THE COST OF DOING BUSINESS IN THE PILBARA

P I L B A R A JUNE 2014

Acknowledgements The consultants would like to thank all those persons and organisations for their important contributions to this study, and in particular the staff of Regional Development Australia Pilbara, WA local and state government agencies, Pilbara-based Business Representative Associations, NGOs, SMEs and the resources industry for their support and assistance. The Report and the information contained therein are expressly for the use of the Client. Written permission is required from the Client for any subsequent distribution or publication. Disclaimer Any statement or finding expressed or implied in this document is provided in good faith based on the information available to the consultants. No warranty, expressed or implied is given for accuracy of the information provided by others. The authors accept no liability for any loss or damages arising from or relating to the use of the report by any other party. ii THE COST OF DOING BUSINESS IN THE PILBARA

CONTENTS EXECUTIVE SUMMARY 2 1. CONTEXT 8 2. METHODOLOGY 10 2.1 Focus 10 2.2 Data Sources 10 2.3 Analysis of the Economy of the Pilbara 10 2.4 Data Analysis and Outputs 11 3. THE COST OF DOING BUSINESS IN THE PILBARA 12 3.1 Regional Price Indexes (RPI) 2011 and 2013 12 3.2 Expenditure Increases in the Shire of Roebourne 15 3.3 Resident Household Expenditure Forecast 15 3.4 Resource Sector Cash Costs 16 3.5 Employment Costs 16 3.6 Historical Accommodation Costs 19 3.7 Current Prices Port and South Hedland 20 3.8 Karratha 23 3.9 Newman 24 3.10 Onslow 25 3.11 Commercial Rent Prices in the Pilbara 26 3.12 Industrial Land Rent 26 3.13 Utility Costs 27 3.14 Resource Sector Energy Issues 29 3.15 Transport Costs 30 3.16 Construction Costs 30 4. FUTURE BUSINESS COSTS 32 4.1 Economic Forecasts 32 4.2 Future Price Increases 38 4.3 Indicative Business Cost Multipliers Pilbara Towns Compared to Perth 39 4.4 Illustrative Business Model (Comparing Cost of Doing Business in the Pilbara with Perth) 39 REFERENCES 42 THE COST OF DOING BUSINESS IN THE PILBARA 1

Executive Summary OBJECTIVES AND CONTEXT In May 2013 Regional Development Australia Pilbara (RDAP) completed a report on the cost of doing business in the Pilbara. This report is an update prepared in May 2014 following the end of the major construction phase of new and expanded resource sector investments in the region. Its coverage includes the main centres of Karratha, Port Hedland, Newman and Onslow. The results and conclusions of this report will be used to: Inform businesses and NGOs about the prevailing cost structure and future costs to improve planning and operations; and Inform government agencies about costs so that policy formulation can be adjusted to take the high costs into account. KEY FINDINGS employees would need to be a minimum of 18% higher than that in Perth, and that there is still often a need to provide subsidised or free accommodation to attract or retain employees. The rate of inflation in the Pilbara has been negative in 2013 and early 2014. Although cost rises will continue to moderate over the medium term (2014 to 2017) the absolute level of costs will remain one of the highest in Australia overall. The cost to households and businesses of utilities is anticipated to continue to rise in the Pilbara. The high socio-economic costs to communities and businesses still creates numerous distortions to normal market price signals. The median cost of buying a house in December 2013 was $680,000 in Karratha; $978,000 in Port Hedland; and $830,000 in Newman and over $900,000 in Onslow. It was $520,000 in Perth. House prices, particularly in Karratha, have come down from the peaks of 2010/11. Regional Price Indicators What has changed? Investment in the resources sector has declined markedly, with a sharp decrease in construction activity. Employment and population growth have slowed down substantially; except in Onslow, where the construction of the Wheatstone and Gorgon projects are still underway. Once these The major cost drivers in the Pilbara remain the resource sector and constraints to economic diversification and infrastructure provision. Over the two years from 2011 to 2013 the gap between the Regional Price Index for the region and Perth has fallen from 137 to 118 1. are completed a slowdown is anticipated Nonetheless the Consumer Price Index also in Onslow. As a result, as anticipated for the Pilbara remains the highest of any in the 2013 report, costs have fallen region in WA and total employment costs for some items, particularly the costs of continue to have a negative impact on accommodation and remuneration (wages businesses and NGOs. and benefits) in all centres except Onslow. In 2013 the data shows that in the Nonetheless the Pilbara costs of doing Pilbara the level of remuneration for business remain far higher than the rest of WA and most of Australia. This high cost structure remains a constraint to starting Estimates of Consumer Price Changes 2007 to 2014 (comparing the Pilbara to Perth) new businesses, operating successfully as an existing enterprise and discourages 2007 2008 2009 2010 2011 2012 2013 2014* diversification. The market for services in Perth 2 (Actual and some sectors has declined adding to the Forecast WA Treasury) 3.0 3.7 2.1 2.6 2.2 2.3 2.5 2.5 difficulties for businesses in the region. % change year on year The downturn in business conditions is illustrated by falls in turnover in small Pilbara (Consultant businesses in Newman for example, where Estimate) % change 7.25 7.95 6.35 6.85 7.15 6.35-10.3-4.3 stakeholders report decreases of some 30% year on year to 40% in 2014, compared to 2012/13. * Forecast It should be noted that whilst investment has declined the export value of Estimates of consumer prices over the period of 2007 to early 2014 are shown graphically below. commodities has increased dramatically. It is likely that the estimate of export 10 earnings forecast in the RDA Pilbara Plan (2012) of A$150 billion by 2016/17 will 5 be achieved. The significant contribution 0 of the Pilbara economy to the economy of WA and Australia needs to be maintained, -5 both by reducing costs and increasing the Pilbara Perth market size. In addition diversification of -10 the economic base is also essential for longterm sustainability, particularly for the SMEs. -15 2007 2008 2009 2010 2011 2012 2013 2014 2 THE COST OF DOING BUSINESS IN THE PILBARA

NONETHELESS THE PILBARA COSTS OF DOING BUSINESS REMAIN FAR HIGHER THAN THE REST OF WA AND MOST OF AUSTRALIA. THE COST OF DOING BUSINESS IN THE PILBARA 3

Business Cost Multipliers Multipliers show the comparative cost for similar products and services in different locations. Perth = 1 3 Estimates of multipliers for a range of major cost items comparing the main towns in the Pilbara with Perth indicate high price differences across some major items with wages and accommodation still dominating the differentials. These multipliers demonstrate the continued high cost structure faced by businesses operating in the Pilbara. Aggregating the comparative costs of operating businesses of a similar type in Perth and in each of the main towns in the Pilbara shows significant overall cost differentials. Although the cost of operating a business has declined in the Pilbara towns over the last 18 months, there is still a way to go before it can be considered to be normal. The comparative data for 2013 and 2014 is shown below. It is to be noted that the cost of doing business is now highest in Onslow. Business Cost Multipliers (First Quarter 2014): Pilbara Towns compared to Perth Cost Item Karratha Port Hedland Newman Onslow Median Individual Weekly Income (2014) 1.9 1.7 1.9 2.1 Median Family Weekly Income (2014) 1.4 1.3 1.4 1.2 House Prices (2014) 1.3 2.0 1.3 1.7 Rent - Accommodation (2014) 2.3 3.3 3.7 4.0 Rent - Commercial (2014) 1.4 1.1 1.1 1.0 Rent - Retail (2014) 1.5 1.5 1.2 1.2 Rent - Industrial (2014) 2.2 2.2 2.2 1.0 Construction (2014) 1.5 1.5 1.6 1.7 Water (2014) 1.5 1.3 1.0 3.2 Electricity SMEs (2013/14) 2.5 2.5 2.5 2.5 Electricity Large Businesses (2013/14) 2.5 2.5 2.5 2.5 Petrol (2014) 1.2 1.1 1.2 1.1 Diesel (2014) 1.1 1.1 1.1 1.1 Car Hire (2014) 2.3 2.2 2.3 3.0 Truck Hire (2014) 1.4 1.4 1.4 1.9 Cost of Operating a Commercial Business in Pilbara Towns compared to Perth: 2013 & First Quarter 2014 Faced with substantial costs above those in Perth and with a small market size, there remains pressure on businesses to survive, while NGOs have to deal with programme funding challenges. Businesses and NGOs face high costs for several other important cost items, such as staff training, staff recruitment and turnover, travel, professional services and consumables. Businesses sometimes have to purchase or rent accommodation for staff, adding a significant cost for business start-ups in particular. Although building construction costs have fallen, the costs of construction can be as much as 1.5 times the Perth norm for a similar building in the Pilbara. Cost Comparison with Perth 2013 and Q1 2014 140% 120% 100% 80% 60% 40% 20% 0 Karratha Port Hedland Newman Onslow Future Costs From 2013 to 2017 Predicting future costs remains difficult. There are a large number of variables involved and developments in commodity markets and investment intentions are constantly changing. Global energy markets are changing exceptionally quickly with major new sources of supply emerging for natural gas and oil and on the other hand significant increases in demand. The dependency on China as the major iron ore market still has an all our eggs in one basket risk; however the market for LNG is more diversified. Although Japan and South Korea remain as the main LNG markets, other markets are opening up such as China, other countries in Asia and potentially in Europe. Increased competition from suppliers such as Russia, Canada and the USA are now gaining momentum. On balance though, LNG prices are likely to remain reasonably favourable in the medium term. 4 THE COST OF DOING BUSINESS IN THE PILBARA

For the Pilbara as a whole the rate of inflation should continue to moderate in the medium term (2014 to 2017), because of the reduction in mining investment relieving pressure on housing and employment costs and other services. Nonetheless it is anticipated that the overall cost structure will remain high compared to Perth. The implication for businesses and NGOs is that although price rises have slowed down they are likely to remain elevated and the cost structure of all urban centres needs to be reduced further. Policy makers need to continue to promote an enabling environment, which assists in reducing costs across the board. KEY MESSAGES Resource Sector In the resource sector capital costs remain amongst the highest in the world. The longer term risk is a decreasing competiveness of Australia, and the Pilbara in particular. Moreover a move by the LNG sector to process offshore on floating platforms will decrease the size of the potential labour force and also the demand for local SME services. The resources sector has been a key driver of both the WA and Australian economies over the last decade, providing investment, employment opportunities, higher incomes and generating demand for services. This beneficial situation may not be quite as buoyant in the future given a probable downturn in iron ore prices to a range of $100 - $130 per tonne over the next few years. Beyond the current expansion and committed new iron ore mines and transport infrastructure, there will be limited new major capital investment over the next few years. The feasibility of new investments in the LNG sector will be buoyed by reasonably high prices and despite high capital costs the introduction of floating technology means that a degree of cost competitiveness may be maintained. Increased competition from the USA and other LNG sources will increase, but the impact of the competition is still too early to judge. The resource companies have focussed on cost cutting with some success and this can be expected to continue. FIFO activity is unlikely to transform into more permanent residency until costs in the Pilbara normalise further and the range of services/facilities on offer improves further, despite much progress in these areas. Tax incentives for FIFO also mitigates moves towards more residential workers. Resource companies planning for major investments need to prepare planning schedules for all aspects of construction and operation well in advance including such aspects as site selection for all infrastructure and sources of water and power. NGO Sector The continued high costs faced by NGOs in the Pilbara must be taken into account by funding agencies to ensure there is provision for adequate and secure funding. NGOs have a vital role to play in the region in providing a range of much needed services. Numerous NGOs based in Perth still have very little on the ground presence in the Pilbara due to the affordability and staffing challenges of the region. NGOs have difficulties in attracting and retaining staff unless they make significant contributions to their accommodation costs. Policy makers and funding agencies should consider NGOs in the Pilbara as still operating under exceptional circumstances when assessing their funding applications. Small and Medium Size (SME) Enterprises In the past the cost of doing business in the Pilbara for SMEs and NGOs has risen primarily as a result of the high demand for labour, accommodation and other services by the resources sector. Cost pressures have eased for these inputs (except in Onslow) however, they remain high and a barrier to entry for new SMEs. In the SME sector it is necessary for business to still pay relatively high costs for labour, accommodation and other employment incentives in order to secure and retain staff. Diversification opportunities are limited by the cost structure, distance and small local markets. The impact of the high cost structure in the Pilbara is reflected in the fact that in 2010/11 the region had 2,343 active businesses and 255 businesses per $1 billion of GRP, which is the lowest in WA by a substantial margin. This situation has not changed significantly in recent years. In numerous service sectors there is limited representation in the Pilbara, with much of the back office work done in Perth, resulting in minimum staff levels in the Pilbara. THE COST OF DOING BUSINESS IN THE PILBARA 5

