CEO ConferenceCEO ConferenceCEO ConferenceCEO Conference

A Macro Look at Resources Resources & Energy Symposium

Michael BlytheMichael Blythe Chief Economist(612) 9118 1101michael.blythe@cba.com.au

May 2012

Important Information

This advice has been prepared without considering your objectives, financial situation or needs, and before acting on the advice, you should consider its appropriateness to your circumstances.

Commonwealth Bank of Australia (“CBA”) as a provider of investment, borrowing and other financial services undertakes financial transactions with many corporate entities in Australia. This may include any corporate issuer referred to in this report.p p

For US and US investors: If you would like to speak to someone regarding the subject securities described in this report, please contact Commonwealth Australia Securities LLC (the “US Broker-Dealer”),

b k d l i t d d th U S S iti E h A t f 1934 (th “E h A t”) da broker-dealer registered under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and a member of the Financial Industry Regulatory Authority (“FINRA”) at 1 (212) 336-7737. This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945("the Bank") and distributed in the U.S. by the US Broker-Dealer. The Bank is not registered as a broker-dealer under the Exchange Act and is not a member of FINRA or any U.S. self-regulatory organization. Commonwealth Australia Securities LLC (“US Broker-Dealer”) is a wholly owned, but non-guaranteed, subsidiary of the Bank, organized under the laws of the State of Delaware, USA, with limited liability. S , US , y

Please see further disclaimers at the back of this document. Please also view our website at www.research.commbank.com.au for a more detailed disclaimer.

2

The Big Picture

REAL GDP(annual % change)% %

Outperforming & underachieving!

REAL GDP(Sep'08= 100)Index Index

66(annual % change)

105

110

105

110( p )

AustraliaLehman collapse

44Trend

100

105

100

105

US

22

95

100

95

100

UKNZ

0090

95

90

95

JapanEurope

The Australian economy continues to outperform other advanced economies.

But domestic growth is running below trend (3¼% per annum)

Sep-98 Sep-01 Sep-04 Sep-07 Sep-10Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

3

But domestic growth is running below trend (3¼% per annum).

Resources & The Big Picture

Bigger than Ben Hur

%MINING INVESTMENT

(% of GDP) %COMMODITY PRICES(log scale 1860=100)

USDindex

USDindex

8

10

8

10

CBA(f)

Source: RBA/CBA

(% of GDP)50005000

(log scale, 1860=100)Source: The Economist

index index

"China"

66

(f)

500500 A i

OPECII

44Previousbooms

500500 AmericanCivil War

WWI

KoreanWar

OPEC I

0

2

0

2

5050

WWII

The emergence of China and the commodity boom is the key defining feature of the economic landscape.

1861 1881 1901 1921 1941 1961 1981 20011860 1880 1900 1920 1940 1960 1980 2000

4

p

Resources & The Economy

The commodity story is an income story.

The good – income

COMMODITY INCOME BOOST* story.

The numbers:44

COMMODITY INCOME BOOST*(% of GDP) %%

– the income injection fro higher commodity prices has been worth 1 2% of GDP pa over the past

44

1-2% of GDP pa over the past eight years;

– incomes are $7,100 per person

22

per annum higher than otherwise;

– a ship load of iron ore “bought” 2 200 flat screen TV’s in 2005 –

00

2011/12to

2012/13*Source: CBA calculations2,200 flat screen TV s in 2005 now buys 22,000!.

Source: RBA Governor Glenn Stevens Nov’10

-2-21994/95 1998/99 2002/03 2006/07 2010/11

5

Resources & The Economy

Consensus has trend GDP growth ECONOMIC ACTIVITY

The bad – a “patchwork” economy

over next few years and resources accounting for ½-⅔ of that growth.

Implications:

145145

ECONOMIC ACTIVITY(2010/11 = 100) Index

Source: RBA , CBA

Index

Implications:

– mining-related economy to expand at ≈9-16%pa over next two years;130130

MiningGDP

– non-mining economy to grow at just 1½-2%pa if overall economy to be kept within the “speed limits”.115115 Non-mining p p

GDP

GDP

1001002010/11 2011/12 2012/13

6

Resources & The Economy

95

AUD EXPECTATIONS(average for the next 10 years)

ESTABLISH FOREIGN OPERATIONS?(% of respondents)

The ugly – a high AUD

90

95

Average of

UScents Source: CBA AUD Barometer

Financials

Total

85

Average of past ten years

Consumer

Other

75

80

M t i l

Industrials

70

75

Importer Exporter Both imp. &

Resources

Materials

*Source: CBA AUD Barometer

Most businesses now believe the Aussie will be permanently higher

Hi h AUD i h i i t d l b hi i l

Importer Exporter Both imp. & export 0 15 30 45%

7

High AUD is having an impact on capex and labour hiring plans.

