Bullfights in Barcelona: Major mining CEOs go head-to-head

It’s a bullfight in Barcelona as the bosses of Rio Tinto, BHP Billiton and Glencore attend the same conference but make very different mining presentations.

The majors are in Spain for the 2015 Global Metals, Mining and Steel Conference, and in the last 24 hours, all have had their say on the future of the sector.

But it’s the different tacks the three CEOs have taken that has caught the eye of industry spectators.

Rio Tinto chief Sam Walsh has reiterated that its iron ore growth strategy is in safe hands, claiming demand out of China will remain strong.

BHP Billiton CEO Andrew Mackenzie says his company is in a process of simplification that will see capex slashed as costs come down.

Meanwhile, Glencore boss Ivan Glasenberg has come out swinging, and once again schooled the other miners on the issue of supply and demand.

Rio Tinto

The world’s biggest miner has copped a lot of flak lately from a range of people questioning its iron ore strategy in light of a depressed price.

FMG chairman Andrew Forrest, Cliff Natural Resources CEO Lourenco Goncalves along with WA Premier Colin Barnett have slammed Rio for its approach, claiming that its ongoing ramp up to 350 Mtpa by 2017 is hurting the market, driving prices down and other miners out.

At the conference in Barcelona, Walsh defended his company’s tactics, stating high-cost produce exiting the market was just part of the mining game.

“Mining is a cyclical industry. High prices brought in marginal producers, often based on overly optimistic assumptions and aggressive business models,” Walsh said.

“These tonnes are now exiting the market, which is part of normal supply and demand. “

Walsh said there was sure to be further “turbulence” as the market adjusts and low grade, high-cost material leaves the market.

Part of this turbulence has been the exit of several high-cost Australian producers who cannot sustain operating at the current volatile market.

The price of iron ore has halved since this time last year and is currently trading at around $US59 a tonne.

However it dropped to $US47 per tonne in early April, and the government’s latest budget has predicted a price average of $US48 per tonne for 2015-16.

Many blame Rio (as well as BHP and Vale) for producing record tonnages of ore flooding the market.

One of the most vocal opponents has been Forrest, whose own operations in the Pilbara are suffering.

Forrest recently revealed that his company had been forced to let go of 100 workers a day due to iron ore’s depressed state.

He is blaming the majors for the bearish sentiment which has befallen the iron ore industry and went as far as to urge the public to “stand up” and ask if the multi-national miners have a social licence to operate.

Rio’s stance has always been that if it caps production as Forrest has suggested, then others will rush to fill the void.

It says it is doing the right thing by its shareholders by increasing its brownfield expansions.

At the conference, Walsh said the story out of China is being mistold, and that growth in the country is strong, even though it is changing.

“This year’s estimated increase of 7 per cent in Chinese GDP is just over $1 trillion, larger than the economy of Poland,” Walsh said.

“The nature and mix of growth in the Chinese economy is also changing, and I will say more on this shortly, but let’s be clear that in this new normal we will still see continued solid economic growth from a larger base.”

Walsh said this “new normal” would see around 1 billion tonnes of Chinese crude steel production by 2030, which requires average growth of around 1 per cent per annum.

However this figure is at odds with the forecast of Li Xinchuang, deputy secretary-general of the China Iron and Steel Association, who recently said the country's steel production would not reach the one billion mark. 

Xinchuang said steel production in China would not grow beyond 900 million tonnes.

“It cannot (get to one billion), trust me, I have been in the business 30 years,” he said.

"We understand it cannot go over 900 million tonnes — we think roughly 800 million to 870 million.”

Still, Walsh told investors at the conference that continued new infrastructure and housing stock will be required to support urbanisation while the replacement of existing buildings and infrastructure is also expected to be a significant driver in the coming decade.

“Given the quality of our material, our location and superior marketing capability, Rio Tinto will continue to be a supplier of choice to the Chinese market,” Walsh said.

BHP Billiton

Mackenzie presented a slightly different message at the conference, choosing to focus on the company’s assets and the importance of keeping a lid on costs in “highly competitive and cyclical markets”.

Like Rio, BHP has also been called into question in recent months over its iron ore strategy, and accused of working to keep a lid on a price rise.

