BHP gets ahead of the cost curve in iron ore

BHP Billiton has hinted that its iron ore expansion in the Pilbara could be done more cheaply than Rio Tinto's, in what would be a reversal of the companies' traditional positions on the cost curve.

Speaking in Houston this week, BHP chief executive Andrew Mackenzie revealed conversations he had held with iron ore chief Jimmy Wilson in which the pair discussed growing iron ore exports at a one-off cost of about $100 for each new annual export tonne created.

BHP is expected to export 212 million tonnes from the Pilbara this financial year and the low cost expansion referred to will be the 50 million tonne expansion to lift Pilbara exports to 270 million tonnes in the future.

"He's assured me that the overall increment from 220 to 270 million tonnes per annum will be delivered at a capital efficiency at, or better than, $US100 ($110) per annual tonne," Mr Mackenzie said. "We continue to see significant opportunity for further growth in iron ore, and we'll start very much with some of the lowest capital, higher return projects."

A capital efficiency of $US100 per tonne is low by modern standards in the Pilbara. Rio Tinto suggested in recent weeks its coming expansion would be completed at just over $US120 per tonne.

The disparity between the two companies could be influenced by the different nature of the works they have to do to expand but, nonetheless, the costing edge will be a nice novelty for BHP which has traditionally been a slightly higher cost producer in the Pilbara.

"You can imagine my challenge to Jimmy is to do better and to continue to work our productivity agenda both in what we've got and what we might invest to actually get to a number which is only two digits in millions of dollars per tonnes rather than three," said Mr Mackenzie, stressing that such an outcome was not guaranteed.

The comments imply an overall cost for BHP of about $US5 billion to expand its Pilbara iron ore division to 270 million tonnes but, given the development plan for the Pilbara is not yet fully determined, the numbers are far from settled.

In the meantime, BHP is focused on fixing bottlenecks in its iron ore export system, and has highlighted the time between the ore's arrival at Port Hedland and when it is loaded onto ships as one area to be improved. It recently announced a $US301 million investment in two new shiploaders at Port Hedland.

Mr Mackenzie also speculated that productivity measures could lift its long-term coking coal production from Queensland above official guidance without spending any further capital. He said he had been "very frustrated" by the poor performance of the copper smelter at Olympic Dam in South Australia, and said a shutdown may be needed early next year.