12/05/2015 - 15:58

Iron ore majors turn the screws on competitors

12/05/2015 - 15:58

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Rio Tinto and BHP Billiton have highlighted their competitive advantage in the iron ore market, with BHP predicting further large reductions in its operating costs in the Pilbara and Rio detailing the big price discount Fortescue Metals Group has to accept for its products.

Iron ore majors turn the screws on competitors
BHP chief executive Andrew Mackenzie.

Rio Tinto and BHP Billiton have highlighted their competitive advantage in the iron ore market, with BHP predicting further large reductions in its operating costs in the Pilbara and Rio detailing the big price discount competitor Fortescue Metals Group has to accept for its products.

In presentations to an investor conference in Spain, the iron ore majors have shrugged off the political controversy in Australia over the so-called iron ore wars, focusing instead on the strengths of their respective businsses. 

BHP said it expected to cut unit costs at its WA iron ore operations by 21 per cent to just $US16 per tonne during the 2016 financial year.

That would put it just ahead of Rio Tinto, which reported unit cash costs in the December 2014 quarter were $US17 per tonne.

The low operating costs enjoyed by the majors mean their iron ore operations remain profitable, despite the slump in prices to about $US60/t currently and as little as $US48/t last month.

Fortescue chairman Andrew Forrest has waged a campaign against the majors, saying they are flooding the market and pushing down prices to force out competitors.

Fortescue has responded to the tougher market by slashng its costs, but from a higher starting point, and it has the burden of a $9 billion debt load.

It has predicted its C1 cash costs will fall to $US18/t in 2016 while its all-in costs are predicted to be $US31 per wet metric tonne.

Rio chief executive Sam Walsh's presentation highlighted positive trends in the market, saying iron ore demand growth was continuing in China, South East Asia and India while supply was shrinking.

Mr Walsh repeated his prediction that 85 million tonnes of high cost supply was likely to exit the market in 2015, with a further 80mt 'at risk'.

That follows 125mt of supply exiting the market last year.

Together, the exits represent a substantial reduction, with Rio saying the contestable iron ore market in 2014 totalled 1.7 billion tonnes.

Mr Walsh's presentation quoted like-for-like iron ore sales price performance during 2014, relative to the 62 per cent Fe index price.

It showed Fortescue's sale price was 17.7 per cent below the index, while Rio's was 0.3 per cent above the index.

Meanwhile, BHP chief executive Andrew Mackenzie provided new efficiency targets for the company’s major businesses.

“In recent years we have made great strides towards becoming the most efficient supplier of our chosen commodities and secured productivity gains of nearly US$10 billion,” he said.

“We believe we can go even further with a simpler portfolio and improve margins by reducing costs more deeply than the competition,” he said.

“The potential benefits are substantial. We expect to cut unit costs at WA iron ore by 21 per cent  to US$16 per tonne during the 2016 financial year.

"Unit costs at Escondida are expected to fall by 16 per cent on a grade adjusted basis. And we expect drilling costs per well in the Black Hawk to average US$2.9 million, a reduction of 20 per cent.”

The predicted cut in WA iron ore costs follows a 29 per cent reduction last year, and puts BHP well ahead of its previously stated target of $US20/t.

Mr Mackenzie said there would be little capital expenditure in its iron ore and coal businesses.

“The iron ore and metallurgical coal markets are currently well supplied and we do not expect to invest significantly more in these businesses at this time. Instead our capital will be focused on the commodities we believe will have attractive supply fundamentals,” he said.

“We believe grade decline in copper and field decline in oil will constrain industry production and support a recovery in prices over the medium term. The potash industry has largely exhausted brownfield expansion options and new greenfield supply will be required.

“Our diverse portfolio of growth options will allow us to select the markets in which we can create the most value.

“Over the next decade, our attractive growth projects at Spence, Olympic Dam and Escondida will help us to embed BHP Billiton as one of the largest and lowest cost copper producers.

"In petroleum, the development of our onshore US acreage, conventional projects like Mad Dog 2, and exploration opportunities such as our program in Trinidad and Tobago will build on our foundation as one of the most competitive independent producers in shale and offshore.

"And following completion of the shafts, Jansen will be the potash industry’s most advanced option to bring on new greenfield supply.”

 

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