Recommendations THE HIGH COST STRUCTURE OF THE PILBARA FOR ALL TYPES OF BUSINESSES AND NGOS REMAINS OF SERIOUS CONCERN AND NEEDS TO BE ADDRESSED. Actions to be taken are proposed as follows: Recommendation 1 Recommendation 2 Recommendation 3 Recommendation 4 Submissions to the Federal Government for developing the North (including the Pilbara) have been prepared by Shires, RDA and other organisations. These have incorporated the concept of a Special Economic Zone (SEZ) as proposed in the RDA Pilbara Plan 2012 and the 2013 Cost of Doing Business Study. The aim of an SEZ would be to decrease costs for all key stakeholder groups including the resources sector, SMEs, NGOs and Government agencies. Possible components of an SEZ were described in the 2013 report 4. Major steps have been taken to increase the size of the resident population. One impact of this is to enhance the size of the market for goods and services and encouraging competition. Additional effort to increase the quality of life and reduce high costs is still required in order to attract a larger resident population. Economic diversification is critical to success. A policy of open investment and public-private partnerships (PPP) are options that need to be pursued as part of the drive to attract more investment into the Pilbara. 6 THE COST OF DOING BUSINESS IN THE PILBARA

Recommendation 5 Recommendation 6 Recommendation 7 Recommendation 8 Following the 2013 Cost of Doing Business Study, the Department of Regional Development decided to compile a Regional Price Index (RPI) every two years, making it a more effective tool, which can be used together with cost multipliers to establish grant funding amounts in the NGO sector and for the use of Pilbara based organisations to establish remuneration levels. This should be continued as an essential information service. Efforts to reduce the cost of accommodation should be continued despite quite sharp falls over the last year and a half. This is particularly true in both Port Hedland and Newman, where rental costs are still exceptionally high. Barriers to further investment in property development now exist insofar as there are currently surplus stocks on the market and construction costs remain higher than in Perth, but the property market requires further normalisation through having a wider range of offerings to different market segments. Options to reduce the impact of high and increasing costs of electricity and water need to be given further attention and further investments in such vital infrastructure should continue to be promoted to encourage economic growth. THE COST OF DOING BUSINESS IN THE PILBARA 7

1. Context In 2013 and 2014 the Pilbara costs of doing business remain higher than the rest of WA, most of Australia and indeed most of the world. This high cost structure is still a constraint to starting new businesses, operating successfully as an existing enterprise and it also discourages diversification. In addition the downturn in the demand for services has resulted in a reduction in market and trading opportunities and a tougher economic environment for SMEs. Regional Development Australia Pilbara (RDAP) 5 commissioned Imani Development Austral to update the 2013 study on the Cost of Doing Business in the Pilbara with a 2014 report. The study has been undertaken after consultations with a range of stakeholders in Karratha and Port Hedland. The intent is to update the cost of doing business profile for each major centre (Karratha, Port Hedland, Newman, Onslow) in the Region. The results and conclusions will be used to: Inform businesses and NGOs about the prevailing cost structure and future costs to improve planning and operations; and Inform government agencies about costs so that policy formulation can be adjusted to take the high costs into account. The major cost drivers in the Pilbara are the high costs of operating resource sector production facilities. Limited supply options and constraints to economic diversification remain. For this reason attention has been paid to the future direction of the resources sector as increases or decreases in the level of investment and production and the resultant demand for services has the largest impact on the economic growth of the region and the regional inflation trend. In the resource sector one of the main considerations remains the competiveness of Australia and the Pilbara in particular. As a result of substantial decreases in the level of investment and construction, and cost cutting measures taken by the organisations operating in the sector, operating costs have fallen and competitiveness has improved somewhat. However, the impact of a high cost structure in the Pilbara is still evident. This has potential major negative ramifications for all businesses in the Pilbara, as capital costs in particular remain high. As a result, in the LNG sector, the alternative processing option of offshore platforms is increasingly likely to become the norm. Clearly it is in the best interests of all businesses, small or large that costs are brought down further, as Pilbara based construction and service needs will be reduced in the future as a result of the offshore processing development. The cost of doing business in the Pilbara for SMEs and NGOs has fallen partly as a result of a reduction in the demand for labour, accommodation and other services; except in Onslow (although declines are anticipated in the medium term). This impacts the viability of existing businesses in a positive way from a cost point of view, however, costs remain comparatively high, and due to a reduction in market opportunities, barriers to entry for new enterprises remain. Lack of diversity is also a situation that needs to be addressed. It should be noted that whilst investment has declined the export value of commodities has increased dramatically. It is likely that the estimate of export earnings forecast in the RDA Pilbara Plan (2012) of A$150 billion by 2016/17 will be achieved. 8 THE COST OF DOING BUSINESS IN THE PILBARA

IN THE RESOURCE SECTOR ONE OF THE MAIN CONSIDERATIONS REMAINS THE COMPETIVENESS OF AUSTRALIA AND THE PILBARA IN PARTICULAR. THE COST OF DOING BUSINESS IN THE PILBARA 9

2. Methodology 2.1 FOCUS The focus of the Study is on the major costs of doing business in the Pilbara. Costs in the main towns of Karratha, Port Hedland, Newman and Onslow, have been compared with costs in Perth and in some cases WA and Australia. The inclusion of WA and Australia as a point of comparison is because Perth remains an expensive city compared to some others in Australia. The detailed surveys carried out in 2013 have not been repeated, as this report is an update. Two methods of collecting and analysing data have been used 6, which give a reasonably comprehensive picture of the costs of doing business in the Pilbara. 2.2 DATA SOURCES Secondary Data Data sources include: 1. Other Studies such as a cost of doing business study prepared by the Chamber of Minerals and Energy (CME) in 2012 7 ; the Business Map, Gap and Supply Chain Research Project, April 2012; the 2013 Cost of Doing Business Study; the Pilbara Plan 2012, various economic and development reports of the Pilbara Shires and numerous reports on various aspects of economic development in the Pilbara. 2. Data from ABS; WA Apex bodies; Shires; Regional Development and Lands; the Pilbara Development Commission, and corporate reports. 3. Consumer Price Index (CPI) and Regional Price Indices (RPI) Estimates of the CPI are used by businesses as one set of data to negotiate salaries and wages. No estimates of the CPI are prepared by the Australian Bureau of Statistics (ABS), or the WA Treasury Department at regional level. CPI estimates are made only for States and major cities. The Department of Regional Development and Lands (RDL), has prepared regional price indices which compare the CPI of regions (including the Pilbara) with prices in Perth. These estimates are periodic with the latest in 2007, 2011 and 2013. Cost Indicators The selection of indicators for establishing costs in the Pilbara is based on cost items that are common to all types of business; the importance of the cost item (contribution to total budgets); data availability and data accuracy. Cost Items include: Employment (salaries and wages) Accommodation Utilities (electricity, water and gas) Commercial and Retail Rent Vehicle Hire Fuel (petrol and diesel) Insurance Airfares The cost of buying properties is also included since this cost is a major consideration for employees and employers, who often provide subsidised housing or purchase accommodation outright for their work force. Since high construction costs are a major factor in determining office accommodation and commercial costs, these have also been analysed. Environmental costs are also (briefly) included. Other cost issues given some attention are overall competiveness and the high cost of capital in the Pilbara. Primary Data: Discussions and Interviews Discussions were held with major resource companies, Business Apex organisations in Perth and the Pilbara, State and Local Government Agencies, utility providers, business enterprises in the Pilbara, and Visitor Centres, which provided useful insights on the cost structure and the future direction of costs. 2.3 ANALYSIS OF THE ECONOMY OF THE PILBARA In 2012 the consultant participated in the preparation of the Pilbara Plan Report for RDAP 8, which included an analysis of the economy of the Pilbara. This analysis was recently updated (2013), as part of a Study on future retail and commercial space needs for the Shire of Roebourne 9 and in 2014 additional analysis was carried out as part of a study on the revitalisation of the three older suburbs in Karratha 10. These reports have been used to assist in estimating future costs increases in the main towns in the Pilbara. Analysis of the economy is an essential input into the cost estimation process. The reduction in future investments by the resource sector (oil, Liquefied Natural Gas (LNG), iron ore and other minerals and commodities), and production volumes and values determine employment, population and service requirements. Changes to the economic scenario, influenced by these main drivers, have the largest influence on the cost of doing business in the Pilbara, for all categories of business, small or large, and in every sector. 10 THE COST OF DOING BUSINESS IN THE PILBARA

2.4 DATA ANALYSIS AND OUTPUTS Where possible, prices have been estimated to show not only absolute prices and price differences, but also changes over time. A comparison of costs in the Pilbara towns with Perth was undertaken, and for some indicators comparison was also made with WA and Australia as a whole. An estimate of the CPI and Business Cost Multipliers for major cost categories between the towns in the region and Perth was updated. Future price increases and the cost structure for doing business in the Pilbara was estimated based on the available data, and the opinions and the views of involved stakeholder organisations. An illustrative model budget showing the relative cost of doing business in the main towns in the Pilbara in 2014 compared to Perth was prepared. It is not possible to do this for all categories of business and therefore typical cost items for a medium size commercial service type business were used as the basis for the model based either on average costs (salaries and wages) or actual unit costs. The data needs to be treated with caution, as specific business costs vary enormously depending on the type and size. THE COST OF DOING BUSINESS IN THE PILBARA 11

3. The cost of doing business in the Pilbara 3.1 REGIONAL PRICE INDEXES (RPI) 2011 AND 2013 11 The cost of living is a standard and fundamental factor taken into account in setting employment benefits. The ABS and the WA Treasury Department do not compile cost of living indices below State and city level. The Department of Regional Development (DRD) estimates regional price indexes every two years as from 2013, comparing the cost of living in the main Pilbara towns (Karratha, Port Hedland) with prices in Perth. The two most recent estimates were made in 2011 and 2013. This allows for cost of living comparisons specifically in those years. There is no data between the two years and no forecasts of future rates of inflation. Although there has been a decrease in costs in the Pilbara, it is clear that the cost of living in all Pilbara centres remains higher than Perth (and also the remainder of WA and Australia). For the entire basket of goods and services, prices were the highest in the Pilbara region, followed closely by the Kimberley and Gascoyne regions. Data is not available for Onslow. However, stakeholder information indicates that the rate of inflation was very high between 2011-2013, but price decreases have started, and will continue for items such as house rentals and goods purchases. In 2013 the RDL indices show that in the Pilbara the level of remuneration should have been 18% higher than that in Perth. Regarding individual towns Port Hedland is 22% more expensive than Perth; Karratha is 19% higher and Newman 12%. The largest fall in the index is in Newman. The impact of the still high cost of living in the Pilbara means that business organisations and NGOs need to continue to offer salaries that are sufficient to meet high costs of living and to attract staff albeit that cost pressures have subsided to an extent. There remains a need to provide subsidised or free accommodation for staff in some cases, which adds a major additional cost burden for NGOs and businesses. DRD estimates of RPI in the Pilbara Towns (Perth = 100) Region/ Town Pilbara Karratha Port Hedland Newman Year 2011 2013 2011 2013 2011 2013 2011 2013 Composite Index 137.1 118.6 137.5 118.8 136.1 121.8 137.9 111.9 Estimates of Consumer Price Changes 2007 to 2014 (comparing the Pilbara to Perth) Pilbara Region/ Town 2007 2008 2009 2010 2011 2012 2013 2014 Perth 12 (Actual and Forecast WA Treasury) % year on year change Pilbara (Consultant Estimate) % year on year change 10 5 0-5 -10-15 Pilbara Towns 3.0 3.7 2.1 2.6 2.2 2.3 2.5 2.5 7.25 7.95 6.35 6.85 7.15 6.35-10.3-4.3 Perth 2007 2008 2009 2010 2011 2012 2013 2014 The indexes for the Pilbara are the highest of any region in WA. In 2013 the indices show that in the Pilbara the level of remuneration should have been 18% higher than that in Perth. The difference between the overall indices from 2011 to 2013 indicates that over the 2 year period the cost of living in the Pilbara decreased in comparison to Perth however the overall cost structure is still high. The 2013 indexes imply a fall in the rate of inflation rate for consumer prices between 2012 and 2013. 12 THE COST OF DOING BUSINESS IN THE PILBARA

