BHP Billiton’s Jimmy Wilson is sending a sobering message to the market and the mining world, especially the smaller players: the iron ore price war is just getting started.
BHP is hunkering down. Its plan to cut its unit cost of iron ore production from $US25.89 a tonne to less than $US20, announced today, is based on squeezing costs and ramping up automation rather than spending piles of money on capital-intensive projects.
But Rio Tinto won't easily give up its title as Australia's lowest cost iron ore producer. In August the miner confirmed it had slashed its unit costs by 11 per cent in the first half to $US20.40 a tonne, just shy of BHP’s ‘medium-term’ target.
Still, if BHP can eke out even marginal gains in the Pilbara, it would have a huge impact. Over the past five years, WA iron ore has become BHP’s flagship asset, generating underlying earnings before interest and tax of $US53 billion.
The miner plans to add 65 million tonnes of capacity per year at WAIO at a capital intensity of approximately $US30 per annual tonne, Wilson said, taking total system capacity from 225 Mtpa to 290 Mtpa by the end of the 2017 financial year. BHP had previously said the 65 million tonnes would come at a capital intensity of $US100 per annual tonne, and then revised that figure down to $US50. To now be looking at a cost of $US30 per annual tonne is impressive.
The big question is how exactly it plans to get there.
Automation will play a big part. BHP is currently trialling nine driverless trucks in its Jimblebar mine and one autonomous drill rig at Yandi. Driverless trains are still to come, but the miner is likely to trial these before too long.
A spokesperson for BHP told Business Spectator that since the autonomous drill rig had been brought in, the miner has seen a 10 per cent increase in metres drilled per shift. Once automated drill rigs are brought in across the board the miner should see significant productivity gains – as well as a heap of job losses.
Indeed, the job losses could be much more significant than many realise. In FY15, BHP expects that of the 245 million tonnes produced, 27 million tonnes will be hauled by automated trucks. But by FY19, the miner expects "40 per cent of total productive movement will be hauled autonomously," a spokesperson told Business Spectator. That means a lot more miners out of work and a much more efficient BHP. After all, automated trucks don't have drivers who need to eat or sleep. They can go non-stop, hour after hour.
But increased capacity brings its own problems. While BHP has invested in its rail infrastructure to alleviate some of the bottleneck in that area by increasing the dual line to Port Hedland, this effectively just pushes the problem down the track.
“The bottleneck is moving to where it will be in the longer term, from the mines to the port,” Wilson admitted.
The miner plans to deal with this future bottleneck issue through low capital intensive projects such as installing new car dumpers and ship loaders, but it’s unclear if that will be enough to ‘de-bottleneck’ the narrow, tide-affected and difficult to navigate Port Hedland.
And that’s where BHP’s at a significant disadvantage to its biggest competitor.
Before the iron ore price fell through the floor, the plan had been to build a $20 billion outer harbour. That’s now on hold indefinitely, so BHP will have to work with what it has.
In contrast, Rio Tinto has access to two ports, Cape Lambert and Dampier, making it much easier to ship the ore out.
Throughout the presentation Wilson focused on making it clear that this is a new, simplified era at BHP – one where the focus is on keeping costs down and extracting gains from its current operations.
It’s a completely different beast to a few years ago, and that in itself should have the higher-cost producers worried.