BHP bracing for the journey ahead

BHP Billiton Ltd shareholders wait in a refreshment area ahead of the company's annual general meeting in London, UK, on Oct 23,2014.The world's biggest mining firm told investors that first-quarter iron ore output rose 17 percent as it continues to expand production in the face of tumbling prices. [Photo/China Daily]

BHP has already factored market changes in China, says top executive

December is normally associated with celebrating achievements and chalking out action plans for the year ahead. But for Andrew Mackenzie, the chief executive officer of mining giant BHP Billiton Ltd, December was the culmination of an eventful journey as it shipped its one-billionth metric ton of iron ore to China.

Though the sheer volume of the shipments made over the last four decades would enthrall most chief executives, Mackenzie is more pragmatic when he says that it is also a time of introspection due to the changing market realities in China.

"There is no doubt that China is of utmost importance to BHP Billiton and we are looking to develop closer ties with the Asian nation and to contribute to its development by providing long-term, reliable and high-quality products at a transparent market price," said Mackenzie.

"It took us just 12 years to ship 900 million metric tons of iron ore, but it took us nearly 30 years to do the first 100 million," he said, adding that judging by current levels BHP Billiton is well on track to do the next billion in five or six years.

The Anglo-Australian mining giant shipped nearly 70 percent of the iron ore produced from its mines in Australia to China during the last financial year, according to its annual report.

"Demand for iron ore from China's huge steel industry has been unprecedented and has helped buoy iron ore shipments."

It has also been a pivot in bilateral trade between China and Australia, said Mackenzie.

China accounts for about half of global crude steel output, and its strength in steelmaking and manufacturing ensures that most of the iron ore that Australia exports to China returns in the form of high-quality infrastructure and equipment.

Since 2008, BHP Billiton has spent some $4 billion on purchasing capital goods and consumables from China for its facilities in Australia, including made-in-China equipment and infrastructure such as machines for bulk handling, transportable buildings and rolling stock for rail transposition, said Mackenzie.

"Most of the infrastructure for the new Jimblebar mine was actually fabricated in China. It was shipped to Port Hedland in Western Australia, and then onwards to the final destination by road, for construction and erection," he said.

Steelmakers in China are, however, going through a piquant situation due to oversupply and falling product prices.

According to data provided by the China Iron and Steel Association, at least a quarter of the Chinese steelmakers were operating at a loss during the first nine months of 2014.

BHP Billiton and other big mining companies had also embarked on a rapid production capacity expansion program, banking on sustained demand growth for iron ore from China.

Though China's imports have surged, prices have fallen by nearly half to under $70 a metric ton, with Chinese steel output growth slowing to around 3 percent, according to Reuters data.

Mackenzie, however, said that BHP Billiton has factored in the changing market conditions and is re-balancing its strategies after a period of massive expansion and a time when supply has struggled to keep pace with demand.

Since 2011, BHP Billiton had stopped approving new investment in major iron ore production growth, a strategy that has proved profitable, he said.

BHP Billiton, will, however, look to bolster its copper mining activities, Mackenzie said. "After rationalizing our operations, we realized that we could easily scale up our iron ore output with minimal or in some cases, hardly any investment. The key to that is to avoid major infrastructure investments, like ports, car dumpers or other cargo-handling equipment," he said.

"Copper, on the other hand, represents a totally different challenge. Unlike iron ore, copper output will fall without additional investments. So our focus in this segment is not just to halt the slide, but to scale up China's copper demand to a level that is on par or slightly more than the demand for iron ore."

Currently iron ore accounts for two thirds of BHP Billiton's sales in China, while copper is juts one sixth of the total shipments.

"This is bound to change as demand for copper is steadily growing in China and could possibly overtake iron ore at some point."

Companies like Rio Tinto and BHP Billiton are acquiring vast copper holdings with an eye on the $140 billion world market for copper, especially at a time when the market is in a state of oversupply. The global surplus in copper could reach 300,000 metric tons by this year, according to estimates from Australia's Bureau of Resource and Energy Economics.

In North and South America, Australia and Mongolia, both BHP Billiton and Rio Tinto are digging new mines or expanding old ones.

In Arizona, the proposed jointly owned Resolution project by Rio Tinto (55 percent) and BHP Billiton (45 percent) could alone meet a quarter of overall US copper demand for decades, if the proposal is approved.

BHP Billiton estimates that global demand for copper may increase by 50 percent to 40 million metric tons by 2030. According to a research paper by Bank of America Merrill Lynch, the price of the metal may grow 20 percent to $ 8,245 per metric ton by 2017.

"China can count on BHP Billiton to alter its strategies to account for the changing growth patterns," said Mackenzie. The company, which is also a large coal producer, said it did not expect to be affected too much by China's decision to introduce import tariffs.

New laws to make steel firms more responsible, say experts

The revised Environmental Protection Law, which imposes stiffer penalties for environment-related wrongdoings and invokes eight new standards to combat pollution by steelmakers, which became effective from this year, will have a far-reaching impact on the fortunes of the industry, experts said.

To meet the new standards, steelmakers have to invest heavily to upgrade technologies and facilities, something that is certain to crimp the already wafer-thin profit margins of companies.

The average profit margin of steelmakers in China is just 2 percent, and more than 20 percent of the companies had reported losses for most of 2014, according to data provided by the China Iron and Steel Association.

Under the new standards, the average cost for making 1 metric ton of steel would go up by 20 yuan ($3.21), said Xu Xiangchun, a Beijing-based steelmarket observer.

According to a survey conducted in 2013, about 70 percent of 298 respondents, comprising mostly steelmakers from North China, admitted that they did not meet pollution control demands required by the proposed revised law at the time, said Liu Zhenjiang, deputy head of CISA.

"It is estimated that the combined cost for upgrading technologies and equipment of China's steelmaking sector would be about 110 billion yuan," said a recent report published by the Securities News.

Experts said the revised law could be a precursor for a market reshuffle, and some companies would be forced to exit the business due to mounting costs and continuing losses.

"Private steelmakers are the worst hit, due to tight credit conditions and rocketing costs. Most of them are unable to cope with the revised environment laws. We estimate that the average per ton production costs for these companies would go up by 80 yuan," said a research report from Qilu Securities Co Ltd.

Production costs for some steelmakers had remained low earlier because they had virtually zero investment on pollution control, and hence could price their products much lower than the companies that were responsible for the environment, said Liu Xinwei, an analyst with SCI International, a market information service provider. If the revised law is implemented fairly, then those selling cheap steel at the cost of the environment will not survive, he said.