Rio Tinto and BHP Billiton defend iron ore strategies

Rio Tinto and BHP Billiton have defended business strategies to keep producing record amounts of iron ore despite the recent price crash.

Speaking at the Global Iron Ore and Steel Forecast conference in Perth yesterday, the two companies’ iron ore bosses said it wasn’t their fault that the price of iron ore had plummeted.

The comments came as the commodity hit a fresh six-year low of $US58 a tonne, putting even further pressure on beleaguered junior miners which are coming to terms with a price drop of over 60 per cent since the start of 2014.

Many critics, including WA Premier Colin Barnett and several junior miners have questioned the majors' plans to increase production in light of weakening demand and depressed prices.

Rio Tinto will be producing 360 tonnes of iron ore by 2017, while BHP wants to increase its output to 275 million tonnes by 2017.

However Rio’s iron ore boss Andrew Harding said unprofitable juniors needed to take responsibility for investing capital into unviable projects.

“I take no enjoyment out of the pain and suffering that higher cost procures may be suffering in this marketplace, but there’s a globally competitive market place and it is open to all the actions that take place by all the people in the market,” Harding said.

“As the price comes down, if you’ve made an investment with your own funds or with shareholder funds in a project that is not sustainable as the market price dips, that’s your responsibility.

“That is not anybody else’s ­responsibility.”

Harding also slammed recent suggestions that it should curtail its iron ore output in an attempt to usher in a price increase.

Describing the strategy as “economically nonsensical”, Harding said if Rio stopped producing tonnages, an operation somewhere in the world would be quick to fill the gap.

“If we don’t supply it, somebody else will,” Harding said.

“The minute someone else supplies and I don’t, our shareholders miss out, our employees miss out, and if that supplier that chooses to fill that void is an international supplier, then the Australian and Western Australian people miss out because they don’t get the revenue-based royalties.”

 BHP’s iron ore boss Jimmy Wilson also defended the company’s expansion plans.

BHP has not invested in iron ore since 2012, but is working to sweat its assets in order to achieve higher production targets.

BHP said a ramp up to 270 Mtpa is expected to be achieved without the need for additional fixed plant investment.

Beyond that, the Inner Harbour Debottlenecking and Jimblebar Phase 2 projects have the potential to increase total capacity to 290 Mtpa by the end of the 2017 financial year at very low capital costs.

Wilson said holding back production in the hope the iron ore price would pick up was not the answer.

“If we pulled back volume, that volume would be filled by other companies,” Wilson said.

“At the end of the day, we will be penalising in essence our shareholders.”

Both companies have been on a massive cost cutting spree of late in order to rein in capital spending.

Rio reduced its capital expenditure by 37 per cent to $US8.2 billion in 2014, compared with the 2012 peak level of $US17.6 billion.

It is expected to be further reduced to less than $US7 billion in 2015, of which around $US2.5 billion is expected to be sustaining capital.

Meanwhile BHP cut exploration and capex from $US22.3 billion to $US15.2 billion in the year to June 2014 and is targeting a $US10.8 billion range by June 2016.

Both companies have been cutting jobs in recent months, with Wilson saying the “lion’s share” of cuts had been completed at BHP.

Over at Rio, the cull had just started, with hundreds of jobs expected to be lost from the company’s iron ore division in a short timeframe.