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Glencore CEO Ivan Glasenberg not impressed by BHP Jimmy Wilson’s iron ore expansion plans.
Mining giant BHP (ASX:BHP) said it will to lift its iron ore capacity by almost 30% without building any new mines and vowed to overtake rival Rio Tinto (LON:RIO) as the world’s most profitable producer of the steelmaking commodity.
The plans unveiled by world’s largest miner by market value were unsurprisingly unwelcome by the market. Glencore chief executive Ivan Glasenberg, who has already slammed the big three iron ore producers —Rio, Vale and BHP— for continuing to expand output and hurt prices, was the first to raise his voice.
The executive said that, together with keep driving prices down, BHP’s announcement was set to hurt Guinea, one of Africa’s poorest countries.
The West African nation has put all its hopes in the massive Simandou iron ore project, which includes a railway and a port. The government, Dow Jones reports, expects to double gross domestic product and open up the nation’s remote interior. But with prices touching historical lows, that goal is increasingly becoming a pipedream.
“Is Guinea going to have Simandou developed at current prices? It’s going to be difficult,” Glasenberg was quoted as saying.
“It’s a project that is going to cost in excess of $25 billion. Who’s going to put in $25 billion?” he added.
Charity begins at home
Jimmy Wilson, BHP’s iron-ore division head, didn’t seem too worry about Guinea or the global market. Unveiling the company’s plan to boost the unit, Wilson said the company is committed to keep digging more tons of iron ore out of the ground, even as the steep drop in prices pushes smaller rivals to the wall.
“Charity begins at home,” the WSJ.com quoted him as saying.
“We have the strongest resource position in Western Australia and the quality of our ore bodies will help us sustain strong margins over the long term. We have already significantly cut the cost of production at [the region’s iron ore operations] and plan to go further,” he noted in a statement.
He estimated BHP could cut its production costs—excluding the price of freight and royalty payments to the government—to less than US$20 a ton. This would be over 25% lower than its average in the year through June 2014.
Over the next five years Australia’s iron ore exports are projected to increase at an average annual rate of 5% and total 900 million tonnes in 2019.
8 Comments
Scott
So Mr Glasenberg’s solution is for everyone else in the rest of the world to pay more for iron ore, and hence steel, so the Guineans can have a mine? A lot of Glencore self interest there.
Mark
Its in the buyers interest to have many sources of product & in the local economies interest to have many producers (jobs & royalties). Sure, we can have a handful of producers selling super cheap iron ore but do we want them to “fix” the price again, giving buyers no room for negotiation and 10,000s unemployed?
brettles02
Its better economics to leave it in the ground to sell at a higher price when the market cycle turns but the BHP minions
won’t recognise this nor will they .
gazza456
Bhp is the big Australian, overseas this will seem like an Australian strategy. Thanks Jimmy this will come back to bite all of us on the bum. If I was a Chines buyer I would boycott BHP . Take out BHP product from the market and the Chinese and Africans could make a living. The Chinese government have enough capital to keep their mills going even if it costs more. They don’t want social unrest.
Don’t ever think you can treat other businesses like this, you dick. It’s just not good business.
PaoloUSA
Driving prices down and relying on one market and closure of high cost Chinese producers, hard to believe that the Chinese are going along allowing one or two suppliers to get them by the balls 3 to 4 years down the road.
Fossil 66
There is no way that BHP can produce iron ore cheaper that Rio except screw their workers and their services/equipment suppliers–I don’t know about other suppliers but every time I deal with BHP I end up with a “bad taste in my mouth” with the feeling I have been screwed—I have never seen a happy BHP employee in my dealings with the company. With new paperless Exploration Earthworks Management System and Automated In Pit mining Systems, Rio has the advantage of the lowest Exploration to Ship costs. However It is a puzzle why both top 3 companies are ramping up production on lowering ore prices, as the only winners are the Chinese customers. Would not it be better to adjust output to market demands? It seems that there is a hidden agenda in this stratergy.
bob ble
Prices of ore are falling regardless. The collapse in the Chinese property market is going to hurt alot more than they are letting on. Both Rio and BHP know that the massive margins of yesterday are over.
Its called bulk commodity for a reason high volume low margin business.
The only way to keep making the same gross ‘profit’ is to increase production and sale, the only way to do that is take market share.
To not act aggressively and use their competitive advantage would be the quickest path to 1). seeing their share price and market cap tumble; and 2). Then being taken private (i.e. SWF) or absorbed (i.e Glencore) who would immediately push forward with the same strategy.
This was always going to happen, this ‘lucky’ country has squandered, redistributed and wasted what was not just an opportunity but a necessity to plan and invest for the next generations.
Lack of government incentives to redistribute working populations to where the work is, instead allowing the economics of not only doubling up of people (half the year off work, changeover costs, at salaries of multiples elsewhere in the world) add on to that the transportation costs unmatched other than offshore O&G.
Ignoring what was always going to happen will cost this country dearly and the biggest FUOAT will be Labours ridiculous attempt to extort more from the industry through its rent tax. To be overseas during that period and listen to the international investment community talk about Australia going to the top of risk in terms of doing business, and watching projects worth billions have to be recalculated with a formulae that little understood the mechanics that the majority knew it would never work.
Those billions ended up in Africa. But they are so far away, the shipping will kill the margin. Thats true if you have an empty ship going one way. But if China knows how do something well, if you invest enough money and buy enough product you create demand in an emerging market the size of Africa, a little extra money means a lot of extra spending.
Send over manufactured goods and ship back ore…..
Bevan Jones
Wait until we unleash our patented new technology to very cheaply and efficiently produce pig iron from lower grade iron ore (less than 58%). All of China’s low grade iron ore reserves will make Australia’s reserves seem meaningless. Iron ore is one of the world’s most abundant minerals and now we can beneficiate it cheaply.