IN THE RESOURCE SECTOR ONE OF THE MAIN CONSIDERATIONS REMAINS THE COMPETIVENESS OF AUSTRALIA AND THE PILBARA IN PARTICULAR. THE COST OF DOING BUSINESS IN THE PILBARA 13

The high cost structure still has policy implications for government agencies. Although this is already well known and steps have been taken to reduce cost pressures regarding accommodation in particular, the cost base of the Pilbara needs ongoing attention. Although costs have recently fallen for some items, they need to be reduced further for long-term community sustainability, and the viability of the NGO and SME sectors. The influence of specific cost items on the RPI is clear. Differences in costs compared to Perth remain very large for housing, transport, household equipment and operation, recreation and education, health and personal care and clothing (with the exception of Port Hedland). It is obvious that economic forecasting is extremely difficult and judgements at any point of time can subsequently be changed quickly. This is particularly the case in an economy based primarily on resources. Assumptions are based on an analysis of the economy of the Pilbara, including the global economic outlook, commodity markets, resource sector investments, population, employments and income trends, and other factors. Price increases in the Pilbara will likely continue to moderate over the next few years. Investment has slowed down and no firm commitments regarding new infrastructure or major additions to production capacity have been made in the medium term. However, if decisions are made to proceed with the outer harbour expansion in Port Hedland and the construction of the new Port Anketell, then costs may rise again in Port Hedland and Karratha. In addition, discoveries of additional commercially exploitable LNG reserves in the oceans adjacent to the Shires of Roebourne and Ashburton will also lead to price pressures in Karratha and Onslow, if decisions are made to increase capacity at some stage in the future. There are both downside and upside risks to the resource industry investment picture. The main downside risks include failure of policy and the USA to further address debt problems and rising rates of inflation as a result of the massive stimulus measures taken in the USA, Europe, China, and Cost Differences (for Specific Cost items) between the Pilbara Towns and Perth 2011 compared to 2013 Indicator Group/ Karratha (%) Port Hedland (%) Newman (%) Cost Difference 2011 2013 2011 2013 2011 2013 Food 15.5 1.0 12.8 1.9 9.6 2.0 Housing 102 41.5 96.5 47.7 100.6 21.0 Cigarettes, Tobacco, Alcoholic Drinks 1.1 0.9 0.8 19.3 7.5 6.4 Transportation 9.5 10.4 12.6 13.4 14.8 13.3 Household Equipment and 7.2 9.7 9.8 10.4 5.6 4.2 Operation Recreation and Education 9.5 9.1 9.3 15.5 16.5 10.8 Health and Personal care 12.2 37.0 9.0 28.2 10.1 13.9 Clothing 17.4 15.9 17.9-5.3 24.5 10.3 Source: Regional Price Index, 2011, and 2013 RDL recently in Japan. Deflation is also a threat in Europe. Lower global economic growth rates will occur with reduced demand for commodities under this scenario. The upside risk is that the signs of global economic recovery accelerate and commodity demand and prices increase as a result stimulating a further round of resource industry investment. It is also quite possible that further commercially exploitable mineral and oil and gas reserves will be found, and more investments in the Pilbara region will take place; although these are less likely in the medium term. The Reserve Bank of Australia and Treasury forecasts for headline inflation (CPI) and labour price inflation (LPI), and Average Weekly Ordinary Time Earnings (AWOTE) are shown below. The Reserve Bank of Australia and Treasury Forecasts for Headline Inflation (LPI, CPI, AWOTE) 2013 2014 2015 CPI 2.9% 2.6% 2.5% LPI 4.3% 4.5% 3.8% AWOTE 5.0% 5.6% 4.9% The implication for both businesses and NGOs is that although prices have moderated, prices are likely to remain somewhat elevated. Lower rates of inflation are likely to remain over the medium term; however the cost structure of all Pilbara urban centres will remain too high. Policy makers need to promote an enabling environment, which assists in reducing costs and not just stabilising current prices. 14 THE COST OF DOING BUSINESS IN THE PILBARA

The Economist magazine introduced the concept of the McDonald s Exchange Rate a slightly flippant way of calculating if a country s currency was over or under valued. It has gained popularity and is remarkably accurate. If you apply the same fuzzy logic to the cost of a Big Mac in Perth with that in Karratha in May 2014, the outcome is illuminating. Perth: $5.35 Karratha: $6.25 Karratha is 17% over-priced compared to Perth 3.2 EXPENDITURE INCREASES IN THE SHIRE OF ROEBOURNE 13 As with the CPI, expenditure levels provide useful information for preparing changes in remuneration for employees by businesses. In the 2013 report the very high rates of consumer expenditure were shown. The overall increase in household expenditure from 2006 to 2011 was exceptionally high at 23.3% or 4.7% per annum. The impact of high prices has the most impact on persons engaged in the non-mining sector. Income disparities in the Pilbara are very high, and lower income earners such as those in the NGO sector have to cope with the high prices with limited allowances relief. 3.3 RESIDENT HOUSEHOLD EXPENDITURE FORECAST Household expenditure increases in the Pilbara are likely to have moderated in 2013 and 2014 with lower salaries and benefits impacting levels of income. The strong increase in the percentage of households in the upper income brackets will not be repeated over the next 10 years as investment by the resources sector slows down significantly. The implications for the cost of doing business in the Pilbara is that in the near term remuneration increases will probably only need to keep pace with regional inflation to attract and retain staff. After 2014 it is possible that wage and salary increases will be more moderate, but still high and after 2015 total disposable income and expenditure will probably rise only in line with the rate of inflation unless further exploitable LNG or iron ore reserves are found to drive new major investment. Between 2006 and 2011 the largest increases in expenditure per household were: Health at 24.3% per annum Housing, gas, electricity, water and other fuels at 12.7% per annum Recreation and Culture at 6.8% per annum Clothing and footwear at 4.3% per annum Education services at 18.7% per annum THE COST OF DOING BUSINESS IN THE PILBARA 15

The resource companies have recently focussed on cost reductions and it is apparent that operating costs have begun to stabilise since 2012. Nonetheless policy needs to be formulated in a manner that takes account of the need for cost reduction in the regional and national interest. However in the LNG sector cash costs remain amongst the highest in the world. 3.4 RESOURCE SECTOR CASH COSTS 14 Iron ore and LNG cash costs were analysed by CME research in 2012. The resource sector in the Pilbara has advantages in terms of product quality, proximity to Asia and a very high level of expertise. However the competitiveness of the Pilbara as a producing region of iron ore and LNG has been severely eroded and major price falls of either commodity will place a strain on operating margins. On the other hand lower cash costs in the resources sector will result in less competition for labour and accommodation and this will benefit the SME and NGO sectors from 2014 onwards. 3.5 EMPLOYMENT COSTS Many of the cost of labour challenges for the resources sector are still applicable to SMEs and NGOs in 2014. It is essential to understand the challenges and to take action to reduce employment costs in all sectors and to formulate policy in a suitably constructive manner to alleviate the cost of labour, which although reduced since 2012 remains high. Reductions in resource sector labour costs will directly influence lower costs for other sectors. 3.5.1 Resource Sector Data 15 Labour remains a key cost input facing most resource developments in WA, although pressures have abated. The latest ABS (2011) census data and other recent international studies show clearly the unprecedented and significant pressures on labour costs in the mining and energy sector in Australia and in particular WA. Costs have moderated since 2011, however anecdotal evidence indicates that earnings and related employment costs are still high relative to most centres in Australia. In the Pilbara, 42% of the mining work force was considered to be high- income earners (earning more than $2000 per week) compared to the national regional average of 5% in 2011. The proportion of Australian s employed in the Mining industry earning $2,000 or more per week has close to doubled in the five years to 2011. The main factors contributing to decreases in labour shortages in 2013 and 2014 were the much lower level of capital construction activity, except in Onslow. Challenges remain: Challenges in attracting a diverse workforce including indigenous, women, international and interstate workers (mobility issues, migration regulations). Costs of mobilising workers. Volatility in the industrial relations environment. Historical training and education system that has not trained adequate talent to meet current and future demand. Australia ranks higher than our competitors for average annual salaries in the oil and gas sector. Contractor day rates in the oil and gas industry are considerably higher across all roles in the Australasian region. 16 THE COST OF DOING BUSINESS IN THE PILBARA

Median Individual Weekly Income per Pilbara Town, Perth, WA and Australia 2001 2011 $ $ $ Percentage Change on Base year Town 2001 2006 2011 2001-2006 2006-2011 2001-2011 Karratha 704 940 1,543 34% 64% 119% Newman 785 1,095 1,538 39% 40% 96% Port Hedland 689 862 1,368 25% 59% 99% Onslow 452 428 926-5% 116% 105% Perth 484 513 669 6% 30% 38% West Australia 540 500 662-7% 32% 23% Australia 375 466 577 24% 24% 54% Median Weekly Income Pilbara Towns, Perth, WA and Australia 2001 to 2011 ($) 1600 1400 1200 1000 800 600 400 200 0 2001 2006 2011 Karratha Newman Port Hedland Perth WA Australia Onslow 3.5.2 ABS Data on Income Changes in the Pilbara Compared to Perth, Western Australia and Australia The labour cost data in the 2013 report on incomes received by Individual and Family Earners in the Pilbara towns relative to those in Perth, WA, and Australia over the period between 2001 and 2011 showed that the percentage increase in individual incomes was between 96% and 119% for the Pilbara cities, as opposed to an increase of only 38% for Perth and 54% for Australia generally. High labour costs have been a major component of the high costs of doing business in the Pilbara. Following a similar trend line, the Median Weekly Income for families also increased from 2001 to 2011. Absolute values for Pilbara towns were very high. The increase for the Pilbara towns of Karratha, Newman, Onslow and Port Hedland was between 96% and 119%, more than double that for Australia generally at 58%. There is no ABS data available on labour costs after 2011. Anecdotal evidence suggests that incomes have decreased since 2013 and this is taken into account in subsequent sections of this report. THE COST OF DOING BUSINESS IN THE PILBARA 17

Estimated 2014 SME Employment Costs ($ salaries and wages - averages per week) 17 compared to 2013 SME Survey Data Employment Cost Item 2013 SME Survey Data 2014 Estimate Difference (minus - %) Managers Full Time 2,640 2,380-10 Managers Part Time 1,810 1,630-10 Professionals Full Time 2,190 1,970-10 Professionals Part Time 2,080 1,870-10 Technicians and Trade Workers Full Time 2,600 1,560-25 to -40 Technicians and Trade Workers Part Time 2,000 1,400-25 to -30 Clerical and Administrative Workers 1,120 780-25 to -30 Machinery Operators and Drivers Full Time 2,880 2,300-20 Machinery Operators and Drivers Part Time 2,040 1,630-20 Estimated 2014 NGO Employment Costs ($ salaries and wages - averages per week) 18 compared to 2013 NGO Survey Data Employment Cost Item 2013 NGO Survey Data 2014 Estimate Difference (minus - %) Chief Executive Salaries 2,040 1,840-10 Operations Managers 1,900 1,710-10 General Managers 1,840 to 1,460 1,660 to 1,310 Professionals Part Time 2,080 1,870 10 Technicians and Trade Workers 1,520 910-25 to -40 Casual Technicians and Trade Workers 500 350-25 to -30 Clerical and Administrative Workers 800 to 1,430 780-20 to -30 Community and Service Workers 800 to 1,350 860-10 to -20 Family Support Workers (Casual) 430 340-10 to -20-10 3.5.3 Comparison of 2013 SME Survey Data 16 with Estimated 2014 Labour Costs The main points of the survey of SMEs carried out by the consultant in 2013 were: The survey confirmed official data showing the exceptionally high cost structure of the Pilbara for SMEs. Rates of pay differ considerably between business categories with very high employment costs in industries such as finance, insurance and construction. Remuneration is lower in services such as travel agencies and florists (but still high in comparison to Perth). Persons working in higher paid professions can potentially cope with the high costs of living. For persons in lower paid categories such as clerical and administrative workers, the high cost structure in the Pilbara remains problematic. Discussions with a wide range of stakeholders in the Pilbara (resource companies, port authorities, employment agencies, real estate agents etc.) indicate that these high employment costs have abated to an extent since about mid 2012 to the first quarter in 2014. This situation is likely to remain in the medium term with the downturn in investment and construction since 2012 (with the exception of Onslow). Overall absolute costs and cost pressures are expected to remain, but will not be as severe as in the past. Labour costs in Onslow will start to decline in 2015 as project construction nears completion. 3.5.4 Comparison of 2013 NGO Survey Data with 2014 Estimates Similarly it is estimated that labour costs in the NGO sector have fallen between 2012 and 2014. A comparison of 2013 and estimated 2014 costs are shown on the table besides. However, overall labour costs for NGOs remain high despite the fall in costs between 2013 and 2014. 18 THE COST OF DOING BUSINESS IN THE PILBARA

