BHP Billiton Aims to Overtake Rio Tinto as Cheapest Supplier of Iron Ore
Iron ore prices may be diminishing but that’s not stopping BHP Billiton’s (ASX:BHP) (NYSE:BHP) desire to be the world’s cheapest supplier.
The Australian-based company, which is currently the third-biggest producer of iron ore, is looking to cut its production costs by more than 25 percent and squeeze more tons from its iron ore mines as it seeks to overtake rival Rio Tinto (LSE:RIO) (NYSE:RIO) as cheapest supplier.
On Monday, BHP outlined an aggressive three-year expansion and cost-cutting plan to increase exports by 65 million tons over the next three years. If the plan works, it would see BHP exporting 290 million tons of iron ore by June 2017, up from the 225 million tons exported in 2014. It would also see the company producing at cheaper levels than Rio Tinto.
"We aim to be the lowest-cost supplier to China on an all-in cash basis," Jimmy Wilson, the head of BHP’s iron ore division, said in a video conference.
"The name of the game in the past was volume above and before everything else. Now cost is much more important and we are finding a lot more opportunities.”
Although BHP did not reveal a cost for the project, the company disclosed the expansion could be completed with a “capital intensity” of $30 per ton, implying a cost of about $1.95 billion.
When asked how his objective to be the lowest-cost supplier in China compare with Rio’s growth plans, Wilson said only time will tell.
"We are acutely aware that Rio is not going to stand still either, they are a great organization and they have opportunities," he said. "Rio is going to improve their business, we are going to improve our business, we believe that we have some sustainable advantages, and our aspiration is to be down the bottom end of that cost curve. I'm sure they have the same aspiration ... time will tell."
According to UBS analyst Glyn Lawcock, BHP Billiton’s cost guidance and expansion cost estimate were well below market expectation and would increase the company’s valuation by about $7 billion, or $1.30 a share.
"However, we suspect today’s announcement may see the market focus on long-run iron ore price downside risks given falling capex/costs.”
As the battle for supremacy rages on between Rio Tinto and BHP, the company said it would continue to accelerate production even if iron ore prices keep falling, which analysts expect to happen.
"We continue to see healthy demand growth for iron ore in the mid-term as Chinese steel production is expected to increase by approximately 25% to between 1-billion and 1.1-billion tons in the early to mid-2020s," said Wilson.
"We will continue to squeeze the lemon because at the end of the day it’s just so value accretive."
Copper production from top ten companies to increase by 3.8%
Copper production from the world’s top companies is set to increase by up to 3.8% this year, following a fall of 0.2% in 2020, GlobalData analysis reveals. Last year’s marginal slump saw production drop to 11.76 million tonnes (Mt).
The initial impact of the COVID-19 pandemic on mining operations was immense, however, six of the ten largest copper producers succeeded in increasing output last year. In 2021, copper production from the top ten copper companies is expected to bounce back, rising by up to 3.8%, to reach 12.2Mt, according to GlobalData, a leading data and analytics company.
The highest increase in copper production was by Canada’s First Quantum, which, despite all the challenges, reported 10.4% growth in 2020. The company’s Sentinel mine in Zambia and Cobre Panama were key contributors to this growth. While the latter remained under care and maintenance between April and August 2020, it delivered record production levels during the subsequent months.
Codelco, the world’s largest producer of the red metal used in electric vehicles, also bucked the trend.
Vinneth Bajaj, Associate Project Manager at GlobalData, commented: “Despite Codelco reporting over 3,400 active cases during July 2020, the company achieved 1.2% growth in its production in 2020. The company implemented a four-phase plan, as part of the COVID-19 measures, to ensure the health and safety of its employees, while also avoiding any significant impact to its copper output.”
Although the overall impact was minimal, declines in production were observed from Glencore (8.2%), Antofagasta (4.7%), BHP (3.9%) and Freeport McMoRan (1.3%). Reduced operational workforces due to COVID-19 measures, lower ore grades and production halts due to maintenance were the key disruptors to output during 2020.
The move towards electric vehicles and clean energy from renewables sources such as solar panels and wind turbines has driven the copper price to all-time highs. Copper has been among the best performers over the last month where metals ranging from aluminum to iron ore have surged to their highest prices in years. The rally is being fueled by stimulus measures, near-zero interest rates and signs that economies are recovering from the global pandemic.