Maximise The Benefits

Minimising domestic constraints - exports

COAL EXPORT CAPACITYCAPEX & PROJECT STATUS% of

450450

MtpaMtpa

Committedcapacity

40024% ofGDP

Index

Underconsideration*

(adv 2-years, rhs)

350350200

300

16

20

Businesscapex

250250

Exports

Capacity

100

200

12

16 capex(lhs)

150150Source: RBA/BREE

0

100

8

12

*Source: ACCESS Economics

The peak impact of the mining construction boom is still some way off.

A th d i ill b d d t ll t d t i

1501502005 2007 2009 2011 2013 2015Mar-02 Mar-05 Mar-08 Mar-11

8

A new growth driver will be needed eventually – resource exports need to rise.

Maximise The Benefits

Heavy construction focus raises cost

Minimising domestic constraints - costs

CONSTRUCTION WAGESy

risks in an environment of skill shortages and pressures on materials.

13001300

CONSTRUCTION WAGES$/wk $/wk

QIV - 2011

A theme in recent RBA commentary 1100

1200

1100

1200

is the need to contain nominal labour cost growth and boost productivity growth.

10001000

800

900

800

900Real wages

8008006 7 8 9 10

Share of labour market

9

Maximise The Benefits

The non-mining economy and the

Getting policy right – Pt I

HOUSEHOLD SPENDING household component of it are bearing the brunt of structural adjustment.

P li k h l t l

6666

HOUSEHOLD SPENDING (% of GDP) %%

Policy makers have a role to play:

– lower interest rates will help;

t ti l iddl i d ll6363

– targeting low-middle incomes and small business for support will help;

– need to get tax policy right – scrapping 6060

6%of GDP

g p y g pp gcompany tax cut and 50% discount on interest earnings is disappointing;

changing superannuation rules (again)– changing superannuation rules (again) is disappointing;

5757Sep-59 Sep-68 Sep-77 Sep-86 Sep-95 Sep-04

10

Maximise The Benefits

Getting policy right – Pt II

RANKING OF COUNTRIES FOR MINING INVESTMENT BY KEY DECISION CRITERIA: 2011(highest ranking for each category is 10 so maximum score is 70) Source: Behre Dolbear Mining Survey

Table on

(highest ranking for each category is 10 so maximum score is 70) Source: Behre Dolbear Mining Survey

RANK COUNTRY ECONOMICSYSTEM

POLITICALSYSTEM

SOCIALISSUES

PERMITTINGDELAYS

CORRUPTION CURRENCYSTABILITY

TAXREGIME

TOTALPOINTS

1 A t li 9 8 8 8 10 9 5 57location drivers

1 Australia 9 8 8 8 10 9 5 57

2 Canada 9 9 4 4 10 9 7 52

3 Chile 9 9 7 6 8 8 4 51

4 Brazil 7 8 5 5 5 9 6 454 Brazil 7 8 5 5 5 9 6 45

5 Mexico 8 8 2 7 6 6 7 44

6 USA 8 9 3 1 10 7 3 41

7 Colombia 6 7 6 6 5 5 4 39

8 Tie Botswana 6 5 5 5 5 5 6 37

8 Tie Peru 6 6 4 4 5 7 5 37

↕

Global investment decisions depend on more than tax regimes.

Even if Australia dropped to “1” for tax regime would still rank No 2 globally

25 Russia 1 1 3 3 1 2 5 16

11

Even if Australia dropped to 1 for tax regime, would still rank No. 2 globally.

Maximise The Benefits

Households are unhappy.

Selling the story – the unhappy consumer

PERSONAL CIRCUMSTANCESGeneral feeling that the “benefits” of the resources boom are not being

h d d hil th “ t ”

4040%%

PERSONAL CIRCUMSTANCES(net % of respondents)

shared around while the “costs” are:

– no tax cuts - carbon tax and flood levy instead;

2020Better in six months time y ;

– high Aussie dollar hurting some key sectors;

00 Better than six months

ago

– household budgets under pressure (utilities, health etc);

retirement savings struggling;

-20-20

Source: CBA Viewpoint – retirement savings struggling;

– job security fears.-40-40

Apr 09 Jan 10 Oct 10 Jul 11 Apr 12

Source: CBA Viewpoint

12

Maximise The Benefits

Selling the story – sharing the spoils

SHARING THE COMMODITY BOOM(cents per $ of revenue)

SALARIES: WHERE SPENT(% of total earned in region)

Payment to

Leakage offshore

( p $ )

100

%(% of total earned in region)

Payment of royalties & taxes

Payment to domestic

shareholders 75

Stays in

Buying domestic services & imports

into resources sector

& taxes 50-60c of every $ of income

remains inAustralia 25

50y

regionLeaves region

0 15 30 45

Paying domestic labour

0

Northern WA Central Qld

RBA calculations are that 50-60¢ of each $ of resources revenue remains in Aust.