3.6 HISTORICAL ACCOMMODATION COSTS 19 Although there has been a fundamental change in the demand supply balance with significant decreases in demand and increases in stock levels, accommodation costs remain the greatest issue in the Pilbara. Despite recent falls in accommodation costs in all the major towns this is an area of policy that still requires ongoing attention. Even more needs to be done to normalise costs. This is not easy because construction costs in the Pilbara are exceptionally high and will be difficult to reduce, given the need for cyclone rating, transport, costs of materials, and professional and technical service costs. Land availability has decreased in importance as an issue, but is still constrained due to a number of factors including flooding and native title. For each town, the Average House Price increased from 2001 to 2012 - the increase for the Pilbara towns was between 331% for Karratha (30% per annum), 618% (55% per annum) for Port Hedland, 1,367% (120% per annum) for Newman and 547% (50%) for other towns including Onslow. This compares with the increase for Perth over the same period of 127%. Average Weekly Rents increased in the Pilbara towns of Karratha, Newman Port Hedland and Onslow by over 300% (43% per annum) in the period between 2005 and 2012. This compares with an average median weekly rental increase of 99% in Perth over the same period. 3.6.1 Historical House Purchase Prices and Trends In the 2013 report increases in house prices for towns in the Pilbara over the period 2001-2012 were compared with Perth. Whilst the absolute value of house prices has risen for Perth the increase in the Pilbara towns was markedly greater. 3.6.2 Historical House Rental Prices and Trends In the 2013 report increases in average House Rental prices for towns in the Pilbara over the period 2005-2012 were compared with Perth. There was a substantial increase in house rental prices in the Pilbara towns, which was markedly greater than in Perth. THE COST OF DOING BUSINESS IN THE PILBARA 19

3.7 CURRENT PRICES PORT AND SOUTH HEDLAND 3.7.1 House Prices The December 2013 quarter was the fifth consecutive quarter the average advertised for sale price of properties in Port and South Hedland fell a trend that started in mid 2012. Port Hedland s average advertised for sale price of $980,000 in the latest quarter was the lowest since the September 2009 figures, whilst the 145 properties advertised is the highest number of properties since figures have been collected by the Commission. South Hedland s December 2013 average advertised for sale price of $810,000 was the lowest it s been in two years. The number of dwellings advertised for sale has risen sharply. The trend in the number of advertised residential properties for sale, the average advertised price, average settlement price and number of sales in Port Hedland and South Hedland are shown below in graphical and tabular form (illustrates the average advertised price of the residential properties for sale based on the number of bedrooms and Settlement figures over the past year). Residential Dwellings For Sale and Settlements, Port Hedland Average Price $000 1400 Average Advertised Price No. Dwellings Advertised 200 1200 Average Settlement Price No. Settlements 175 1000 150 800 125 100 600 75 400 50 200 25 0 Number Min $ Max $ Avg $ Port Hedland For Sale 145 $640,000 $1,699,000 $978,148 One Bedroom 33 $650,000 $820,000 $719,152 Two Bedroom 57 $650,000 $1,400,000 $933,000 Three Bedroom 36 $640,000 $1,675,000 $1,137,403 Four Bedroom & above 19 $975,000 $1,699,000 $1,261,684 Port Hedland Settlements 2007 2008 2009 Source: Realestate.com.au, Landgate 2010 2011 2012 2013 Sales Min $ Max $ Avg $ Mar-13 9 $699,000 $1,750,000 $1,312,111 Jun-13 8 $680,000 $1,250,000 $995,500 Sep-13 6 $525,000 $1,105,000 $891,666 Dec-13 3 $960,000 $1,180,000 $1,040,000 Dwellings Advertised 20 THE COST OF DOING BUSINESS IN THE PILBARA

Residential Dwellings For Sale and Settlements, South Hedland Average Price $000 1000 900 Average Advertised Price Average Settlement Price No. Dwellings Advertised No. Settlements 400 350 800 700 300 600 250 500 200 400 150 300 200 100 100 50 0 2007 2008 2009 2010 2011 2012 2013 Source: Realestate.com.au, Landgate Dwellings Advertised Number Min $ Max $ Avg $ South Hedland For Sale 219 $489,000 $1,600,000 $811,713 One Bedroom 5 $530,000 $625,000 $584,000 Two Bedroom 23 $489,000 $1,290,000 $631,391 Three Bedroom 102 $550,000 $1,600,000 $770,520 Four Bedroom & above 89 $540,000 $1,399,000 $918,315 South Hedland Settlements Sales Min $ Max $ Avg $ Mar-13 20 $565,000 $1,900,000 $890,750 Jun-13 40 $362,500 $1,300,000 $784,587 Sep-13 17 $90,000 $1,170,000 $661,000 Dec-13 6 $655,000 $990,000 $805,000 Despite the house price falls the cost of purchasing a property remains far higher than in Perth in Port Hedland and South Hedland. The price ratio is about 2:1. THE COST OF DOING BUSINESS IN THE PILBARA 21

3.7.2 Rental Costs Port Hedland s average advertised rental prices dropped for a sixth consecutive quarter from an all-time high of $2,540 per week during the September 2012 quarter to a five year low of $1,530 per week in the latest quarter. South Hedland s average advertised rental prices dropped for a sixth consecutive quarter from an all-time high of $1,920 per week during the September 2012 quarter to a three year low of $1,400 per week in the latest quarter. The trend in the number of residential properties advertised for rent in Port Hedland and the average weekly costs are shown below. 3.7.3 Port Hedland Outlook Discussions with stakeholders in Port Hedland indicate that the market may be bottoming out. Salient points are as follows: The FMG expansion has been completed including the mine site and related rail and port capacity infrastructure. A BHP ship loader upgrade has commenced (some $300 million). According to estate agents there has been a very recent increase in the demand for rental properties and number of rentals (both residential and commercial). Recent increases in occupancy rates in workers camps (from an estimated 40% to 80%). Stronger demand from corporate clients for rental properties has recently emerged. There is a high level of demand for modern four bedroom two bathroom properties renting at $ 1,800 to $ 2,000 per week more recently. Lower property prices are again attracting investors and private owners. On the other hand there is an oversupply of one-bedroom units. Advertised Residential Rental Properties and Average Weekly Cost, Port Hedland Rental Cost $ 2600 2340 2080 1820 1560 1300 1040 780 520 260 0 Perth Average Rental Cost Port Hedland Average Rental Cost Port Hedland No. Rentals Advertised 2007 2008 2009 Source: Realestate.com.au, REIWA.com.au 2010 2011 2012 2013 Number Min $ Max $ Avg $ Port Hedland Rentals 128 $600 $2,800 $1,530 One Bedroom 29 $600 $1,200 $928 Two Bedroom 27 $700 $2,200 $1,376 Three Bedroom 48 $800 $2,800 $1,643 Four Bedroom & above 24 $1,400 $2,800 $2,202 Although rental costs have fallen they are still very much higher than in Perth with a ratio of over 3:1 in both Port Hedland and South Hedland. Advertised Residential Rental Properties and Average Weekly Cost, South Hedland Rental Cost $ 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Perth Average Rental Cost South Hedland Average Rental Cost South Hedland No. Rentals Advertised 2007 2008 2009 Source: Realestate.com.au, REIWA.com.au 2010 2011 2012 2013 Number Min $ Max $ Avg $ South Hedland Rentals 241 $550 $2,700 $1,398 One Bedroom 16 $600 $900 $759 Two Bedroom 25 $550 $2,400 $1,040 140 120 100 80 60 40 20 280 240 200 160 120 80 40 Rentals Advertised Rentals Advertised Three Bedroom 130 $800 $2,300 $1,286 Four Bedroom & above 70 $800 $2,700 $1,879 22 THE COST OF DOING BUSINESS IN THE PILBARA

Residential Dwellings For Sale and Settlements, Karratha Average Price $000 1100 1000 900 800 700 600 500 400 300 200 100 0 Karratha Average Advertised Price Karratha Average Settlement Price Karratha No. Dwellings Advertised Karratha No. Settlements 2007 2008 2009 Source: Realestate.com.au, Landgate 2010 2011 2012 2013 Number Min $ Max $ Avg $ Karratha For Sale 294 $285,000 $1,300,000 $716,486 One Bedroom 12 $285,000 $659,000 $444,000 Two Bedroom 17 $379,000 $1,200,000 $556,176 Three Bedroom 140 $429,000 $1,300,000 $658,971 Four Bedroom & above 125 $470,000 $1,175,000 $828,864 Despite substantial falls in house prices the cost of purchasing a property in Karratha is still high and for apartments in particular. Advertised Residential Rental Properties and Average Weekly Cost, Karratha Rental Cost $ 2200 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Perth Average Rental Cost Karratha Average Rental Cost Karratha No. Rentals Advertised 2007 2008 2009 Source: Realestate.com.au, REIWA.com.au 2010 2011 2012 2013 Karratha Settlements Sales Min $ Max $ Avg $ Mar-13 42 $499,000 $1,250,000 $722,702 Jun-13 30 $499,000 $1,000,000 $678,133 Sep-13 24 $470,000 $3,000,000 $783,416 Dec-13 19 $375,000 $1,375,000 $672,421 400 350 300 250 200 150 100 50 550 500 450 400 350 300 250 200 150 100 50 Dwellings Advertised Rentals Advertised 3.8 KARRATHA 3.8.1 House Prices The number of advertised residential properties for sale in Karratha has more than doubled in the last quarter; from a four year low of 108 properties in September, to 294 listings in the December quarter. The average advertised for sale price in Karratha is at its lowest since the September 2007 quarter, with advertised four bedroom properties from as low as $470,000. The trend in the number of advertised residential properties for sale, the average advertised price, average settlement price and number of sales in Karratha and the average advertised price of the residential properties for sale in Karratha based on the number of bedrooms and Settlement figures over the past year is shown below. 3.8.2 Rental Costs Karratha s average advertised weekly rental has dropped for the ninth consecutive quarter, down from $1,780 in the September 2011 quarter to $1,080 in the latest quarter, which is the lowest since figures have been collected by the Commission. The 446 properties advertised for rent during this quarter is also the second highest on record. 3.8.3 Karratha Outlook Given the prospect of a greatly reduced level of investment over the medium term; a possible decreased presence of the major resource companies in the town; and low rates of population growth and additional dwellings required, the market could remain soft for several years. Should construction of phase one of Port Anketell start the market may flatten out temporarily. The number of operational staff required is only some 150 and not all of these personnel will live in Karratha. THE COST OF DOING BUSINESS IN THE PILBARA 23

