MARKETS SPECTATOR: BHP's hi-tech hopes

Mining companies are notoriously bad at managing costs. BHP Billiton wants to change that.

Analysts at Morgan Stanley estimate the mining giant's costs increased by a cumulative 36 per cent, or $US8.7 billion, in the last five years, while its extra operating profit through volume growth was $4.4 billion.

Enter SAP. By the end of this year, all of BHP's operations will be using the same SAP software system. Already about 80 per cent of its employees are using it. The software enables BHP to benchmark processes across its vast empire, comparing costs at a smelter in Mozambique, for example, with a similar process in Australia.

BHP conducted a benchmarking exercise that exposed substantial differences in performance on identical processes between assets. Morgan Stanley says the miner wants to lift the bottom quartile performers to the average of the group.

Easier said than done. Markets set commodity prices, and agreements with mining contractors are often set in stone for years. More importantly, says Morgan Stanley, the relationship between the currency of the producing country and the US dollar dictates as much as 50 per cent of costs. The broker estimates every US cent change against the Australian dollar affects BHP’s net profit by US$100 million.

Moreover, mining companies tend to make the same savings. That leads to lower margins instead of higher prices. To reduce costs in nominal terms, BHP needs to overcome cost inflation that may be 2-2.5 per cent a year, says Morgan Stanley.

Nevertheless, BHP maintains that its mining and maintenance work can be better planned with SAP software, claiming that its adherence to planned daily schedules will improve. That will make its production forecasts more accurate because mined tonnes and grades can be better tracked along with inventory, according to BHP.

BHP operates a vast network of automated equipment, from truckless mining to mass material movement equipment. Those machines may have no trouble adhering to a program that in theory will make their operations more efficient. It's just those difficult human beings who may not.