The miner has since been given a little reprieve after it revealed it would not invest in a planned debottlenecking at Port Hedland, a move which will stop 20 billion tonnes of iron ore from entering the seaborne market.

The company has hit back at claims about its iron ore expansions, revealing that its Board had not approved an iron ore investment since 2012.

But BHP still has plans to add 5 million ore tonnes this year, taking its total output to 250 Mtpa.

Speaking in Barcelona, Mackenzie said the low iron ore price seen over the past few months is likely to continue.

“At today’s lower rates of demand growth, incremental supply will take longer to absorb,” Mackenzie said.

But in an attempt to rubbish talks of holding back volume, Mackenzie’s argument mirrored Rio’s that the move would only encourage others to fill the void.

“We operate in highly competitive and cyclical markets, where earnings outperformance through the cycle depends on being the most efficient supplier, not supply restraint.” Mackenzie said.

“Any attempt to curtail low-cost supply in open markets only encourages the continuation – or entry – of more costly production. This deprives the market of its power to deliver the most efficient supply.

“Therefore our ongoing success does not rely on supply restraint but instead rests on our foundation of the right commodities, the best assets, operational excellence, balance sheet strength, and capital discipline. A combination of these attributes serves us well during all points in the cycle, but particularly in the current environment.”

Instead of entertaining ideas of culling production, Mackenzie spoke of the importance of cutting costs and focusing on simplification.

Mackenzie said BHP’s capital and exploration expenditure would fall to $US9 billion in the 2016 financial year, from $US12.6 billion in 2015.

Meanwhile, BHP expects to cut unit costs at its Western Australian Iron Ore operation by 21 per cent to $US16 per tonne during the 2016 financial year.

Mackenzie said BHP had secured productivity gains of nearly $US10 billion in recent years, and said the demerger of South32 would deliver even more benefits to the company.

“We believe we can go even further with a simpler portfolio and improve margins by reducing costs more deeply than the competition,” he stated.

With iron ore and metallurgical coal markets currently “well supplied” Mackenzie said BHP does not expect to invest significantly more in these businesses at this time.

“Instead our capital will be focused on the commodities we believe will have attractive supply fundamentals,” he said.

Glencore

A long-time critic of the other majors’ production ramp ups, Glasenberg used part of his conference presentation to get back to the basics of supply and demand.

This is not the first time the Glencore chief has given miners a simple lesson in economics.

Speaking at the company’s annual general meeting in Switzerland last week, Glasenberg blamed falling commodity prices on overproduction by other mining houses.

"Unfortunately our competitors in the world have produced more supply than demand, and commodity prices are down for that reason," he said.

"I'm doing my level best to convince my competitors that we should understand demand and supply.”

In February he stated that blame for the iron ore price fall should land squarely on the shoulders of major miners who have undertaken expansion projects.

While last year Glasenberg stated the industry had been saturated with new mines that led to a surplus in metals and shrinking profits.

Glencore has been quoted as saying it was not willing to cannabilise its revenue for volumes.

Staying true to his word, Glasenberg decided to cut the company’s Australian coal production by 15 per cent, or 15 million tonnes, earlier this year.

“We don’t want to be the ones forcing the price down with oversupply,” he said at the time.

And it seems Glasenberg wanted to keep this message fresh and alive during his speech in Barcelona.

"The mining sector is suffering a crisis of confidence," he said

"Oversupplying markets regardless of demand is damaging the credibility of the industry.”

Glasenberg said mining had been one of the worst performing sectors in the last 12 months, with commodity investment flows now $US60 billion blow their 2012 peaks.

He went on to state that it was critical to understand supply and demand fundamentals, stating that key emerging markets are maturing.

In one slide, the outspoken CEO even used direct quotes from the majors in which they are defending their iron ore strategies to send an ominous warning:

He then went on to state what differentiated Glencore was its diverse resource base that exposed the company to mid and late demand cycle commodities such as copper, zinc, nickel, aluminium and lead.

So which CEO is correct?

They all are in the sense that all three are doing what they deem best for their shareholders within the constraints, or opportunities, of investment decisions of years past.

While they all make cogent arguments, it will be the markets themselves that have the last say as to which strategy will work best long-term.

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