Number Min $ Max $ Avg $ Karratha Rentals 446 $390 $2,150 $1,081 One Bedroom 60 $390 $1,000 $731 Two Bedroom 32 $400 $1,500 $761 Three Bedroom 175 $450 $1,750 $963 Four Bedroom & above 179 $800 $2,150 $1,372 Rental costs in Karratha remain very high compared to Perth at a ratio of over 2:1. It is clear that despite income reductions for persons in the upper brackets of pay this category of workers is still in a strong position to purchase property, whilst in the middle and lower levels of income, decreases in remuneration levels mean that accommodation purchases are often out of reach and rentals are still likely to consume a large proportion of incomes. There is a high level of uncertainty at present regarding employment security and prospects and this will deter even the higher income earners from purchasing. This uncertainty may diminish somewhat over the course of 2014 as the employment market steadies to an extent. Improvements to the ambience and facilities in the town and lower prices will probably result in an increased resident population. How large this growth will be remains to be seen. The slowdown in the demand for both purchased and rental accommodation has led to a higher level of properties on the market and a higher vacancy rate. 3.9 NEWMAN 3.9.1 House Prices House prices in Newman have declined significantly over the last year in line with falls in the other major centres in the Pilbara. The trend in the number of advertised residential properties for sale, the average advertised price, average settlement price and number of sales in Newman is shown below (illustrates the average advertised price of the residential properties for sale in Newman based on the number of bedrooms and Settlement figures over the past year). The average advertised rental price of $1,720 per week is the highest amongst the three major towns and very much higher than Perth by a ratio of some 4:1. Residential Dwellings For Sale and Settlements, Newman Average Price $000 1000 Newman Average Advertised Price 200 900 Newman Average Settlement Price 180 Newman No. Dwellings Advertised 800 Newman No. Settlements 160 700 140 600 120 500 100 400 300 80 60 200 40 100 20 0 2007 2008 2009 2010 2011 2012 2013 Source: Realestate.com.au, Landgate Dwellings Advertised 24 THE COST OF DOING BUSINESS IN THE PILBARA

Number Min $ Max $ Avg $ Newman For Sale 86 $495,000 $1,325,000 $841,783 One Bedroom 1 $610,000 $610,000 $610,000 Two Bedroom 14 $495,000 $1,200,000 $635,321 Three Bedroom 34 $550,000 $945,000 $804,124 Four Bedroom & above 37 $749,000 $1,325,000 $960,773 Newman Settlements Sales Min $ Max $ Avg $ Mar-13 28 $61,600 $1,250,000 $712,771 Jun-13 12 $515,000 $1,150,000 $857,083 Sep-13 13 $73,700 $1,100,000 $707,207 Dec-13 3 $570,000 $820,000 $666,333 Advertised Residential Rental Properties and Average Weekly Cost, Newman Rental Cost $ 2250 Perth Average Rental Cost 130 Newman Average Rental Cost 2000 120 Newman No. Rentals Advertised 110 1750 100 1500 90 80 1250 70 1000 60 750 50 40 500 30 250 20 10 0 2007 2008 2009 2010 2011 2012 2013 Source: Realestate.com.au, REIWA.com.au Number Min $ Max $ Avg $ Newman Rentals 122 $466 $3,300 $1,720 One Bedroom 14 $466 $1,300 $942 Rentals Advertised 3.9.2 Rental Costs The 122 residential properties advertised for rent during the last quarter in Newman was the highest number in recent years. The average advertised rental price of $1,720 per week is the highest amongst the three major towns and very much higher than Perth by a ratio of some 4:1. 3.9.3 Newman Outlook Unless new major investments are made the market outlook is for continued soft demand for both house sales and rentals. 3.10 ONSLOW 3.10.1 House and Rental Prices Time series data for Onslow from the PDC is limited. Following very sharp rises in prices between 2008 and 2014 house purchase prices in Onslow remain extremely high. The median price was $908,000 in March 2014. Rents are still also very high at some $1,900 per week on average in the March 2014 quarter, with the highest rentals at astronomical levels. 3.10.2 Onslow Outlook Currently there are about 20 properties on the market for sale; about 24 apartments close to completion; and planning approval passed for another 120 of which a limited number have been sold. A Landcorp subdivision of 240 blocks will possibly come onto the market in 2014/2015. Given the new supply coming to market at a time when construction work will begin to slow down as projects are completed there is likely to be a significant over-supply of properties and purchase and rental prices are likely to decline quite sharply from the current boom conditions. Two Bedroom 16 $750 $1,650 $1,203 Three Bedroom 52 $700 $2,600 $1,601 Four Bedroom & above 40 $500 $3,300 $2,354 THE COST OF DOING BUSINESS IN THE PILBARA 25

3.11 COMMERCIAL RENT PRICES IN THE PILBARA In the 2013 report a comparison of Commercial Rental Property Prices in the Pilbara towns between 2010 and 2012 showed that there was a near doubling of commercial property rent prices in Karratha, a marked increase and then a decrease in Newman and a decrease in Port Hedland. There are also a wide variety of location specific prices ranging from high cost prime commercial property locations to those in less advantageous areas. Interviews with stakeholders in the commercial rental market indicate that rental prices have fallen. Examples are: In Karratha rents falling by some 10% to 25% for properties that were previously rented out at $650 to 750/sqm per week. Discounting of rents and more lenient rental terms in some precincts; properties in the previous price level of $500/sqm have fallen by up to 30% to some $350/sqm in some precincts. In Port Hedland there has also been a decrease in demand for commercial rental properties and consequently prices have fallen, as is also the case in Newman. A recent report produced for the Small Business Centre West Pilbara in Karratha on the concept of a Business Incubator 20 indicates that commercial rental prices were about 15% higher in Karratha than in the Perth CBD. Commercial rates in Karratha vary in a price range of $400 (Crane Circle) to $750 (Pelago East) per sqm (excluding outgoings and GST). Prices in Perth range from $395 (Adelaide Terrace) to $525 (Subiaco). Average Weekly Commercial Property Rents 2010 to 2012 (per sqm/month) Year Karratha $ Newman $ Port Hedland $ Onslow $ Pilbara Average $ 2010 1,783 1,992 2,262 n.a. 1,861 2011 2,101 2,573 1,811 482 2,215 2012 2,935 1,862 1,736 n.a. 2,253 % Change ( 12/ 10) +65% - 7% - 23% n.a. +21% 3.12 INDUSTRIAL LAND RENT A recent report prepared by Landcorp 21 prepared in March 2013 confirmed that industrial rental prices in the Pilbara are high in comparison to Perth. 3.12.1 Karratha Gap Ridge Industrial Estate entering the market was a significant change to the dynamics of the industrial market in Karratha offering a better quality product. It is likely that developers will have to achieve warehouse rents in excess of $350/sqm, in order to make a prospective development viable. Over the period industrial rents in Karratha Light Industrial Area were ranging from $260 - $460/sqm depending on size, location and quality; however the majority of this evidence is for smaller units on land areas below 3ha in size. Demand for hardstand and lay-down areas is particularly strong with rents currently at between $20-30/ sqm, depending on specification. For concrete and bitumen hardstand leasing, evidence suggests that it can range from $40-$45/sqm, however this is for areas between 100-1,000 sqm. There remains a significant disparity in industrial rentals currently being achieved in Karratha compared to the average blended net face rents for industrial space in the Perth metropolitan area. The difference reflects a two to three times the market rent in the metro area. Developments between 2013 and 2014: since the Landcorp report was produced the market has weakened overall, and industrial property sales have slowed. 3.12.2 Port Hedland Data from the Landcorp report indicated that there was a similar price range to those in Karratha. Average land values for fully serviced Lots of more than 10,000 sqm were $372/sqm; and for Lots less than 10,000 sqm were $421/sqm. 26 THE COST OF DOING BUSINESS IN THE PILBARA

There has been renewed industrial market activity in Port Hedland and the outlook is firmer than in Karratha. 3.12.3 Newman and Onslow Time series data for Newman and Onslow were not available at the completion date of this study. Non-serviced land prices in Onslow were very high until recently at between $325,000 to $483,000 per ha. However, stakeholder views were that prices would decline during 2014/15 in both centres. Percentage increase compared to Perth prices for Pilbara towns 2013/14 according to New Classification by Water Corporation of Town Rates Towns 2012/13 % relative to Perth 2013/14 (c/lt) 2013/14 - % relative to Perth Karratha 145% 3.007 147% Newman 95% 1.965 96% Port Hedland 133% 2.671 131% Onslow 286% 6.474 317% Perth - 2.043-3.13 UTILITY COSTS 3.13.1 Water 22 The methodology for calculating the cost of water has been changed by the Water Corporation for 2013/14 with a new classification of charges. Water prices in the Pilbara towns have increased gradually over the years 2010 to 2014. The Pilbara towns water prices are overall much higher than those of Perth in any year and increasing. Based on current trends it is possible that prices will continue to rise in the Pilbara. The difference in prices between the Pilbara towns and Perth in 2013/14 has increased slightly compared to 2012/13 as shown besides. Water prices in Onslow are extremely high. 3.13.2 Electricity Electricity prices remain a major concern in the Pilbara. There remains the possibility of further increases in the future with remaining tight generating capacity and rising demand. The quantity of electricity used by households and businesses is very much higher in the Pilbara than in Perth. Estimates of the ratio vary between 2.5 to 3.5, depending on the extent of usage of air conditioners and other appliances. Electricity Rates for Small and Medium sized businesses in the Pilbara towns were considerably below those in Perth in 2008/9, but increased by a greater percentage than Perth over the period 2008/9 to 2013/14 and are now at the same level. This possibility was flagged in the 2013 report. The percentage increase for Small to Medium sized businesses from 2009 to 2013/14 was 86% for Pilbara towns compared with the Perth increase of 48% for equivalent businesses. Percentage increase compared to Perth prices for Pilbara towns 2013/14 according to New Classification by Water Corporation of Town Rates Year 08/09 09/10 10/11 11/12 12/13 13/14 Pilbara All Towns % above Perth 13/14 % Increase 2009 to 2013/14 14.3 16.5 21.7 25.3 28.7 26.68 100% 186% Perth 18.3 21.67 22.71 25.6 n.a. 26.68-148% Price Changes Pilbara Towns and Perth for SMEs 2008/09 to 2013/14 (C/kW) 35 30 25 20 15 10 5 0 Pilbara Towns Perth 08/09 09/10 10/11 11/12 12/13 13/14 THE COST OF DOING BUSINESS IN THE PILBARA 27

A similar trend for Large Businesses exists. Electricity rates for large businesses in the Pilbara towns were considerably below those in Perth in 2008/09, but increased by a greater percentage than Perth over the period to 2013/14, and are now on a par with Perth. The latest information on electricity generation in the Pilbara is that in South Hedland a new plant for electricity generation is to be constructed at a cost of $500 million taking about 30 months to build. Horizon Power has also installed smaller generators at existing sites to bolster electricity supplies to supply power to homes and businesses. Future price indicators imply that Pilbara rates may be above Perth electricity rates in the future. The percentage increase for large businesses from 2009 to 2014 was 201% for Pilbara towns compared with the Perth increase of 67% for equivalent businesses. Variation in Electricity Prices Pilbara Towns compared to Perth 2008/09 to 2013/14: (Country Non Residential Rates in c/kw Large Businesses (L2 or L4) Year 08/09 09/10 10/11 11/12 12/13 13/14* Pilbara All Towns Pilbara Towns % above Perth 2013/14 % Increase 2009 to 2014 15.9 17.5 22.7 32.4 35.14 32.02 100% 201% Perth 19.2 22.7 29.4 31.94 40 35 30 25 20 15 10 5 0 35.00 Est. 32.02* - 167% Price Changes Pilbara Towns and Perth for Large Businesses 2008/09 to 2013/14 (C/kW) Pilbara Towns Perth 08/09 09/10 10/11 11/12 12/13 13/14 3.13.3 Gas There has been no change in the gas situation in the Pilbara between 2013 and 2014. It is totally unsatisfactory, with no distribution grid or piped supplies and very expensive canisters. Because of the unavailability of piped gas and its high cost when bottled, business depends on electricity, although larger quantities in tanks are cheaper based on volume. A calculation of the relative cost per litre of Bottled/Tanked gas in the Pilbara compared to Piped gas to the home as delivered in Perth shows that the Pilbara price is very much greater than the Perth price. There are several suppliers for businesses in the Pilbara, for example Origin Energy, BOC bottled gas, and Elgas. Elgas prices for the supply of gas bottles/tanks of gas are: In Karratha and Port Hedland the price per litre is $1.50. In Newman & Roebourne the price is higher at $1.70 per litre as the distance transported from depot is greater. 28 THE COST OF DOING BUSINESS IN THE PILBARA

