News: BHP BHP Group Posts FY Underlying Attributable Profit US$13.7 Bln, page-19

China steel woes will recast miners' M&A desires
27 Aug 2024 04:08
Mike Henry sure likes to downplay his acquisitive tendencies. While unveiling results for the year to the end of June on Tuesday, the BHP boss declared that his $47 billion tilt for Anglo American earlier this year "wasn't Plan A for us". Instead, organic growth is. That may just be sour grapes after his overtures to his rival failed. But the growing steel crisis in China makes such deals ever-more appealing.The People's Republic accounts for around half of the two billion tons of the metal produced globally each year. And it buys most of the iron ore, a key ingredient, dug up in Australia by BHP, Rio Tinto and Fortescue .Now overcapacity, wrought in part by the property market slump in the world's second-largest economy, is pushing its steel industry into what Hu Wangming, chair of top producer China Baowu Steel Group, calls a "harsh winter". At least 75% of the country's steel mills are not turning a profit, per Macquarie; a survey by consultancy Mysteel puts than number at 95%. As a result, the iron ore price has fallen some 30% this year to just below $100 a ton.That's painful for miners Down Under. Rio relies on iron ore for 73% of its EBITDA, while Fortescue is almost entirely dependent on it. At BHP, the figure is lower at 65%, but that's thanks in part to its purchase last year of local copper miner Oz Minerals for $6.4 billion - a quarry Henry dubbed "nice to have, not a must-have" after his approach was initially rebuffed.Had his proposal to buy Anglo succeeded, iron ore's share of BHP's EBITDA would have dropped below 60%, Breakingviews calculates using both companies' most recent annual results. That would have provided a quick jolt to Henry's longer-term plans to diversify BHP's income by developing its existing copper and potash assets; he's also snapping up undeveloped and early-stage projects, spending $2.1 billion on Latin American copper mines last month.Aussie miners have a decent buffer against China's woes: all-in iron ore costs are $40 a ton at BHP, rising to $60 at Fortescue, per UBS. And Henry is showing some balance sheet caution, cutting the annual dividend, increasing capital expenditure, and reducing net debt.

Trouble is, shares in BHP - and Rio - are down by almost a fifth this year, while potential targets like Freeport-McMoRan , Anglo and Teck Resources are up by as much as the same amount. That makes diversification via M&A all the more expensive.
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