BHP Billiton aims to cut its iron ore production costs by more than 25% and squeeze more tonnes from its mines as it aims to overtake rival Rio Tinto as the world’s cheapest producer, the world’s largest miner said on Monday.
The Australia-based miner has raised the stakes in the ongoing war of attrition in global iron ore with a plan to slash costs and lift production, reported ABC Australia. The company is going head to head with arch rival Rio Tinto for global domination that in recent months has seen prices plummet, threatening to send smaller, higher cost suppliers to the wall.
Reuters noted that the miners’ focus has shifted to cost cutting as iron ore prices have dropped from about $190 a tonne in 2011 to less than $80 now, sinking to five-year lows as supply growth from the mega producers has exceeded demand growth by more than two to one. “We will continue to squeeze the lemon because at the end of the day it’s just so value accretive,” Jimmy Wilson, the head of BHP’s iron ore division, told reporters in a video conference ahead of an analyst tour of its West Australian mines.
Wilson said BHP planned to add a further 65 million tonnes of annual production to an already flooded market, with ambitions to become the lowest cost producer. “Our confidence in this approach will enable us to drive unit costs, including freight and royalties, below $20 a tonne in the medium term,” he told an analyst briefing on Monday.
Rio Tinto holds the dominant position in the industry. It is the biggest and cheapest iron ore supplier. Now producing about 290 million tonnes per annum, Rio is expanding its output to a projected 360 million tonnes. BHP’s aim is to become the lowest all-in cash cost supplier of iron ore to China, Wilson said. “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.”
Turning over the stone
BHP hopes to achieve the lower costs by reducing its spending with contractors, such as maintenance operators, chopping the headcount by a few hundred people and by focusing on mining around its four existing hubs. “With annual sustaining capex of approximately $5 per tonne over the next five years, we aim to be the lowest-cost supplier to China on an all-in cash basis,” Wilson said, adding that was just an aspiration, said Reuters in its report. “I’m acutely aware that Rio’s not going to stand still either,” he told reporters.
Foot on the accelerator
He said the company would continue to accelerate production even if iron ore prices keep falling, which analysts expect to happen over the next few years. “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 1.0 and 1.1 billion tonnes in the early to mid-2020s,” he said.
Impact on smaller miners
Falling prices have already hit margins across the industry and made many smaller mining companies unprofitable. Wilson said 40 million tonnes of Chinese production have already exited the market and that new low-cost supply from Australia will displace output from other regions such as Iran, Mongolia and Kazakhstan. By 2015, major producers in Brazil and Australia will account for 1.15 billion tonnes or 83% of world seaborne ore trade, according to Australian government data, up from 71% just three years before. Wilson said the closure of smaller producers was an unfortunate side-effect of market conditions. “At the end of the day, it’s a tough old world out there,” he said. “Obviously we have to do what we have to do for our business, and we take no joy in other businesses being impacted.”