BHP Billiton CEO Sees Efficiency in China's Steel Capacity Cuts in His Company's Biggest Market

Chen Shanshan / Yicai

2017-03-29

(Yicai Global) March 29 – Having served as chief executive of Melbourne-based BHP Billiton Ltd. [ASE:BHP], the Anglo-Australian multinational mining, metals and petroleum company for four years, Andrew Mackenzie comes to China once or twice each year. As the world's largest natural resource supplier, China is already the Australian company’s largest market.

In an exclusive interview with Yicai Global, Mackenzie expects the company to produce 275 million tons of iron ore this year, and “within 2 years (iron ore output) to reach 290 million tons”. China accounts for 61% of the company’s iron ore sales.

The Chinese government is pushing de-capacity of the steel industry this year, however Mackenzie said he is not worried that the capacity cut will bring a substantial reduction in demand for iron ore. "China is not cutting steel production, but reducing production capacity, which means that excess capacity in steel production will be eliminated and the industry will become more efficient. In addition, as steel demand is still growing and steel mills need to use high-quality iron ore to improve production efficiency, the premium of high-grade iron ore will be pushed up,” he said.

Asked about the company’s future investment plan, he said, “given that prices for commodities are high, and we are not sure that’s sustainable, then we don’t expect to find many bargains at the moment.”

Chinese investors have made many overseas merger and acquisitions in the past few years, but Mackenzie said they are going in a different direction now.

"My observation is that Chinese companies are doing less of that now than they would have done a few years back. I don’t think that’s just because the prices are becoming more expensive. It’s because there is a realization that there is a free market for commodities around the world, and particularly the commodities that we can deliver China and all the resources it needs in the most efficient way,” Mackenzie noted.

Chinese companies can play up more of their own advantages as low-cost and high-tech manufacturers, and make full use of the resources of international suppliers such as BHP Billiton, rather than purchase non-superior mineral assets overseas regardless of cost, he advised.

He further told Yicai Global that BHP Billiton has been looking at some opportunities for M&As, but as current commodity prices are still rising, the company is not sure whether this rally is sustainable, and thus it is unlikely to make a move at present.

“The growth strategy I laid out for our company shows the ability to increase the value of the company by 70% without merging and acquiring new assets," he said.

The cost of production of iron ore from different mines in the world differs greatly. The cash cost per ton of iron ore is only about USD15 for foreign mining giants such as BHP Billiton, the Brazilian Vale SA [NYSE:VALE], and Australia’s Rio Tinto PLC [LONDON:RIO], but about USD50 for some domestic mines. Therefore, in the round of iron ore price drops in 2015, many domestic mines were forced to stop production, while foreign mining giants were still expanding.

Compared to iron ore or coal, Mackenzie believes the market is more likely to see future rises in copper and oil prices. He expects global energy consumption growth to drive copper demand, but oil and gas production will face a decline by about four percent per year. There will be an annual growth of 1-1.5 percent in future market demand. Copper ore grade may fall three percent per year, but the future market demand will grow by two percent annually. In both areas, supply growth should be maintained at around 5 percent at least, otherwise the supply and demand balance will be broken, resulting in a substantial increase in prices, but the rise in copper prices may be slower and may take two to three years, he said.

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