The benefits of the boom do spread through the broader economy

0 15 30 45Source: RBA

Northern WA Central QldSource: CBA Viewpoint

13

The benefits of the boom do spread through the broader economy.

Global Issues

Demand matters

CHINA: STEEL & POLICYCHINA: CONSTRUCTION & POLICYCHINA: GDP & POLICY

-3.560

CHINA: STEEL & POLICY (change)%pa %pts

Crude steelproduction

(ann ch in growth, lhs)

-3.540

CHINA: CONSTRUCTION & POLICY (change)%pa %pts

Ch in reservesrequirement ratio(6 mnth change

-3.56.0(annual % change)%pa %pts

GDP(ch in annual

-1.4

0 80

30

( g , )

-1.4

0 80

20(6 mnth change,

adv 12 months, rhs)-1.4

0 80 0

3.0 growth rate, lhs)

0.8

2.9-30

0

Ch i

0.8

2.9-20

00.8

2.9-3.0

0.0

Ch in reservesrequirement ratio(6 mnth change,d 14 th h )

5.0-60Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Ch in reservesrequirement ratio(6 mnth change,

adv 8 months, rhs)5.0-40

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Floor spaceunder construction

(ann ch in growth, lhs)5.0-6.0

Jan-02 Jan-05 Jan-08 Jan-11

adv 14 months, rhs) QI

Even if domestic settings are right, our ability to maximise the benefits will depend on offshore events beyond our control.

14

Global Issues

So does the composition of growth

TRADE & PRODUCTION(Jan'08=100)

I d IndexCHINA & EXPORTS

(% of a country's exports that remain in China)

130

150

130

150( )

Index Index

Emerging Asiaindustrial

production

90(% of a country s exports that remain in China)%

Source: HKMA

110

130

110

130

Advanced

60

90

110

90

110 Advanced economyimports

30

70

90

70

90

Source: BEPA 0

Asian growth is increasingly domestically driven.

Australia is more exposed to the Asian domestic story

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Phil. Thai. Mal. Sing. Kor. Jap. NZ Indo. Aus.

15

Australia is more exposed to the Asian domestic story.

The Long Run

Middle income consumers

CONSUMPTION SHARE & INCOME The Chinese consumer is set to become an important economic driver.

100

CONSUMPTION SHARE & INCOMEConsumption(% of GDP)

Incomes at the point where the consumption share typically lifts.75

Expanding global middle class to underwrite consumer demand for:

larger and better quality housing;50

USA

Japan

– larger and better quality housing;– more and better quality food;– more consumer durables;China Source: IMF

SouthKorea

– more education services;– more holidays.

250 20 40 60

GDP/capita (PPP)

16

A Look into the Abyss

IMF defines stabilisation as achieved

More volatility?

GENERAL GOVERNMENT DEBT IMF defines stabilisation as achieved when advanced economy gross debt at 60% of GDP (pre-crisis median). 120120

Title% ofGDP

GENERAL GOVERNMENT DEBT(advanced economies)

% ofGDP

Adjustment is a lengthy process – IMF scenarios stretch out to 2030

Extended timeframe indicates financial8080

Extended timeframe indicates financial market volatility will be an enduring feature.

4040

You are

here

“Asia” determines Australian growth and incomes. “North Atlantic” economies drive sentiment and

4040

Source: IMFfinancial markets.00

2007 2012 2017 2022 2027

Source: IMF

17

CBA Economic Forecasts

Economy 2009/10(a)

2010/11(a)

2011/12(f)

2012/13(f)

GDP (% ch) 2.3 2.0 2.8 3.3

Of which: Consumer spending (% ch) 2.5 3.1 3.3 2.9

Business Investment (% ch) -5.2 6.4 20.1 12.3

Unemployment (%) 5.5 5.1 5.3 5.5

CPI (% ch) 2.3 3.1 2.3 2.6

Wage Price Index (% ch) 3.1 3.8 3.7 3.9

T f T d 4 1 20 8 4 1Terms-of-Trade -4.1 20.8 4.5 1.5

Current account balance (% of GDP) -4.3 -2.4 -2.4 -2.8

Underlying Budget balance (% of GDP) 4 2 3 7 2 8 0 2Underlying Budget balance (% of GDP) -4.2 -3.7 -2.8 0.2

