Analysts are split on whether BHP Billiton can achieve its ambitious drive to claim Rio Tinto's mantle as the cheapest exporter of iron ore to China.
The miner said on Monday it would slash its costs by 25 per cent to below $US20 a tonne and grow its exports by 65 million tonnes by 2017.
Deutsche Bank analyst Paul Young said the ramp-up was faster and cheaper than expected, at a cost of $US30 a tonne for a total of about $US2 billion. But he questioned whether the miner's determination to reduce its costs by 25 per cent was achievable.
"Whilst targeting to be cheaper than Rio Tinto in China on a landed basis, we still think the gap can't be entirely closed," he said.
"Closing the all-in cost gap to Rio will be an effort as Rio has shorter haul distances, greater economies of scale and more automation, but the cost-out drive is a good news story for both."
BHP Billiton iron ore president Jimmy Wilson acknowledged on Monday that Rio Tinto would "not stand still" in its own drive to cut costs.
"We are acutely aware that Rio is not going to stand still either, they are a great organisation and they have great opportunities," he said.
But Citi analysts believe BHP's drive to surpass Rio Tinto is a possibility with a falling Australian dollar.
Citi noted that BHP's analysis is based on a constant Australian dollar of US91¢ and said with its expectation that the Australian dollar would fall to US80¢ by the end of 2015, BHP could easily push its costs below $US20 a tonne by 2017.
"[With a] low strip ratio for the next five years with four long life hubs, there is no reason why BHP can't be the lowest cost iron ore producer ... despite some challenges logistically at the port," Citi said in a note on Monday.
BHP will undertake "discreet debottlenecking" projects at its port at Port Hedland, including upgrades of inflow and outflow routes and upgrading equipment.
UBS analyst Glyn Lawcock said BHP's "impressive" announcement would increase its net present value by about $US7 billion, due predominantly to the reduced capital expenditure required for the expansion and the expected lower operating expense.
But he noted the news "may see the market focus on long-run iron ore price downside risks given falling capex and costs".
Mr Wilson would not be drawn on the company's outlook for the iron ore price but said it remained confident on the medium-term outlook for China's steel demand.
While, as Mr Young noted, the cost drive under way by the Pilbara's majors was good news for their shareholders, it was not a good news story for the sector's mid-cap producers, who were fighting for survival amid market oversupply and a crashing iron ore price.
The iron ore price has dived more than 40 per cent since the start of the year to around $US80.
Mr Wilson touched on claims on Monday that the majors were working to flood the market with supply in order to push out higher-cost producers, stating that "high prices over the last decade created the incentives for new entrants to join the market", and he took no joy in the "uncomfortable position" that some producers find themselves in.
Source: The Sydeny Morning Herald
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