BHP Billiton reconsiders iron ore expansion
The race to the top just got a little slower for BHP Billiton. The Anglo-Australian company announced on Wednesday it will put the brakes on its planned expansion in iron ore production in favor of conserving cash as commodity prices continue to deteriorate.
The company said deferring capital spending at its inner harbor infrastructure at Port Hedland would enable its proposed 290 million-ton-per-year expansion to be done at a lower capital cost.
“Our focus remains on producing at the lowest possible cost, with Western Australia iron ore unit costs now below US$20 per ton, as we continue to improve productivity,” said Andrew Mackenzie, BHP chief executive.
BHP’s decision to hold off comes at a critical time as rival miners increasingly plead for BHP, Rio Tinto and Vale to cap their production in an effort to stabilize iron ore prices.
Andrew Hodge, analyst at Wood Mackenzie, said: “BHP’s message is that it wants to conserve capital and it is about value rather than volume.” He added: “Taking some tons out of the market may have a positive impact on prices.”
On Wednesday, forecast for the amount of iron ore BHP plans to produce in the year to the end of June increased to 230 million tons, a 13 percent rise in the company’s guidance from the previous 12 months.
According to Australia & New Zealand Banking Group Ltd. and Pacific Investment Management Co., a floor in prices may now be forming.
Surprisingly enough, prices for iron ore rose 5.5 percent to $57.81 per a ton on Friday.
Low carbon world needs $1.7trn in mining investment
According to a new report from consultancy Wood Mackenzie, mining companies need to invest nearly $1.7trn in the next 15 years to help supply enough copper, cobalt, nickel and other metals needed for the shift to a low carbon world.
Cutting carbon emissions
The United States, Britain, Japan, Canada and others raised their targets on cutting carbon emissions to halt global warming at a summit in April hosted by US President Joe Biden.
Meeting those targets will need large-scale deployment of electric vehicles, storage for power generated from renewables and electricity transmission, all of which require industrial materials, such as lightweight aluminium and metals used in batteries such as cobalt and lithium.
Wood Mackenzie analyst Julian Kettle calculated miners needed to invest about $1.7trn during the next 15 years to “deliver a two-degree pathway - where the rise in global temperatures since pre-industrial times is limited to 2°C”.
“At an industry level, there seems to be reticence around investing sufficient capital to develop future supply at the pace and scale demanded by the energy transition (ET),” he said.
Mining firms are wary of making heavy investments after their experience of the last decade when they invested in new capacity just as demand peaked, leading to a collapse in prices and revenues. They also need to please investors, who are unlikely to want to see dividends diverted to capital spending.
Rising demands of investors related environment, social and governance (ESG) issues further add to the challenge.
Australia, Canada and Western Europe carry a low ESG risk but some of the best resources are in high-risk areas, such as Democratic Republic of Congo, which sits on about half the world’s cobalt reserves according to the U.S. Geological Survey. “Given the need to meet tough decarbonisation and ESG targets, Western governments, lenders, investors and consumers will need to get comfortable operating in jurisdictions where ESG issues are more complex,” Kettle said.
Kettle said government support was needed to help miners comply with ESG issues to ensure production from high-risk areas was conducted in an acceptable way to consumers.
“Then, and only then, will the West be able to secure sufficient volumes of the raw materials needed to pursue the energy transition in the timescales envisaged.”