18

CBA Market Forecasts

Markets Jun’12 Sep’12 Dec’12 Mar’13

Australia Official cash 3¾ 3½ 3½ 3½

90-day bills 3.8 3.6 3.6 3.6

3-year bonds 2.7 2.7 2.8 2.9

10-year bonds 3.5 3.6 3.8 3.9

3-year swap 3.4 3.4 3.4 3.5

10-year swap 4.3 4.4 4.6 4.6

USA Fed funds 0-¼ 0-¼ 0-¼ 0-¼

2-year bonds 0.2 0.3 0.4 0.4

10 b d 2 0 2 2 2 210-year bonds 2.0 2.2 2.5 2.7

Spreads AUS-US 10 yr 150 140 130 120

AUS 3-10 yr 80 90 100 100

FX AUD 0.98 1.01 1.03 1.04

TWI 73 9 75 8 76 8 77 1

19

TWI 73.9 75.8 76.8 77.1

Important Disclosures & Disclaimer

Please view our website at www.research.commbank.com.au. The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank") and its subsidiaries,including Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec"), Commonwealth Australia Securities LLC, CBA Europe Ltd and Global MarketsResearch, are domestic or foreign entities or business areas of the Commonwealth Bank Group of Companies (CBGOC). CBGOC and their directors, employees andrepresentatives are referred to in this Appendix as “the Group”. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer tobuy any securities or financial instruments. This report has been prepared without taking account of the objectives, financial situation and capacity to bear loss, knowledge,experience or needs of any specific person who may receive this report No member of the Group does or is required to assess the appropriateness or suitability of the report forexperience or needs of any specific person who may receive this report. No member of the Group does, or is required to, assess the appropriateness or suitability of the report forrecipients who therefore do not benefit from any regulatory protections in this regard. All recipients should, before acting on the information in this report, consider theappropriateness and suitability of the information, having regard to their own objectives, financial situation and needs, and, if necessary seek the appropriate professional, foreignexchange or financial advice regarding the content of this report. We believe that the information in this report is correct and any opinions, conclusions or recommendations arereasonably held or made, based on the information available at the time of its compilation, but no representation or warranty, either expressed or implied, is made or provided asto accuracy, reliability or completeness of any statement made in this report. Any opinions, conclusions or recommendations set forth in this report are subject to change withoutnotice and may differ or be contrary to the opinions conclusions or recommendations expressed elsewhere by the Group We are under no obligation to and do not update ornotice and may differ or be contrary to the opinions, conclusions or recommendations expressed elsewhere by the Group. We are under no obligation to, and do not, update orkeep current the information contained in this report. The Group does not accept any liability for any loss or damage arising out of the use of all or any part of this report. Anyvaluations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. Differentassumptions and estimates could result in materially different results. The Group does not represent or warrant that any of these valuations, projections or forecasts, or any of theunderlying assumptions or estimates, will be met. Past performance is not a reliable indicator of future performance. The Group has provided, provides, or seeks to provide,investment banking, capital markets and/or other services, including financial services, to the companies described in the report and their associates. This report is not directed to,or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution,y, y p y y y, , y j ,publication, availability or use would be contrary to law or regulation or which would subject any entity within the Group to any registration or licensing requirement within suchjurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to the Group. None of the material, nor its content, nor any copy of it,may be altered in any way, transmitted to, copied or distributed to any other party, without the prior written permission of the appropriate entity within the Group. In the case ofcertain products, the Bank or one of its related bodies corporate is or may be the only market maker. The Group, its agents, associates and clients have or have had long or shortpositions in the securities or other financial instruments referred to herein, and may at any time make purchases and/or sales in such interests or securities as principal or agent,including selling to or buying from clients on a principal basis and may engage in transactions in a manner inconsistent with this report.US Investors:If you would like to speak to someone regarding the subject securities described in this report, please contact Commonwealth Australia Securities LLC (the “US Broker-Dealer”), abroker-dealer registered under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and a member of the Financial Industry Regulatory Authority (“FINRA”) at 1 (212)336-7737. This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945("the Bank") and distributed in the U.S. by the US Broker-Dealer. The Bank is not registered as a broker-dealer under the Exchange Act and is not a member of FINRA or any U.S.self-regulatory organization Commonwealth Australia Securities LLC (“US Broker-Dealer”) is a wholly owned but non-guaranteed subsidiary of the Bank organized under theself regulatory organization. Commonwealth Australia Securities LLC ( US Broker Dealer ) is a wholly owned, but non guaranteed, subsidiary of the Bank, organized under thelaws of the State of Delaware, USA, with limited liability. The US Broker-Dealer is not authorized to engage in the underwriting of securities and does not make markets orotherwise engage in any trading in the securities of the subject companies described in our research reports. The US Broker-Dealer is the distributor of this research report in theUnited States under Rule 15a-6 of the Exchange Act and accepts responsibility for its content. Global Markets Research and the US Broker-Dealer are affiliates under commoncontrol. Computation of 1% beneficial ownership is based upon the methodology used to compute ownership under Section 13(d) of the Exchange Act. The securities discussed inthis research report may not be eligible for sale in all States or countries, and such securities may not be suitable for all types of investors. Offers and sales of securities discussedin this research report, and the distribution of this report, may be made only in States and countries where such securities are exempt from registration or qualification or have

