurisdictions which lack a strong track record in corporate governance. Such companies are not exclusively limited to the extractive industries sector but the recent focus on these reflects the significant number of listings by extractive companies in the 2000s. The UK Stewardship Code provides an additional mechanism by which investors can improve the governance of listed companies by monitoring the performance of directors and the fulfilment of their duties to investors and other stakeholders. 3.6 Is there sufficient engagement between UK extractive industries and the NGO sector? Are there examples of best practice in engagement between the extractive industries and NGOs? We believe that NGOs can play an important role in promoting awareness of best practice in the conduct of extractive companies. At Glencore we have an open door policy towards outside stakeholders who have a legitimate interest in working constructively with us either centrally or on specific country projects. Glencore s investment in sustainable development in the local communities in which it operates is significant, spending over $200 million in the last financial year, a sum equivalent to 3.6 per cent of the group s net income. While the advocacy role of NGOs in promoting best practice is welcome, the potential also exists for some organisations to see their role in terms of both judge and jury in condemnation of the extractive sector generally. We reject this stance since we believe that without the contribution of the extractive sector, the relevant countries would suffer a material reduction in investment and tax revenues, in turn causing harm to local communities. We are committed to working with all non-state actors who share the desire to foster sustainable economic growth. 7

8 3.7 Does the UK have the skills base to remain a centre for the extractive industries and to ensure that UK based businesses benefit from potential future opportunities such as shale gas? The UK has an enviable endowment of academic and technical education that is relevant to the extractive sector. This can be found in world renowned universities and colleges across the UK, such as Imperial College in London and the Camborne School of Mining. There is, however, no room for complacency in the UK. The extractive sector, like much of British industry, is in need of skilled and technically competent workers. The Government should therefore place particular emphasis on investing in skills-based learning to ensure that young British people are able to take advantage of the opportunities presented by energy and mining companies, active both in the UK and overseas. We also believe that the extractive industries can play a major role in the rebalancing of the UK economy and in ensuring that it enjoys the sustainable growth that will result from a diverse and skilled labour force. 3.8 What is the impact in the industry of the UK signing up to the EITI? Glencore is a signatory to the EITI and welcomes the British government s decision which provides a renewed impetus to the EITI initiative. Glencore is committed to the development of robust governance procedures that promote the transparency and accountability of relationships between extractive industries and host Governments. We consider that the EITI will work to its best effect if Governments take greater responsibility in ensuring that data is collected more efficiently and made available in a timely fashion to all stakeholders. 3.9 Would increased regulation for London listed extractives companies result in competition from elsewhere or can it be used to make the UK a centre of excellence for best practice and corporate governance? The UK should resist the temptation to introduce new regulation except where: 8 1. there is a clear objectively proven case that the specified regulation is necessary and that the regulation is only the minimum required to achieve that or those particular objective(s), i.e. no gold-plating takes place; and 2. the relationship between the cost of compliance and the likely benefit for all stakeholders is shown to be strongly positive.

9 High standards of corporate governance do not necessarily affect the competitiveness of a location. However, regulatory regimes which tend to create cost and personnel burdens are unlikely in themselves to improve standards of conduct. If the UK wishes to remain an attractive location for extractive companies, it should seek to maintain a regulatory regime that not only imposes high standards but does so with the minimum cost to companies and the public purse What is the competitive landscape for the extractive industries in the 21st Century and is it in the UK s interest to remain a global centre for them? During the first decade of this century, the mining and extractive sectors enjoyed a period of high commodity prices and heavy investment. Recent trends in metals and in minerals suggest that a period of consolidation and adjustment may now be underway. This should lead to a more competitive environment for extractive companies, one in which the more efficient players will thrive while those that are less resilient may fall by the wayside. In such an environment, successful companies seeking capital and skills will gravitate towards the most efficient and liquid markets in both financial and human resources. The UK has a big endowment of skills in natural resources, in part because of offshore oil and gas production in the North Sea but also because of Britain s colonial legacy and a long and distinguished history of commodity trading, based in the City of London. The continued presence of a number of large extractive companies, listed on the London Stock Exchange, is also important. While the value of oil and gas production in the UK can be quantified, it is difficult to measure the benefit to Britain of extractive companies established in Britain but whose activities are mainly overseas. However, it would be a mistake to focus only on dividends repatriated or tax paid (although as noted above, these are themselves significant benefits). The UK derives huge benefit from mining and oil companies in terms of training and the employment of Britons in posts overseas and in the services activity generated in Britain by the corporate activities of extractive companies. Moreover, the corporate presence and stock exchange listing of extractive companies, including many of the world s largest enterprises, represents an important attraction to foreign capital, thus boosting the UK s position as a global financial centre. In the future, the extractive sector will continue to see the UK as a natural corporate home if it retains its competitive advantage in terms of finance, skills, regulation, tax and its open-door policy to foreign investors. As the physical output of minerals in the UK dwindles, the UK s importance as a home to the extractive sector will depend 9

10 more on its ability to provide high-level skills in finance, trading and project management and engineering. The opportunity exists for Britain to enhance its position as a global hub for energy, mining and resources with further economic benefit to the UK. In seizing that opportunity, the UK must commit to remaining an open and efficient marketplace for the conduct of commodity trading, corporate finance and business, generally. September