3.14 RESOURCE SECTOR ENERGY ISSUES 23 Since the 2013 report was published there has been further rising demand for energy by the resource sector, which has an impact on all businesses in the Pilbara. The mining and energy industry in WA utilises energy in a range of ways for extraction, development and ongoing operations including processing and utilisation. It is a significant cost input for companies in the sector. Prices on new wholesale domestic gas contracts in WA remain at least double those of recent prices in the eastern states. The increase in costs is expected to only escalate as the resource sector demand for gas is expected to increase by 47% by 2018. According to the CMEWA 2013 Growth Outlook Study, energy consumption in WA s minerals and energy sector has increased from 14% of WA s energy consumption in 1990 to 30% in 2011. It is now the largest consumer of energy in the State. Total electricity consumption is projected to increase by approximately 52% by 2018 driven predominately by projects in the mining and energy sector. Energy affordability and reliability is a significant and growing cost factor for mining and energy companies, particularly those with large capital investments up front and significant ongoing processing or refining required. Based on data published by the Department of Mines and Petroleum, the average price of all domestic gas contracts in WA in 2009/10 is calculated to be $3.70 per GJ. However, prices for gas under new contracts have recently been reported to be in a range of approximately $5.55 to $9.25 per GJ. THE COST OF DOING BUSINESS IN THE PILBARA 29

3.15 TRANSPORT COSTS Transport cost data has been sourced for 2013/14 only. The data is sufficient to show the differences in prices of the towns in the Pilbara with Perth, for selected cost items. The analysis indicates the very high costs of these items in the Pilbara. Fuel price and vehicle hire comparisons 24 are shown in the table below. In all towns the costs of fuel and vehicle hire has remained considerably higher in the Pilbara than Perth. In Onslow the cost of car hire is extremely high. In the case of truck hire, costs in the Pilbara centres have fallen, but are still some 10% above Perth. Another indicator of high comparative costs for the SME and the NGO sector is the cost of a return flight (at the economy Flexi Saver Rate) from Perth to each of the Pilbara Towns and this is compared to the corresponding airfare to Melbourne and Sydney and also Singapore (as of June 2014). Flight costs from Perth to the Pilbara towns are generally higher than the fares to Melbourne or Sydney, even though those cities are much further, and are similar to flying internationally to Singapore. However it should be noted that considerable discounting on flights from Perth to the Pilbara towns does mean that cheaper flights are often available. 3.16 CONSTRUCTION COSTS Interviews with stakeholders in the Pilbara Interviews indicate that in general construction costs in 2013 and 2014 are lower than in 2012, but still at 1.45 to 2.00 times as high in the Pilbara compared to those in Perth Estimates vary for example developers indicate that for cost planning and estimating for both Port Hedland and Karratha (including market testing with builders in the region) the estimated increased cost is 50% above Perth costs for construction and 5-10% for differences in design and construction methodology. Fuel and Car Hire Prices for Pilbara Towns and Perth Metro April 2014 ($) Cost Item Karratha % above Perth Port Hedland % above Perth Newman % above Perth Onslow % above Perth Perth Petrol (c/ltr) 167 15% 164 13% 170 17% 166 15% 145 Diesel (c/ltr) 167 13% 161 9% 170 15% 167 13% 148 Car Hire (per 3 days) Truck Hire (per 3 days) 263 87% 254 85% 263 87% 342 240% 140 474 * 39% 474 * 39% NA - NA - 340 * Note: * Estimated through discussions with vehicle hire operators as data not available Flight Costs for Perth/Pilbara Towns and Perth to Melbourne and Sydney April 2014 ($) Destination Karratha Port Hedland Newman Melbourne Sydney Singapore Pilbara Town to Perth Return 1260 1260 1240 Perth to Melbourne Return 1100 Perth to Sydney Return 1170 Perth to Singapore Return 1380 30 THE COST OF DOING BUSINESS IN THE PILBARA

Rawlinson s Construction Cost Guides (2012 and 2013) and Other Reports A range of recent surveys and data on construction costs 25 were referenced. The estimates indicate: Construction costs have risen strongly in recent years due to large increases in energy costs, material shortages and skilled labour shortages. Interviews in 2013 indicated that in general construction costs were 1.75 to 2.00 times as high in the Pilbara compared to those in Perth. The Ranges Karratha estimates the cost of construction to be 1.8 times the cost in Perth. The estimated increased cost is partly due to a 5% to 10% differences in design and construction methodology. Recent discussions indicate that although costs have fallen they remain well above Perth costs. The Rawlinson s Construction Cost Guides 2012 and 2013 indicate that the construction cost index for Perth compared to Sydney increased from 122.36 in 2000 to 234.71 in December 2011. A range of indicators shows that Perth construction costs are the highest in the nation. Current costs to build an administrative building in Perth (single storey, standard finish) are $2,145- $2,310 compared to Melbourne at $2,045-$2,205. In turn the high cost of construction in the Pilbara can be gauged from cost indices for the main towns in the Pilbara compared to Perth (Perth = 100). These are: Karratha: 155 Port Hedland: 160 Newman: 165 High construction costs are a result of: Distance High labour costs 50% higher than Perth excluding flights and accommodation High accommodation costs High material costs More rigorous standards to meet flooding and cyclone issues this adds 30% to structural steel tonnages and 400% to 600% to concrete footing volumes Site visits add 10-20% to costs The 2013 data shows little change concerning the price indexes. Karratha and Port Hedland remain at 155 and 160 respectively. Although there is no data for Onslow stakeholders have indicated that costs remain very high. Future Construction Costs More than likely the 2014 indexes will show a decrease in construction costs as activity has slowed almost across the board. Perth construction costs are anticipated to have increased by 1% in 2013 compared to 2012. Discussions with stakeholders 26 confirm that cost pressures are subsiding due to less demand for services. Prices will not increase unless there are further port developments and/or exploitation of additional LNG or iron ore reserves. Employment costs will be lower over the period 2014 to 2017 - but will remain comparatively high. The rapid increases of the past few years are unlikely to be repeated without major new investments. Whilst the cost of water may rise only slightly, the cost of electricity may well continue to rise quite significantly. The cost of materials is unlikely to have fallen as much as labour costs, but may well have decreased to an extent. Environmental considerations mean that costs remain higher in flood prone areas and standards related to cyclones also lead to higher costs than would otherwise be the case. Overall it is believed that development costs have fallen by some 10-20% in 2013 and 2014 compared to 2012. Competitiveness and Capital Costs 27 WA resources companies and SMEs need to be cost competitive to ensure sustainable operations, and in the case of the resource companies so that they can compete globally for capital and markets. The level of competition in the global resources sector is increasing for Australia and WA. Falling iron ore prices have now placed an even greater spotlight on the need for cost cutting. In the LNG sector, Chevron 28 stated in 2012 that resources projects in Australia were 40 per cent more expensive than in the US and its workforce was 60 per cent less productive than the US. As pointed out in the 2013 report, the high cost structure of the resources sector has an impact on capital costs for all businesses in the Pilbara, small or large. There is no doubt that costs have fallen in 2013 and 2014 - however as was pointed out at a recent petroleum conference in Perth 29 (March 2014) high costs are driving companies to invest in floating LNG facilities instead of on land as construction costs are far lower in countries building the platforms than those in Australia and in particular those in the Pilbara. The reduction in the potential size of the work force as a result of these developments in future investments decreases economic activity in the Pilbara, and thus the viability and diversification of local SMEs servicing this sector. Environmental Costs 30 Developers and other businesses incur high environmental costs. These costs apply to all businesses in the Pilbara, where environmental impact is a factor. The Pilbara is home to a fragile ecosystem that also contains rare flora and fauna that requires detailed EIA assessments before any major project development. There are also the costs associated with operating in a harsh climatic environment that includes extreme heat, cyclones and floods. In 2014 these costs remain high at about $50,000 per ha. for large-scale operators. THE COST OF DOING BUSINESS IN THE PILBARA 31

4. FUTURE BUSINESS COSTS Future costs have been forecast to 2017. The future cost of doing business in the Pilbara has been estimated by analysing: The data sets of costs of doing business in the Pilbara. The global economy and commodity markets and prices. Resource Company Investments and the impact on the demand for services. Opinions of stakeholders. The expectations of businesses and the NGO sector as expressed during consultations. 4.1 ECONOMIC FORECASTS The economy of the Pilbara is very dependent on the global economy and commodity markets (principally iron ore and liquefied natural gas). No forecasts of growth, employment, population, the demand for services and likely future costs are plausible without analysis of the global economy including the major economies of the United States (USA), the European Union (EU), China, Japan and other countries in Asia and the impact of changes to growth on commodity markets. 1. Global Economy 31 Global Gross Domestic Product (GDP) 2014 to 2017 will be 3-4% per annum in line with recent International Monetary Fund (IMF) and World Bank (IBRD) forecasts. After 2017 the normal business cycle will resume, with a likely decrease in growth due to higher interest rates as inflation rises and fiscal and monetary policies are adjusted. Growth in GDP of the USA is expected to fluctuate between 2.5% and 3.0% per annum. Although it is not widely recognised, growth in almost all of the 27 EU Member States is now positive and growth rates of 1% to 1.5% are anticipated in the medium term although there are still considerable headwinds in Europe (such as potential deflation) the situation has improved significantly 32. The implication of higher rates of growth in these two major economies is significant. They are the source of major imports from China and elsewhere, including goods that depend on iron ore and energy as part of the production supply chain. Imports of goods and services by the developed world from China and other Asian countries will remain fairly high in the medium term and this will support commodity prices to an extent, as will inter Asian trade 33. In the medium term GDP growth in China will slow to between 6.5% and 7.5% (double digit gains prevailed after the $800 billion stimulus in 2009). GDP growth rates will be about 5% for most other countries in Asia. Longer term it is likely that growth in China will fall to somewhere between 4-6% as the economy matures. This is very important to the Australian economy. There has been a degree of improvement in the economy of Japan over the last year after two decades of stagnation (by far the largest market for LNG for Australian producers). The rate of growth in India has declined over the last 18 months to between 4% and 5%. It is possible that this trend may reverse and one consequence (amongst others) is that India may become a larger buyer of iron ore and LNG in the future. 2. Overview Investment and Production Estimates of future employment and population, and therefore the demand for services and the impact on the cost structure of the Pilbara, have been based on the past history of employment and likely developments in the economy. Investment in the resources sector depends on commodity prices and costs. A sharp slowdown in mining and LNG investment has been underway since mid 2012, most of the Royalties for Regions expenditure for community facilities will be completed by 2013, the road developments and other public infrastructure investments will mainly be completed by 2014 and most of the construction of new ongoing or approved residential/ retail and commercial precincts by MIRVAC, FINBAR and other commercial investors will also be completed by 2014. It is unlikely that there will be any major investments in iron ore or LNG in the Pilbara over the period 2014 to 2017 other than those already announced. This means far fewer FIFO workers and a substantial decrease in the rate of employment and population growth. On the other hand production volumes are astronomic and still growing. As a result, a steady to slowly growing resident work force will be required. The cost structure of the Pilbara will not rise further under this scenario. 32 THE COST OF DOING BUSINESS IN THE PILBARA

IT IS UNLIKELY THAT THERE WILL BE ANY MAJOR INVESTMENTS IN IRON ORE OR LNG IN THE PILBARA OVER THE PERIOD 2014 TO 2017 OTHER THAN THOSE ALREADY ANNOUNCED. THE COST OF DOING BUSINESS IN THE PILBARA 33