20

p , p , y y p g qbeen so registered or qualified for offer and sale, and in accordance with applicable broker-dealer and agent/salesman registration or licensing requirements. The preparer of thisresearch report is employed by Global Markets Research and is not registered or qualified as a research analyst, representative, or associated person under the rules of FINRA,the New York Stock Exchange, Inc., any other U.S. self-regulatory organization, or the laws, rules or regulations of any State.

European Investors:This report is published, approved and distributed in the UK by the Bank and by CBA Europe Ltd (“CBAE”). The Bank and CBAE are both registered in England (No. BR250 and05687023 respectively) and authorised and regulated in the UK by the Financial Services Authority (“FSA”). This report does not purport to be a complete statement or summary.For the purpose of the FSA rules, this report and related services are not intended for retail customers and are not available to them. The products and services referred to in thisFor the purpose of the FSA rules, this report and related services are not intended for retail customers and are not available to them. The products and services referred to in thisreport may put your capital at risk. Investments, persons, matters and services referred to in this report may not be regulated by the FSA. CBAE can clarify where FSAregulations apply.Singapore Investors:This report is distributed in Singapore by Commonwealth Bank of Australia, Singapore Branch (company number F03137W) and is made available only for persons who areAccredited Investors as defined in the Singapore Securities and Futures Act and the Financial Advisers Act. It has not been prepared for, and must not be distributed to or

li t d i f t h i t A dit d I treplicated in any form, to anyone who is not an Accredited Investor.Hong Kong Investors:This report was prepared, approved and published by the Bank, and distributed in Hong Kong by the Bank's Hong Kong Branch. The Hong Kong Branch is a registered institutionwith the Hong Kong Monetary Authority to carry out the Type 1 (Dealing in securities) and Type 4 (Advising on securities) regulated activities under the Securities and FuturesOrdinance. Investors should understand the risks in investments and that prices do go up as well as down, and in some cases may even become worthless. Research report oncollective investment schemes which have not been authorized by the Securities and Futures Commission is not directed to, or intended for distribution in Hong Kong.y , g gAll investors:Analyst Certification and Disclaimer: Each research analyst, primarily responsible for the content of this research report, in whole or in part, certifies that with respect to eachsecurity or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) nopart of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the report. Theanalyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering,

th i i d i t ti k t i f ti Di t l f th G h d ffi di t f th bj t f thisynthesizing, and interpreting market information. Directors or employees of the Group may serve or may have served as officers or directors of the subject company of thisreport. The compensation of analysts who prepared this report is determined exclusively by research management and senior management (not including investment banking).No inducement has been or will be received by the Group from the subject of this report or its associates to undertake the research or make the recommendations. The researchstaff responsible for this report receive a salary and a bonus that is dependent on a number of factors including their performance and the overall financial performance of theGroup, including its profits derived from investment banking, sales and trading revenue.Unless agreed separately, we do not charge any fees for any information provided in this presentation. You may be charged fees in relation to the financial products or other

i h B k id h i h l Fi i l S i G id (FSG) d l P d Di l S (PDS) O l i lservices the Bank provides, these are set out in the relevant Financial Services Guide (FSG) and relevant Product Disclosure Statements (PDS). Our employees receive a salaryand do not receive any commissions or fees. However, they may be eligible for a bonus payment from us based on a number of factors relating to their overall performanceduring the year. These factors include the level of revenue they generate, meeting client service standards and reaching individual sales portfolio targets. Our employees mayalso receive benefits such as tickets to sporting and cultural events, corporate promotional merchandise and other similar benefits. If you have a complaint, the Bank’s disputeresolution process can be accessed on 132221.

21