BHP Billiton Throws Down The Gauntlet

BHP Billiton (BHP: NYSE) President, Jimmy Wilson is unperturbed that iron prices have fallen to sub-$80 levels (Qingdao, China) from $160 in February 2013, and are down 40% on the year.

At an iron briefing and a Western Australia Iron Ore (WAIO) site tour for analysts and investors today, Wilson announced plans to cut unit costs at the site by a minimum 25%.

“We expect unit cash costs of less than US$20 per tonne in the medium term, a reduction of more than 25 per cent on the average achieved in the 2014 financial year,” he said. “Our reserves are concentrated around our four major mining hubs which will support a lower level of sustaining capital expenditure than required by our peers.“

“With annual sustaining capex of approximately US$5 per tonne over the next five years, we aim to be the lowest cost supplier to China on an all-in cash basis,” he added.

He also claimed that the company could boost capacity at WAIO by 65 million tonnes a year at a very low capital cost of about US$30 per annual tonne.

Demand-supply imbalance
A lot has been made of dwindling ore demand from China, ostensibly because of an economic slowdown in that country. Increasing supplies from Australian mines have exacerbated the pressure on iron ore prices.

The fall in ore prices has exacted a toll on the BHP Billiton stock, which is down nearly 21% over the last 2-1/2 months.

BHP Billiton Stock Price

Figure 1

“High prices over the last decade created the incentives needed for new entrants to join the market and traditional producers to substantially increase supply,’ Wilson explained. “As a result, growth in seaborne supply is expected to exceed growth in demand over the short to medium term.”

BHP Billiton Short-Term Supply Pressure

Figure 2

Long term ore demand forecast
However, he was sanguine about long-term demand for ore, projecting that by the early to mid-2020s Chinese steel production could jump 25% to over a billion tonnes, generating good demand for iron ore.

With other emerging market countries growing their steel production too, Wilson thinks global steel production could see a CAGR of 2.5-3.0% up to 2030.

S&P’s outlook on iron ore
Ratings agency Standard & Poor’s on Friday reduced its price outlook on iron ore through 2016 from $95 to $85, and as result, cut the credit score on Atlas Iron Ltd by one level to B.

The agency left BHP Billiton’s rating, currently at stable A+, untouched, however. “The lower iron ore prices would likely cause BHP Billiton’s credit metrics to be weaker in the year ending June 30, 2015,” it said. “However, we believe the company has strong financial flexibility to mitigate further falls in prices.”

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