BHP Billiton’s iron ore president has launched a robust defence of the strategy to ramp up production at a time of oversupply, saying it will pay off generously in the long run.
Jimmy Wilson also says long-term Asian demand for steel will eventually set off a new round of multi-billion-dollar mining investment projects in Australia.
But the current shake-out still has a way to run, he says.
Major producers BHP and Rio Tinto have come under mounting criticism from investors, politicians and other miners amid claims they are killing the commodities super cycle and hurting government revenue by pushing more products into an oversupplied market.
Fortescue chief Nev Power on Friday lobbed a new grenade into the debate saying the production strategy pursued by the two mining giants was “flawed” and would probably see corporate heads roll at those companies.
Speaking at BHP’s Perth office this week, Mr Wilson said it made sense for the miner to make the most of the $US22 billion ($25 billion) invested in the iron ore division over the past five years by squeezing every last lump from the system.
Extra production coupled with an ongoing cost-cutting drive would offset falling sales revenue, he said, and put BHP in prime position to reap the rewards of its work when the market returned to balance in the longer term.
“All of this, we believe, gives us a sustainable competitive advantage.”
BHP is working to lift production from 225 million to 290 million tonnes a year by June 2017 — a move Mr Wilson said would deliver a “truly outstanding return”.
“We’re going to go as hard as we can on driving as much volume through our installed capacity as we physically can,” he said.
Amid a flood of new ore, the price of the key steelmaking ingredient has plunged about 40 per cent this year, resulting in a list of junior iron ore casualties.
Mr Wilson said although the shake-out would continue in the “medium term”, the long-term growth of Asia would “definitely” prompt a new round of project spending in Western Australia’s Pilbara within 30 years.
“Demand side in this business still remains good but what we’re doing is we’re oversupplying it at the moment and we’ll oversupply in medium term.”
The update from BHP came as it confirmed it would bow to investor pressure and list its ‘NewCo’ spin-off on the London exchange, along with an Australian and South African listing.
IMO it's going to be tough for developers to try and secure finance in this environment. Management is really going to have to earn it's money on this one. I'm very glad we have that $40m in the bank, just in case no finance interest is forthcoming and the company needs to ride this out for 12-24 months.
EQX Price at posting:
27.5¢ Sentiment: Hold Disclosure: Held
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