THE DISTILLERY: Miner strain
Three of Australia's premier business commentators more of less came to the same conclusion about the signals from BHP Billiton and Rio Tinto yesterday. They are both focusing on costs in a big bad way.
The Australian Financial Review's Matthew Stevens says the separate, but similar, warnings from BHP and Rio underline the competitive pressures being heaped upon what was once Australia's greatest single earner – coal.
"Having committed Rio to the removal of $US7 billion of combined operating, exploration and capital costs over the next two years, chief executive Tom Albanese yesterday described the new and increasingly entrenched demarcations of the mining world. For some time now Albanese has been telling us that iron ore now stands alone as Australia's boom mineral, with its erstwhile twin in wealth creation, coal, being forced into the ranks of the also-rans by an unwelcome alliance of capital and operational cost growth and a sustained erosion of the fiscal regime and core productivity. Now, to be fair to all involved, some of this drift in the competitive standing of Australian coal is sort of unavoidable given the influence of geology (the coal sits ever deeper) and climate (successive years of heavy rains and flooding have temporarily but materially undermined the cash flow and productivity metrics of even the best of the Queensland operations)."
Then there's the rise of cheap shale gas in the US, which Stevens also points out. Meanwhile, The Australian Financial Review's Chanticleer columnist Tony Boyd says Albanese implicitly conceded something embarrassing to the market yesterday.
"The world's second largest miner is telling its shareholders that management allowed itself to become complacent about costs during the good times. The good news is that the company has woken up and, even better, it is providing hard targets. That contrasts with other resources companies that have talked vaguely about cost improvements without being specific. However, BHP Billiton chief executive Marius Kloppers told media on Thursday that his company was the first to shout loudly that ‘the costs must go down'.”
Of course, as Business Spectator's Stephen Bartholomeusz points out, the cost pressure wouldn't be so significant for their domestic operations at least if the Australian dollar hadn't decoupled from the commodity prices the two miners trade in.
"The currency issue is a particular one for BHP and Rio, given that so much of their core resource base is in Australia. Albanese made the point that even in Rio's fabulous Pilbara operation, which has cash costs of only $US24.50 a tonne and delivered costs (to China) of $US47 a tonne, the benefits of a stringent focus on costs were offset by the strength of the Australian dollar. Given that the currencies' relativities may have changed structurally, the miners have no option but to act on the premise that it will remain elevated for the foreseeable future and, in an environment of lower commodity prices, will have to be offset by an obsessive focus on costs and competitiveness.”
While the aforementioned three business writers speak of the similar takeaways that BHP and Rio left investors, Fairfax's Malcolm Maiden says their respective differences were also apparent, particularly on iron ore where Rio is much heavier.
"The contribution both iron ore businesses make depends substantially on what sort of economic growth Beijing engineers next year. Marius Kloppers said yesterday that BHP expected China's GDP growth to range between 7 per cent and 8 per cent in coming years, down from a run rate of 10 per cent-plus during the boom. Rio's Tom Albanese was a bit more bullish, predicting growth above 8 per cent next year. It also depends on how quickly new iron production comes on stream, (BHP's decision to delay the expansion of its Port Hedland export port in the Pilbara will keep supplies tighter and prices stronger in the medium term), the extent to which Chinese iron ore production falls in the northern hemisphere winter, and on whether or not production here is hurt by cyclones during the summer.”
The Australian's John Durie focused on the leadership speculation surrounding Kloppers, specifically pointing out that chairman Jac Nasser did a "masterful job” saying trying to say approximately nothing yesterday.
"The sad reality for Kloppers is that market consensus says he is a lame-duck chief and keeping the chair warm for whomever Nasser selects to replace him. No one knows what Nasser has told Kloppers privately, but his demeanour suggests he is relaxed and a great performer. Nasser obviously doesn't want to set timetables, which may not be met for reasons outside his control, but the longer the uncertainty the worse it is for the company.”
Elsewhere, Fairfax's Adele Ferguson notices that since Treasurer Wayne Swan started targeting the banks two years ago and passing reforms to support a combined fifth pillar of lending, via credit unions and building societies, not much has happened.
"A few credit unions have merged, six building societies have changed their names to mutual banks for branding purposes, and fewer consumers than expected embraced legislation designed to make switching banks easier. Despite all the chest-beating by the Treasurer, the reforms have been a fizzer. This is nowhere more telling than in the amount of market share the big banks have captured since the GFC – and hold onto.”
The Australian's economics correspondent, Adam Creighton, argues that the "cluelessness” in the electorate about how much tax the government generates from income and GST "is the single biggest reason our governments have ballooned to such monstrous and inefficient sizes.”
The Australian's Bryan Frith touches base with Oceania Capital Partners, formerly known as Allco Equity Partners, to find some discontent over some generous treatment to its largest shareholder. This is very clever reporting yet again from Frith.
And finally, The Australian Financial Review's resources reporter, Jamie Freed, looks at the political and mining reputations at stake in the inquiry being conducted by the NSW Independent Commission Against Corruption.