BHP Aims to Reduce Costs and Increase Productivity

Tuesday, October 7th, 2014
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BHP Billiton
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Mining giant BHP Billiton plans to overtake rival Rio Tinto to become Australia’s lowest cost iron ore producer.

The world’s biggest miner says it will not need to build a new iron ore mining hub for at least 30 years as it cuts costs and pursues productivity gains at its four existing Pilbara centres.

President of BHP’s iron ore business, Jimmy Wilson, predicts Rio Tinto will respond with more cost cutting as the supply of iron ore begins to outweigh demand.

“Rio’s going to improve their business, we are going to improve our business,” Mr Wilson told reporters.

“We believe we have some sustainable advantages and our aspiration is to be down the bottom end of that cost curve.”

BHP has cut thousands of jobs in recent years during a major cost cutting drive.

The company says it will now be able to produce iron ore, excluding the cost of shipping and government royalties, for less than $US20 ($A21.64) per tonne in the medium term after spending $25 billion on its supply chain over the past decade.

“Our confidence in this approach will enable us to become the lowest all-in cash cost supplier to China,” Mr Wilson told analysts on Monday.

BHP says the $US20 figure would be a 25 per cent reduction compared with results achieved in 2014, but insists recent price falls do not change its view about healthy long term demand.

The company plans to expand its exports by 65 million tonnes to 290 million tonnes per annum by the end of full year 2017.

Mr Wilson says the company’s current footprint meant that it will not need to build major mining hubs for decades.

“Existing hubs, not new hubs will sustain this business for at least the next 30 years and provide the requisite growth options,” Mr Wilson said.

UBS analysts recently estimated that the company’s break-even all-in costs are about $US50 per tonne compared to Rio Tinto’s $US45 per tonne.

Brazilian iron ore giant Vale recently said it plans to slash cash costs, before shipping, from $US22 a tonne to $US18 within four years.

The iron ore price has plunged 40 per cent this year and was trading at about five-year lows of $US78.90 on Monday.

Mr Wilson also conceded iron ore supply is now set to outpace demand for the first time in a decade following a widespread boost to production in Australia.

He added that higher cost supply was being displaced from the market and prices had weakened.

Chinese steel production was expected to increase by approximately 25 per cent to between 1.0 and 1.1 billion tonnes in the early to mid-2020s.

In light of this, BHP expects to increase production by 20 million tonnes to 245 million tonnes, up from 225 million tonnes.

It then plans to raise the capacity to 275 million tonnes by adding mining fleet at its Jimblebar operations and making productivity equipment improvements at Newman.

BHP’s board will soon consider moves to free port capacity to meet its 290 million tonnes per annum goal.

The company recently announced plans to spin off most of its aluminium, coal, manganese, nickel and silver assets into a NewCo as it focuses on its iron ore, copper, coal, petroleum and potash assets.

By Kim Christian
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