BHP Billiton has invested more than $US25 billion ($28.5bn) in the past 10 years in all the big pieces of kit needed to more than double what might be called its installed iron ore capacity in the Pilbara to the current 225 million tonnes a year.
Now it is sweating on those integrated “supply chain’’ assets to deliver another 65 million annual tonnes for the knockdown price of less than $US2bn.
It is amazing stuff. Here we have its most profitable business being expanded in the “medium’’ term by some 30 per cent at a next-to-nothing cost.
What’s more, the sweating of the installed assets (four mining hubs, rail and port and all of their associated interconnects) is to bring down unit cost of production by 25 per cent to less than $US20 a tonne (before sustaining capital, freight and royalties) across the whole 290 million tonnes, not just the additional 65 million tonnes.
Having said that, it is just as well, and in all honesty just what should have been expected after the $US25bn 10-year spend. It is just as well because iron ore prices have collapsed from last (calendar) year’s average of $US135 a tonne to five-year lows of under $US80 a tonne.
To have any hope of maintaining super-profits from the Pilbara business, BHP has to run hard just to stand still.
That’s the pitch to local and international analysts and investors being shown around BHP’s Pilbara operations this week. The tour breaks the three-year drought for such show and tells, as clear an indicator as there could be that BHP’s iron ore president Jimmy Wilson had good news to tell. Good news for BHP shareholders, Western Australian government royalty collections, and Canberra tax collections at any rate.
But given the iron ore price dump is all about new and low-cost supply now exceeding demand for the first time in a decade, thanks to expansions by low-cost producers like BHP, there was no cheering from our higher-cost iron producers — essentially all of those outside of the big three of the Pilbara: Rio Tinto, BHP and Fortescue.
Wilson is a friendly chap and is no different to his mining industry peers in taking no joy in the pain and suffering being felt by the industry’s higher-cost producers, two of which have already fallen over.
“It is a tough world out there,’’ he said yesterday. The harsh reality was, he said, that if a producer had a cost point above the price point, it was going to hurt. “Such is life,’’ Wilson said.
It is a reflection that can be made when your own unit costs are headed towards less than $US20 a tonne, potentially pipping the lowest-cost Pilbara producer, Rio, in the process.
Cold comfort for the rest of the pack though.
While there was plenty of good news from Wilson and the rest of the BHP iron ore executives yesterday, there was nothing specific on where to now for iron ore prices.
In recent weeks, there has been the comment from former BHP gun Alberto Calderon that we should be thinking about prices in the low $70s a tonne being the norm for several years. And then we had Andrew Mackenzie himself saying it was “quite unlikely’’ prices of more than $US100 a tonne would be seen again.
What Wilson and his team did do was give some broad parameters around why iron ore prices were not about to collapse from current levels. But, Wilson admitted, it was impossible to predict just when and how prices would react to supply exceeding demand. Nervous times all around, which is why BHP shares were hit hard yesterday notwithstanding the good news out of the Pilbara.
Source: The Austraian
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