Global firms take diversified path to boost demand

Multi-pronged approach, lower costs among strategies adopted by mining giants to offset flat demand in a sluggish market

A growing number of international mining giants are relying on diversified businesses to deal with flat demand for iron ore stemming from China's economic slowdown.

China's fast growth over the past years created huge demand for raw materials such as steel and iron ore, said Andrew Mackenzie, chief executive officer of BHP Billiton Ltd, the world's biggest diversified mining company, headquartered in Melbourne, Australia. But such demand will be hard to sustain, he said.

"We will see growth coming from energy sectors, including oil, natural gas and coking coal, instead of iron ore and steel, in China," Mackenzie said.

"It is hard to predict how fast the growth will be in those sectors, but we are happy with our diversification, which is our core competitiveness," he said.

BHP has invested in two major non-ore sectors: energy and agriculture-related businesses, which have helped prepare the company for the next round of growth.

"We have acquired good assets in energy and fertilizer-related units," Mackenzie said.

Li Xinchuang, head of the China Metallurgical Industry Planning and Research Institute, said China's iron ore imports have slowed since 2011 and that demand will continue to slow, forcing international mining giants to seek novel ways for survival.

BHP has been a strong player in oil and gas exploration, development, production and marketing. It commands a significant position in the Gulf of Mexico, the United States and Australia markets.

In 2013, the company produced a record 236 million barrels of oil equivalent, a year-on-year growth of 6 percent, according to its financial report.

The oil output was a little more than half that of China's third-largest oil and gas producer, CNOOC Ltd.

Though known as a mining company, BHP's petroleum business contributed to 28 percent of the company's total profit last year, according to its report.

In addition to oil and gas, the company has invested in aluminum, copper, nickel and manganese assets to meet increasing demand from these sectors.

Wei Zengmin, an industrial analyst at Mysteel, a Shanghai-based commodities consultancy, said BHP has a better portfolio than many other mining companies in terms of diversification.

"Some mining companies have various assets but all in the commodities category. As commodities prices are related to each other, it means such companies face large risks when the international commodities market becomes weak," Wei said.

Rio Tinto Plc, another Australian mining giant, also owns a diversified portfolio, including aluminum, copper, diamonds, thermal and metallurgical coal, uranium, gold and industrial minerals, in addition to iron ore.

In 2013, the company achieved a gross revenue of $54.6 billion, with iron ore accounting for 48 percent of the total. Aluminum took up 22 percent and copper, 9 percent, of the revenue.

China, the world's biggest steelmaker, contributed to 35 percent of Rio Tinto's revenue in 2013.

Sam Walsh, CEO of Rio Tinto, said he is confident on prospects for China's economic growth and iron ore demand.

Over the past four years, Rio Tinto has spent $5 billion on Chinese equipment and services, which helped the company maintain good trading relations with China.

Walsh said the company will continue to buy equipment and services in China, which is taken as a goodwill gesture by industrial observers.

Wei, the analyst at Mysteel, said the iron ore market is highly competitive as China's demand has flattened.

In fact, he said, it is risky for some mining companies that are not in good shape in terms of resources, costs and capacity to diversify. Some Chinese mining companies, he said, were forced to declare bankruptcy after trying to diversify into other industries.

Thus, international players still dominate the market due to their advantages in cost and capacity.

BHP said it has no plans to cut iron ore production since it can still make good profits in an oversupplied market thanks to its low-costs.

BHP reported an output of 49.57 million tons of iron ore for the first quarter of this year, an annual growth of 23 percent. The company has set its yearly output target at 217 million tons for 2014.

Rio Tinto achieved an iron ore output of 66.4 million tons for the first quarter, reflecting growth of 8 percent year-on-year.

It expects to produce 295 million tons this year, and to expand the annual capacity for its port, railway and power infrastructure to 360 million tons by the first half of 2015.

The third-largest miner in Australia, Fortescue Metals Group Ltd, increased output by 56 percent to 31.5 million tons for the first quarter.

The increased supplies by the iron ore giants have led to falling prices in the market.

The average price of imported iron ore fell to $87.6 a metric ton on June 30, down 24.55 percent from the same period last year, according to Mysteel.

Wei had predicted that imported iron ore prices would stay at between $80 and $110 a ton.

The increasing supply in the market was partly caused by investment in capacity-building by international mining companies over the past years to meet growing need in China.

The Chinese government also has encouraged domestic mining companies and steel mills to expand business overseas through acquisitions in order to break the iron ore price monopoly held by mining giants in the global market.