Average Iron Ore Prices 2011 to February 2014 (at nominal US$ / dmt) 2011 2012 2013 3. Iron Ore Markets and Investments Historic prices are shown above to place current price levels and movements in perspective. January 2014 February 2014 March to May 2014 * 168 128 135 128 121 92-120 Perth 19.2 22.7 29.4 31.94 Note: * Consultant s estimate Iron Ore $ per Dry Tonne 200 160 120 80 40 0 2010 2011 2012 2013 2014 Source: Bloomberg There are three scenarios for iron ore prices, which will impact on production and investment decisions. Scenario One: The price of iron ore falls below US$90 per tonne 34 over the medium term 35. This is less likely, but certainly not impossible. Under this scenario iron ore producers will continue to reduce costs (following cost reductions of over US$10 billion by Rio Tinto and BHP alone over the last two years) and there could actually be reductions in employment levels as a result. The two larger producers are in a position to continue to make reasonable levels of profit at lower prices (BHP and Rio Tinto are believed to have operating costs of about $45 per tonne); The operating costs of FMG are higher (about $54 per tonne) and they still have large debts (despite having paid off about $4 billion of debt in 2013) and their financial stability is more questionable at these price levels. Medium and smaller miners would not all be able to continue to produce at lower price levels. Allied to cost reduction programmes it is well known that the major miners are on the way to reducing employment levels through technological means. Under this scenario decisions on developing the Port Hedland outer harbour (estimated A$20 billion capital expenditure) facility and construction of Port Anketell will probably be delayed. Scenario Two: Iron ore trades in a range of US$90 to US$130 per tonne. This is the most likely price range. Increased demand from the USA and Europe for imports may cushion a recent downward trend for iron ore prices. In the USA if policy with regard to infrastructure spending (the government is seeking $300 billion for infrastructure) is followed through there will be a direct increase in demand for iron ore from the USA. At this price producers will retain current production levels and in the case of Rio Tinto they will continue with their 3rd phase expansion. Other producers may expand production by modest amounts. The first phase of Port Anketell will be implemented and the outer harbour expansion at Port Hedland will remain on the table. Otherwise there will be no incentive for further major investments and employment levels will remain steady. Scenario Three: The price of iron ore rises to above US$130 per tonne. This scenario is less likely. It may occur if the government in China decided yet again to provide fiscal and monetary stimulus; growth in India strengthens and the USA and Europe consume more iron ore than forecast. Under this scenario production and investment decisions will remain in line with those of scenario two; however the first phase of Anketell Port will probably proceed and the prospects for implementation of the Port Hedland outer harbour development will rise. In the medium term known investments and increases in production and capacity are as follows: Rio Tinto has announced the 3rd phase of its iron ore expansion to 360 million tonnes per annum, with maximum capacity reached in 2017 at a capital cost of A$400 million. Some 500 to 750 persons are currently being settled in Wickham the impact of the expansion on the population of Karratha will be minimal. 34 THE COST OF DOING BUSINESS IN THE PILBARA

CITIC Pacific has announced (March 2014) that it will continue with construction of its Sino Iron magnetite project at Cape Preston with all six lines to be completed by 2016 (some 266,000 tonnes has been produced to date). A few smaller operators will be increasing production in the Pilbara. Increased levels of investment and production thereafter will only occur when increased supplies have been absorbed. The expansion of the port facilities at Cape Lambert to some 355 million tonnes will be completed by 2015 at the latest. Almost all operational staff will be based in Wickham. Smaller port construction such as the Balla Balla magnetite iron ore mine and trans-shipping project in the Pilbara at a cost of A$1.3 billion midway between Port Hedland and Karratha may have a minor impact on the demand for services in Karratha. Baosteel and an Australian partner Aurizon are making a A$1.42 billion bid for Aquila resources reserves are estimated at about 2 billion tonnes and stage one production of the West Pilbara Iron Ore (WPIO) is estimated at some 30 million tonnes per annum adding to capacity in the Shire of Roebourne if successful the construction of Anketell port will receive a boost and so will production of other mines as the rail and port facilities will be open to other producers the capital cost of development is estimated at $10 billion for the full development of the port infrastructure. The Western Australian Government intends to develop a new deepwater port and strategic industrial area at Anketell for increased iron-ore exports and industry in the Pilbara. The location of the proposed port and strategic industrial area is approximately 30km east of Karratha and 10km west from Cape Lambert. Objectives of the development are to: Establish a multi-user, multicommodity deepwater port capable of exporting at least 350mtpa of iron ore, developed on a proponent pay basis. The port development plan includes constructing a 15km shipping channel, jetties and associated shore-based infrastructure including a desalination plant, power plant and road and rail links. Create industrial land of some 840ha, which will be sufficient to cater for industrial use that may arise in the future. A strategic area of about 5000ha (total port area) will be developed to accommodate a range of different users and different commodities and will include an infrastructure corridor to the North West Coastal Highway. Stage 1 of the project will include an initial capacity of some 100 million tonnes per annum. This would result in the employment of some 950 persons in its construction phase for a 6-month period and 150 in the operational phase. During the full construction phase the port project has the capacity to create about 4000 new jobs during construction and an operational workforce of around 900 personnel. The port will be serviced by existing towns, especially nearby Karratha, providing further business and development opportunities. It is understood that construction camp facilities are under discussion to spread the benefits. In Port Hedland and the iron ore service area BHP is increasing capacity and the expansion of iron ore production capacity to 155 million tonnes per annum has been accompanied by supporting infrastructure development. The Roy Hill mine is under construction and again this will be accompanied by infrastructure support with completion scheduled for the end of 2015. The North West Infrastructure group consisting of three iron ore companies (Atlas Iron Limited, Brockman Resources and FerrAus Limited) has supporting infrastructure for some 50 million tonnes per annum. Atlas Iron has increased estimates of its known reserves substantially and believes that these reserves are sufficient for the company to compete with larger operators in the future in terms of scale. In the Shire of Ashburton, the Pilbara West Iron Ore Project is still under development; the FMG Chichester and Solomon Mine (40 million tonnes per annum) project have opened. THE COST OF DOING BUSINESS IN THE PILBARA 35

4. LNG Markets and Investment Historic prices are shown below to place current price levels and trends in perspective: An international gas market is developing under which buyers will gain more than sellers 36. Supplies are increasing. The first LNG was shipped in May from a $19 billion project in Papua New Guinea, the first in a wave of new LNG supplies that are about to come to market. Projects under way mean that by 2018 over a third more LNG capacity will come on-stream the equivalent of China s current consumption of LNG and piped gas combined. By 2025 capacity could double. Australia has seven projects under construction, which will together supply 80 billion cubic metres (bcm) a year, which is more than Germany s entire current consumption of gas. Australia should become the largest LNG exporter after Qatar by 2016. Although piped gas is set to grow too, LNG s share of the world s gas supply is likely to rise from around 15-20% now to as much as 30% if all the projects being planned come to fruition (International Gas Union (IGU)). Some existing exporters are raising production. Russia, which supplies just less than 5% of the world LNG market, aims to have 20% by 2030. As recently as 2008 America was expecting to become a large gas importer. Now, thanks to the shale-gas boom, the LNG infrastructure built for import is being redesigned for export. The first big terminal, at Sabine Pass in Louisiana, will start shipping gas by early 2016. Four more have also been given permission to start shipments. American LNG exports could be as much as 75bcm by 2018. On the other side of the coin there is new demand. The number of countries with LNG import facilities is expected to rise to 50 by 2020 from 29 currently. Israel, Singapore and Malaysia opened new terminals in 2013. Some of the new demand comes in countries, which used to sell gas, not consume it. Egypt has stopped exporting LNG in order to keep domestic supply plentiful and cheap. Gas consumption is rising fast in Indonesia and Algeria, once seen as dependable exporters. Historic LNG Prices USA, Europe, Japan 2011 to March 2014 (US $ per mmbtu) Global LNG demand by 2030 could be almost double that of 2012. The main reason is its growing use for power generation, chiefly in Asia. But new ways of using LNG are multiplying, notably in transport. For shipping, it is cleaner than heavy fuel oil, which is increasingly running into environmental restrictions. Already, 50 Norwegian vessels use LNG with hundreds more being built that use the fuel. Poland expects that 500 or more will be plying the Baltic in the next five years. Though spot trades have more than doubled their share of the LNG market since 2000, to 27% of the market, there is still no single global price: LNG demand could fall if Japan restarts some nuclear plants. And China s new deal to buy 38bcm a year of pipeline gas at a ten year cost of US$400 billion from Russia could blunt its appetite for costly LNG from the Middle East. But Europe may want more LNG if Russian supplies are cut or interrupted due to political considerations. In summary the picture with regard to LNG 2011 2012 2013 January to May 2014 * Europe 10.5 11.5 11.8 12 USA 4.0 2.8 3.7 4.5 Japan 14.7 16.6 15.2 18.5 Note: * Consultant s estimate LNG Historical Prices Europe, USA, Japan 2011 to March 2014 (US $ mmbtu) 18 16 14 12 10 8 6 4 2 0 Europe USA Japan 2011 2012 2013 J-M 2014 prices is different to that of iron ore; it is more positive, although increased supplies remain a threat, but demand is also anticipated to rise strongly: The structure of the global LNG market and possible developments were described in the 2013 study on The Cost of Doing Business in the Pilbara 37. Changes to pricing mechanisms are possible and Australian producers will face increased competition from the USA and other producers. However demand is increasing rapidly in Asia and elsewhere. The LNG price forecast range is between US$14 - $20 per MMbtu and as with iron ore the lower AU$ exchange rate is beneficial on the price side. At any point in the forecast price range current production and employment levels in the LNG sector will remain steady. In the fields offshore of the neighbouring Shire of Ashburton and elsewhere in the 36 THE COST OF DOING BUSINESS IN THE PILBARA

Pilbara LNG prices are likely to support the vast increase in production already achieved or underway/planned and this will have a limited impact on service provision in the Pilbara. The basic scenario for LNG investments indicates that the demand for services from the LNG sector will remain steady and that the level of employment will not increase in the next few years. In the medium term the investment landscape is as follows: Additional investment in the LNG industry in the Shire of Roebourne has not been flagged and will depend on the quantity and quality of exploitable reserves and the cost of doing business, which is still amongst the highest in the world regarding capital costs. As far as is known the Woodside led consortium for the Pluto project is not investing further on construction and processing in the medium term and no other explorers have indicated that they will be exploiting reserves in the immediate future. The Chevron led LNG projects of Gorgon and Wheatstone during the period 2014 to 2017 will have an impact on the level of service provision in Karratha. It is understood that Chevron will not increase its presence in Karratha. The Macedon Gas project (BHP and Apache Energy) was opened in 2013 (capital cost of $1.4 billion). There are a number of LNG developments, which may have a small impact on the level of demand for services in Karratha. These include: The EXXONMOBIL and BHP Billiton plan to produce LNG from either a $10 billion-plus floating LNG platform off Western Australia from their Scarborough gas field starting in 2014-15 or to pipe the gas to the Pluto facility (less likely). If the latter option was pursued this would have a positive impact on the demand for services and property in Karratha 38. The Browse floating platform option for processing is the preferred option of the Woodside led consortium, however any investment is unlikely to have any impact on demand in Karratha as the development is too far away - one of the prior options under consideration which was to pipe the gas down to Karratha for processing is off the table now. The construction of the offshore processing Prelude project (Shell led consortium) in the Browse basin about 450 km NE off Broome will continue in 2013 and reach the final phases of the schedule in 2014/15, however this will have no impact on the demand for services in Karratha. Given high levels of exploration there is a possibility that additional commercially viable LNG reserves may be found offshore off the Pilbara and additional investment would then follow, provided current favourable prices remain in place. 5. Other Investments in the Pilbara Other investments with a small impact on employment and services include the following: In Karratha the development of the Gap Ridge Industrial area will continue over the medium term, although take-up in 2013 and 2014 (March) has been slow. In Karratha the construction of the $775 million Yara Pilbara Nitrates plant is under construction on the Burrup Peninsula with civil works started in 2013 and production to start in July 2015. The possible construction of a new hotel in the Mirvac precinct in the Karratha town centre. The reopening of hospitality services in Whim Creek. Port Hedland Port Authority: there is predicted a substantial increase in activity from 2011/12 to 2016/17 the demand for services will increase as a result: Annual total vessel movements rising from 3,686 to 5,780 Number of rail movements per annum from 13,140 to 27,000 Total export tonnage from 245 MT to 440 MT Total import tonnage from 1.6 MT to 2.2 MT Total staff employed from 120 to 224 Nextgen are to build, own and operate a new undersea cable at a capital cost of about $100 million - running from Darwin to Port Hedland to support the LNG developments in the Browse Basin to enable the INPEX Ichthys and Prelude (Shell) projects to access a full range of communications services the cable will moreover have the potential to service the communications needs of other resource companies and their projects in the Pilbara. The upgrade of the airport in Onslow is near completion, with an increase in the capital cost of some $11 million. The Ashburton North Industrial Area remains under development (8,000ha) the first stage is provided for the Wheatstone and Macedon project operations. THE COST OF DOING BUSINESS IN THE PILBARA 37

