BHP Billiton aims to be world’s lowest-cost iron ore miner
While the iron ore market war talk may still be reasonably muted, there is nothing unclear about the lines that are being drawn in the sand for what was previously alluded to in this Mining section (August 27 2014) as the "new iron age battle of the behemoths" between Brazil's Vale, BHP Billiton and Rio Tinto. The battle field will be delineated by the achievement of highest production at lowest cost per ton. And there will be scant sentiment about the inevitable collateral damage to the world's smaller iron ore producers. BHP makes no bones about that in this report on the issue. To paraphrase the Swahili proverb: "When elephants fight the grass gets trampled." GK
By Silvia Antonioli
"We will continue to squeeze the lemon because at the end of the day it's just so value accretive," Jimmy Wilson, the head of BHP's iron ore division, told journalists in a video conference.
The focus of mining companies has shifted towards cost-cutting as iron ore prices have dropped from about $190 a tonne in 2011 to less than $80 now, falling 40 percent this year alone.
BHP, the world's third-biggest iron ore miner, said it would boost the annual output rate from 225 million tonnes at end-2013 to 290 million in the next few years.
At the same time, it expects to cut the cost of that expansion to about $30 per tonne, or overall capital spending of about $2 billion, which is well below a previous estimate of under $50 a tonne.
BHP is also reducing average unit production costs, excluding freight and royalties, which are now $25 per tonne, down from $27.50 for financial year 2014 and moving lower.
"The name of the game in the past was volume above and before everything else. Now cost is much more important and we are finding a lot more opportunities," Wilson said.
BHP hopes to achieve the lower costs by cutting its spend with contractors, chopping the headcount by a few hundred people and benefiting from economies of scale.
Foot on the accelerator
Wilson said the company would continue to accelerate production even if iron ore prices keep falling, which analysts expect to happen over the next few years.
Falling prices have already hit margins across the industry and made many smaller mining companies unprofitable.
Wilson said 40 million tonnes of Chinese production have already exited the market and that new low-cost supply from Australia will displace output from other regions such as Iran, Mongolia and Kazakhstan.
By 2015, major producers in Brazil and Australia will account for 1.15 billion tonnes or 83 percent of world seaborne ore trade, according to Australian government data, up from 71 percent just three years before.
Wilson said the closure of smaller producers was an unfortunate side-effect of market conditions.
"We don't take any joy from people losing their jobs because a company closes, but at the end of the day charity starts at home," he said. "We have to run our business as hard and as well as we physically can. We have a responsibility to our shareholders."