BHP Billiton (BHP) has made it clear that its iron ore business will withstand the current weakness in global prices.
Speaking at an iron ore and steel forecast conference in Perth yesterday, the company’s head of its iron ore business, Mr Jimmy Wilson, made it clear the company will maintain its competitiveness in the global market and that of its Western Australia iron ore business.
His comments came as the global iron ore price hit an 18 month low of just under $US105 a tonne (around $A114 a tonne), while the company’s shares struggled higher in local trading yesterday after Monday’s big falls here and in offshore markets.
BHP shares ended down 0.6% at $35.93 – after being in positive territory for much of the day. They shares fell more than 4% on Monday.
BHP vs RIO 1Y – BHP says it will ride out the iron ore slide
It is clear from Mr Wilson’s comments yesterday that BHP sees the current fall as temporary, and although future demand for iron ore could be weaker than in recent years, BHP will continue to be a major, efficient operator.
“Our market outlook is for continued strong steel demand growth over the next 10 years," Mr Wilson told the conference.
"Our view that Chinese crude steel production is expected to peak at 1.1 billion tonnes, around 2025, is unchanged.
"We remain confident that global demand for iron ore will continue to grow, though at a more moderate rate, driven by urbanisation and industrialisation.
“BHP Billiton will retain a favourable position on the iron ore cost curve underpinned by the quality of our resource base. These resources further position us to benefit from an increasing market preference for high quality lump and fines iron ore products,” he said.
Mr Wilson also reiterated the company’s productivity agenda in its WA iron ore operations was underway and delivering significant value.
“Our journey to deliver sustainable productivity benefits has encompassed a full review of the supply chain across mines, rail and port. Our initial focus on equipment availability, utilisation and operating rate was followed by low-cost de-bottlenecking initiatives," he said.
"Across our mines we have realised significant productivity improvements that have resulted in increased shovel, truck and ore handling plant availability and utilisation. Where appropriate, we have also installed relocatable crushers to increase high margin volumes.
"Over the longer term, BHP Billiton has a low-cost option to expand Jimblebar production to 55 million tonnes per annum (mtpa), as well as debottlenecking of the supply chain, to deliver capital efficient growth towards 270 mtpa (100 per cent basis).
“Our Iron Ore business is well positioned to deliver high margin volume growth at a lower cost without the need for an additional mining hub or major port and rail infrastructure,” Mr Wilson said.
The profits BHP and Rio Tinto (RIO) make from shipping WA dirt overseas are huge – they are among the most profitable businesses in Australia.
Both groups said last month that a $US1 a tonne change in the iron price changed their profits by $US120 million ($133.1 million).
So the current 15% fall this year could cut close to $2 billion from combined profits if sustained over the next year. But that rarely happens, prices rise and they fall.
BHP earned $US7.8 billion in the December half, and Rio earned $US10.2 billion in the year to December, and much of the profits came from their WA iron ore operations.
Both companies are highly cost-efficient and are on the bottom of the global iron ore mining cost curve.
As they continue to lift production, smaller, higher cost miners that will be squeezed – which seems to be the underlying strategy of both companies, plus their big Brazilian rival, Vale and Fortescue Metals (FMG), which is still seen as the vulnerable one of the quartet.
Fortescue was badly squeezed when the global price dropped to $US86.70 a tonne in September 2012, from more than $US130 a tonne mid year. The company came close to failing and had to sell assets, slash debt and costs and cut staff to remain alive.
Iron ore prices rose and the company used that respite to continue to cut costs (meaning its break even point has fallen sharply). It has repaid billions of dollars in debt (and paid an interim dividend of 10c a share to keep shareholders interested and rewarded.
Fortescue continues to power up output towards the 155 million tonnes a year target and this will help drop the break even price from $US83 a tonne to $US73 a tonne next year.
Fortescue shares dipped 1.9% yesterday to $4.83 – taking its two day fall to more than 10%.
What a lot of investors don’t realise is that even if iron ore prices fall below $US100 a tonne and do not recover as China’s steel mills cut consumption in response to weaker demand, falling prices and government cuts to capacity and especially older, more polluting facilities, the big four global giants won’t feel the pain as unlike smaller, later entrants.
Think BC Iron (BCI), Atlas (AGO), the big project from Gina Rinehart’s company in WA, plus small miners in India, Iran and especially China whose mostly low grade ore will lot be as attractive at low global prices for ore with much higher iron content from Australia and Brazil.
And low global prices will sink every magnetite project, current and planned, because of that ore’s higher processing costs.
Low prices will also mean that the big projects in areas such as Africa and Brazil will be in danger of being postponed for years to come.
Mr Wilson made a big point in his speech yesterday of how the Chinese government’s tougher environmental stance on old facilities were "leading to a preference for quality iron ore”. And ‘quality ore’ comes from Australia and Brazil.
And Mr Wilson fleshed out the company’s forecast of a growing oversupply of ore from new sources.
"Over the next five years supply growth is expected to exceed demand growth.
"The majority of supply growth will be low cost – largely from Australia and Brazil; no major African projects expected to be developed by 2018 and high cost domestic Chinese supply will be displaced as will other opportunistic supply source," Mr Wilson forecast.
And that’s why BHP is looking to sell its iron ore prospects in West Africa – there’s no longer any need for them.
That’s also why BHP, Rio and Fortescue continue to expand their production and sales – it’s a brutal attempt to weaken the competition here and around the world, including China.