4.2 FUTURE PRICE INCREASES Forecast rates of price increases in the Pilbara have been based on standard methodology, incorporating assumptions and also taking into account stakeholder views. Cost pressures in the Pilbara will probably continue to moderate over the next few years. Nonetheless, costs will still remain at elevated levels in comparison to the rest of the world. There are both downside and upside risks to the forecasts. The main downside risks include failure of policy and the USA to further address debt problems and rising rates of inflation in Asia and the rest of the world as a result of the massive stimulus measures taken in the USA, Europe and China. Lower GDP growth rates will occur with reduced demand for commodities. The upside risk is that current signs of global economic recovery accelerate and commodity demand and prices increase. In addition, it is quite possible that further commercially exploitable LNG reserves in particular will be found and more investments in the region will take place. The implication for businesses and NGOs is that although price rises may not be as rapid as in the past, they are likely to remain elevated. Moderation in the rate of inflation is likely to be most pronounced in Karratha. However the cost structure of all centres will remain unacceptably high. Policy makers need to continue to promote an enabling environment, which focuses on reducing business and living costs. Interviews with all stakeholders in Perth, Port Hedland, Karratha and Onslow made the following points regarding the cost structure of the Pilbara: The high cost structure of the Pilbara remains difficult. At one time in the past there was a Zone tax rebate in the Pilbara for individuals, which no longer exists. Sustainable growth needs to be underpinned by investment in infrastructure and the State and Federal Governments need to take more of a lead. All organisations interviewed in the Pilbara show support for the concept of a Special Economic Zone (SEZ) and publicprivate partnerships as ways of driving investment. In all urban centres cost pressures have subsided: Employment costs will continue to moderate and the rapid increases of the past few years are unlikely to be repeated without major new investments. House prices will remain at levels well below the peaks of 2011 due to a slowdown in employment and population growth, and increased delivery of both serviced land and new housing options. The cost of housing rent will continue to fall slightly - increased offerings will help to subdue price pressures. Commercial/retail and industrial rents will not increase as the demand for additional space has moderated, and major new developments in the Karratha city centre and Gap Ridge will provide more offerings and alternatives. Due to less construction activity once current major urban projects are completed, construction costs will continue to fall. Whilst the cost of water may rise only slightly the cost of electricity may well continue to rise quite significantly. In Port Hedland and Onslow (for awhile) the cost structure is likely to be higher than the other centres. 38 THE COST OF DOING BUSINESS IN THE PILBARA

Indicative Business Cost Multipliers Cost Item Median Individual Weekly Income (2014) Karratha Port Hedland Newman Onslow 1.9 1.7 1.9 2.1 Median Family Weekly Income (2014) 1.4 1.3 1.4 1.2 House Prices (2014) 1.30 2.0 1.3 1.7 Rent - Accommodation (2014) 2.3 3.3 3.7 4.0 Rent - Commercial (2014) 1.4 1.1 1.1 1.0 Rent - Retail (2014) 1.5 1.5 1.2 1.2 Rent - Industrial (2014) 2.2 2.2 2.2 1.0 Construction (2014) 1.5 1.5 1.6 1.7 Water (2014) 1.5 1.3 1.0 3.2 Electricity SMEs (2013/14) 2.5 2.5 2.5 2.5 Electricity Large Businesses (2013/14) 2.5 2.5 2.5 2.5 Petrol (2014) 1.2 1.1 1.2 1.1 Diesel (2014) 1.1 1.1 1.1 1.1 Car Hire (2014) 2.3 2.2 2.3 3.0 Truck Hire (2014) 1.4 1.4 1.4 1.9 4.3 INDICATIVE BUSINESS COST MULTIPLIERS PILBARA TOWNS COMPARED TO PERTH The analysis of the major cost items in preceding sections of the report, which compares prices in the Pilbara with prices in Perth, has been used to estimate cost multipliers based on actual prices per unit (for example water, electricity and car rental) or using averages for cost items such as salaries and wages. The indicative multipliers for major cost items show the additional cost of doing business in the Pilbara compared to Perth 39. Whilst multipliers have considerably reduced in 2014 compared to 2013 the data indicates that the cost structure in the Pilbara remains far higher than Perth. 4.4 ILLUSTRATIVE BUSINESS MODEL (COMPARING COST OF DOING BUSINESS IN THE PILBARA WITH PERTH) An illustrative model has been compiled for 2014 based on available cost data and estimated differences in costs between the Pilbara Towns and Perth. Where cost data was not available a best estimate of differences has been made. The analysis has been made as simple as possible as was the case in 2013. A services type business has been modelled to illustrate the high costs of doing business in the Pilbara. Obviously there is a very wide range of business types and sizes, which would require different models. It is assumed that the business is competing for personnel similar to that of the resource industry. It has been assumed that there will be no cost to a business for the purchase of a house in Perth or need for subsidised rent. In the Pilbara towns it has been assumed that one house will be rented in Year One and a 30% rent subsidy is paid for employees, as accommodation often has to be provided or partly provided to attract and retain staff. Only major cost items analysed in this report have been included. THE COST OF DOING BUSINESS IN THE PILBARA 39

Indicative Cost Comparison Model of an SME Service Business in the Pilbara towns compared to Perth in 2014 ($ per annum) Illustrative Business Model Perth Karratha Port Hedland Newman Onslow Salaries and Wages 800,000 1,493,686 1,324,279 1,488,846 1,645,669 Subsidised Rent - Accommodation 0 16,864 23,868 26,832 29,640 Rent - Commercial 120,000 164,360 131,936 134,064 120,000 Water 20,000 29,437 26,148 19,236 93,282 Electricity 100,000 250,000 250,000 250,000 250,000 Business Insurance 10,000 15,000 15,000 15,000 15,000 Petrol 20,000 50,000 50,000 50,000 50,000 Diesel 10,000 25,000 25,000 25,000 25,000 Other Vehicle Costs 5,000 7,500 7,500 7,500 7,500 Car Hire 10,000 23,274 22,478 23,274 30,265 Consumables 10,000 13,000 13,000 13,000 13,000 Services (Accountancy etc) 12,000 15,600 15,600 15,600 15,600 Total 1,117,000 2,103,721 1,904,809 2,068,353 2,294,957 Percentage above Perth Costs - 88 71 85 105 40 THE COST OF DOING BUSINESS IN THE PILBARA

Although the cost of operating a business of this type has declined in the Pilbara towns the percentage above Perth costs is still substantial, with Onslow the most expensive. The comparative data for 2013 is shown besides: Comparison of Percentage Costs of Operating a Business in Pilbara Towns with Perth in 2013 and First Quarter 2014 Town Percentage above Perth 2013 Percentage above Perth 2014 Q1 Karratha 131 88 Port Hedland 94 71 Newman 119 85 Onslow 107 105 Cost Comparison with Perth 2013 and Q1 2014 140% 120% 100% 80% 60% 40% 20% 0 Karratha Port Hedland Newman Onslow THE COST OF DOING BUSINESS IN THE PILBARA 41

References 1 Based on RDL CPI reports for 2011 and 2013. 2 Treasury Department WA. 3 For example if a product cost $1 in Perth and the multiplier is 1.2 then the same product will cost $1.20 in the Pilbara. 4 An SEZ would encourage diversification; promote investment from any source and geographical location (including utilities); reduce the cost of red tape (which is an added cost and time consuming); lower personal tax rates which would encourage residence, increase labour mobility; lower the cost of doing business and give financial incentives to businesses to locate to the Pilbara and assist with viability. Regarding personal tax, options would need to be studied and applied to residents only to mitigate the high cost of living and encourage permanent residence. Options need to be related to the cost of living. For example a simple adjustment to the threshold for paying zero tax is one option. This could, for instance, consist of changing the threshold to $70,000 (the current threshold is $18,200) for persons resident in the Pilbara. The tax reduction to individuals from such a change would be sufficient to make a significant difference to the ability to meet living costs, and encourage more workers to reside in the Pilbara. Similarly company tax options for SMEs need to be studied. For example to encourage inward investment and diversification a corporate tax free period of three years for new small and medium sized entrants to the region could be considered. To improve the viability of all SMEs, a tax rate of 15% per annum instead of the current rate of 30% would assist considerably. This was the basis of the astonishing rise in the economic wealth of Ireland in the 90s and early 2000s period (notwithstanding the ensuing problems caused by the GFC). 5 See Annex 1 for the Brief. 6 The surveys carried out in 2013 have not been repeated as they are resource intensive. 7 Cost of Doing Business for the WA Resource Sector-The Chamber of Minerals and Energy of Western Australia (CME) - December 2012. 8 Pilbara Report 2012 Exploring Opportunities in the Nations Powerhouse Regional Development Australia Pilbara. 9 Commercial and Retail Property Demand Analysis and Strategy Shire of Roebourne Imani Development Austral January 2013. 10 Karratha Revitalisation Plan - Shire of Roebourne - May 2014 Essential Environment and Imani Development Austral. 11 Based on RDL CPI reports for 2007, 2011 and 2013. 12 Treasury Department WA. 13 Data compiled by id.consulting and the National Institute for Economic and Industrial Research (NIEIR). 14 CME Research. 15 CME Research. 16 A working week of 40 hours has been used to convert hourly rates to full time equivalents. 17 Care should be taken in using the survey data which is based on a relatively small sample size but nonetheless is in line with official data. 18 Care should be taken in using the survey data which is based on a relatively small sample size but nonetheless is in line with official data. 19 Data Sources: Pilbara Development Commission, REIWA and ABS. 20 CCS Strategic: Karratha Business Incubator Study February 2014. 21 Consultancy Report for Landcorp Industrial Land Supply Analysis Pilbara Region March 2013. 22 Data sourced from Water Corporation. 23 CME Research. 24 Data sources for fuel: Fuel Watch. The costs for vehicle hire are based on the hire of an intermediate sized car (Hyundai Accent) for a period of 3 days and for a pickup truck for 3 days in each town, and in Perth. 25 Pilbara Hotspots Report; Master Builders WA; Stakeholder interviews; Rawlinson s Cost Guide 2012 and 2013; 19th Annual Demographic International Housing Affordability Survey; RDAP Study on Cost of Doing Business in the Pilbara Imani Development Austral. 26 Mirvac; Landcorp; Estate Agents: Finbar: Karratha Chamber of Commerce and Industry. 27 CME Research. 28 Zone conference: Perth November 2012 Chevron MD. 29 Australian Petroleum Production and Exploration Association Conference Minister Ian Macfarlane. 30 CME Report December 2012 on the Cost of Doing Business in WA. 31 Sources: International Monetary Fund (IMF): World Bank (IBRD) and Organisation for Economic Cooperation and Development (OECD). 32 The most important indicator (amongst many) of healthier economies in The European Union over the last few years is the 10 year yield rate in the peripheral countries most at risk (Italy, Portugal, Greece and Ireland) bond yields have been falling for over two years and currently stand at less than half the crisis rates and in the case of Greece have fallen by over 60%. 33 According to China s Foreign Minister (2013), China s trade with Asian countries is now more than its trade with the US and Europe. Beijing s trade with its neighbours rose to $1.2 trillion ( 800bn) in 2012, about $120m more than its combined trade with the European Union (EU) and the US. China is now the largest trading nation in the world. 34 Benchmark price for 62 % fines delivered Tianjin Port in China. During 2013 the benchmark price of iron ore held up well. It traded around $ 130 per tonne for most of the year (AU$ 143 equivalent due to a lower exchange rate) as a result of a 10 % increase in consumption in China and delays in increased iron ore production by BHP, Rio Tinto and other producers. Firmness in the price led to Rio Tinto deciding to proceed with its 3rd phase of increased investment and output from existing mines by some 70 million tonnes per annum to a total of about 360 million tonnes per annum in total. BHP, FMG (up to 155 million tonnes per annum) and other producers have been increasing output and BHP still has a production target of just less than 300 million tonnes per annum. Roy Hill will produce up to 55 million tonnes per annum. Other producers around the globe are preparing to increase production. 35 Source: World Bank. 36 Economist Intelligence Unit: May 2014. 37 Regional Development Australia Pilbara (RDAP). Imani Development Austral. March 2013. This report is currently being updated. 38 Submission for approval to the Federal Environment Department has revealed the timetable for first exports in 2020. Construction of a 495m long and 75m wide floating vessel that will house five LNG processing trains capable of producing between six and seven million tonnes of the liquefied fuel a year is the basis of the floating processing option. 39 Care should be taken in using these multipliers. They are based on averages or medians and do not necessarily indicate the precise costs for different types of business. 42 THE COST OF DOING BUSINESS IN THE PILBARA

THE COST OF DOING BUSINESS IN THE PILBARA 43