It’s the basic economics of supply and demand. And with commodity prices at near record lows, heavyweights like Glencore are cutting supply in an attempt to bump up prices. BHP Billiton’s message is that the closure of certain mines won’t have an affect on price as most have been cash negative. The world’s largest miner says it won’t be closing cash ‘rich’ mines but will look at loss-making ones, and makes decisions on that basis, as it has done in the past. And the proof may lie in market reaction, BHP’s stock has fallen 11 percent on the London stock exchange this year, against a 60 percent drop in Glencore, which may also point to the quality of the assets held by each miner. How quickly the super cycle turns, and if you applied Warren Buffett’s philosophy to the situation “when there’s blood on the streets” maybe now’s a good time to look at potential acquisitions in the space. Although Buffett has warned against buying into a space where you have no control of the pricing. And this story highlights that point further. – Stuart Lowman
By Jesse Riseborough
(Bloomberg) — BHP Billiton Ltd., the world’s biggest mining company, shrugged off views from rival producers including Glencore Plc that mines and plants should be closed in a bid to lift sagging prices.
“I’m quite intrigued by all the conversation about cutting down production because I haven’t seen any production being shut-in which is making cash,” Arnoud Balhuizen, BHP’s president of marketing, told reporters in London on Wednesday. “It’s just a normal, rational economic decision if you have a cash-negative operation you shut-in. But it doesn’t do anything for price.”
Glencore, the worst performer this year in the U.K.’s benchmark stock index, has scaled back zinc, copper and coal operations after slowing demand from top user China sent prices to the lowest in at least five years. Its billionaire Chief Executive Officer Ivan Glasenberg last week became the flag-bearer for a commodities revival after his move to cut zinc production by a third sparked one of the biggest metals rallies this year.
Read also: BHP, Glencore share prices test new lows as commodities rout deepens
“The difference between us and some of our competitors again is that we, in the current portfolio, have tier-one, big, high-margin businesses,” Balhuizen said. “Obviously we are not going to shut in very cash rich operations.”
BHP Shares
BHP, based in Melbourne, has dropped 11 percent in London trading this year. That compares with a 60 percent plunge for Glencore and a 4.5 percent retreat for the U.K.’s FTSE 100 Index.
Read also: Iron ore price plunge – Mining CEOs didn’t hear obvious message from China
BHP has closed some unprofitable production of steel-making coal in Australia in recent years, Balhuizen said. Freeport- McMoRan Inc., the largest publicly traded copper supplier, said this week it may look to further reduce production amid falling prices.
“If you are not making money, I believe you should take production out and reduce the supply,” Glencore’s Glasenberg said last week, prior to the company’s announcement that it would cut zinc output. The Swiss miner and trader is restructuring its finances and operations as it seeks to allay investor concern that it carries too much debt.
Codelco’s Stand
Publicly traded companies are under greater pressure than state-owned producers to placate investors by curbing output as prices collapse. Codelco, owned by Chile’s government, said it’s maintaining output targets and warning investors not to expect any dramatic changes to its record investment plans.
Read also: Glencore CEO Glasenberg: Impossible to read China or bottom for commodities
In iron ore, trading more than two-thirds below its 2011 peak, more high-cost production will probably be cut as a glut of new supplies from Australia and Brazil continues to flood the market, Balhuizen said.
“The cost curve will continue to flatten, will continue to come under pressure,” he said. It will “continue to need high-cost iron ore to leave the market as it has been doing in a very rational way in the last 12 to 18 months,” he added.
