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A strategy for every cycle

Andrew Mackenzie, Chief Executive Officer
FT Commodities Summit – The start of a new cycle
Lausanne, Switzerland

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Welcome! It’s great to be here in Lausanne, a global city that promotes technological progress, fosters creative thought and invests in research and development to set itself up for an unpredictable future.

The resources industry like Lausanne must also plan for an unpredictable future. To predict the future of commodities is difficult, but not impossible. We have to plan ahead to pull a better future towards us.

We must use the best science, technology trends and economics to do so as best we can. And we must be humble about our precision and be flexible to respond to the black swans as they arrive.

For our commodities the biggest driver of demand and certainty is population growth - with a bit of geology and some technology! It is our understanding of all three which gives us huge confidence in the future of BHP and our sector compared to others.

But (before I attempt to predict the future) let me take you back in time, to 50 years ago to 1968 when 1000 leaders from science and technology, defence, energy and economics came together at a conference in New York to try and predict what the world might look like in 2018.

The people in the room included Harvard economist John Kenneth Galbraith, IBM automation director Charles DeCarlo and Bell Labs director John R. Pierce. They made some outlandish predictions such as weaponised hurricanes, anti-gravity belts and lightning suppression technology that remain outlandish today. But equally some of their predictions were accurate like climate change, the internet and Big Data.

They understood that technology had a fundamental role to play. It allows businesses to operate more efficiently, produce more environmentally-friendly products and safely deliver the basic wants of the world’s growing population.

On energy and resources, the futurists noted that demand forecasts were ‘particularly difficult’ they said: ‘Energy is the base of any industrial society. The safest prediction one can make in this dynamic field is that whatever the changes we predict for the year 2018 they are likely to be grossly underestimated.’

Also in 1968 this ambition was on display in another hemisphere when a small team at BHP made a bold prediction about the future of steel demand and had the vision to establish our first iron ore mine at Mt Whaleback, in the heart of Western Australia’s Pilbara region.

Iron ore has underpinned the infrastructure development so critical to the advancement of economies around the world.

And fifty years on from this bold prediction, BHP has now shipped over one billion tonnes of iron ore to Japan and China respectively. To make sure we ask the right questions about the future we focus on how people’s lives may change because that is what affects how our commodities will be used and in what quantity and quality.

And like Galbraith and co we collectively wrestle with questions of enormous consequence.
Not just for our generation but for generations to come. So, what do we see today?

We see that the global economy has performed well the result has been a solid performance by the commodities of most importance to BHP. And the general backdrop for industrial commodities is optimistic.

Some of the key uncertainties that weighed on business confidence a year ago have now been clarified. In commodity markets we have more evidence on OPEC strategy and on the Chinese resolve to pursue supply side reform and to focus on environmental concerns. Central to the China National Development and Reform Commission’s ambition is an ecological society.

However, challenges remain. Global businesses must navigate tighter financial conditions, disparate corporate tax rates and regulatory regimes, exchange rate volatility and a rise in the clamour for protectionism.

Despite the United States’ tariffs on steel and aluminium products outside of the US, policy-makers have re-embraced free trade which has underpinned global growth.

Free trade is vital to the health of the global economy. It is our collective responsibility to champion the virtues of free trade to make sure we can compete on level playing fields around the world because those are the conditions under which business, countries and the people who live in them will prosper.

As we look beyond the near term and in line with this Summit’s theme ‘The start of a new cycle’ we must ask: What will be the driver not of the next cycle but of the next wave? As I said before, population! (with a bit of geology and technology).

The futurists got one thing absolutely right. They predicted the world’s population would nearly triple by 2018. Populations are on the rise in the developing world more will live in cities and expect a better quality of life through better infrastructure decarbonisation and electrification.

And this will drive demand for energy, metals and fertilisers for decades to come.

Some forecasts predict the world will need to spend 3.7 trillion annually to develop and upgrade its infrastructure. If we look at China’s Belt and Road Initiative, demand for steel is expected to increase by an additional 150 million tonnes over the next decade.

Decarbonisation and the transition away from traditional fossil fuels will also have implications for commodities demand.

Some people believe that renewable energy will reduce the world’s total commodity demand.
I disagree.

China, the world’s largest consumer of commodities is also on track to become the global leader in clean energy technology. And renewable energy infrastructure will generate greater demand for commodities.

Wind turbines, for example, are copper and steel intensive. And electric vehicles require copper for components and the electricity grid that powers them.

Renewables and electrification offer great opportunities for BHP that we have planned and built towards over recent years. Electrification and decarbonisation will drive demand for quality as well as quantity. As steel mills and copper smelters transition to more energy efficient and less carbon intensive technology, structural premiums will emerge for higher quality iron ore, metallurgical coal and copper concentrates.

Again over the last few years at BHP, we have invested into this future - at Caval Ridge, Spence and Escondida!

The same materials - iron ore, coal and copper that advanced the progress of the human race for thousands of years will (along with fertilizers) remain the building blocks of modern life and propel us into the future.

So, how will we meet this demand?

For any discussion about supply, I always start with the premise that there is a geological abundance of most commodities of iron ore, copper, coal, gas and potassium, lithium cobalt and so on in the Earth’s crust.

However to unlock that potential requires accessibility. First accessible ore bodies built by geological processes that concentrated our commodities into economically-viable deposits.
We have to understand these processes to make the discovery and development of ore bodies viable. And the orebodies have to be overlain by accessible jurisdictions.

In the countries we invest in our tax and royalty payments fund basic goods and services such as healthcare education or infrastructure. If wealth is diverted from those who should benefit this contribution is diminished and the politics is less stable and accessible. Corporations must demand basic governance standards so that we and our host communities thrive. This will require a mutual commitment to greater and greater transparency.

Once good governance and transparency are established the question is ‘How do we realise the full value of a resource as deposits become deeper lower grade and more complex?’ The answer is technology and innovation!

If we consider copper as an example over the last century technology spearheaded new techniques to extract higher quality copper to compensate for a decline in grades and increase in demand.

Innovations like sulphide mineral flotation flash furnaces. Then solvent extraction and more recently bacterial leaching of sulphide ores set us up for a copper-hungry future. Technology and innovation also allow us to maximise the value of our existing footprint to reduce costs, lift efficiency and increase sustainability.

Nearly a decade ago we developed a robotics hub for our Western Australian operations at Mt Whaleback. The BHP robotics lab is the largest in the Pilbara region and analyses some fifteen hundred blast hole and production samples every day for our iron ore mines.

Last month we fulfilled our ambition to fully automate our production drill rigs across the iron ore operations. These innovations not only make our work safer and more productive but they also equip our employees with the skills to be at the forefront of an automated future.

Change wasn’t easy in 1968. Fast forward to 2018 and change is no easier. It is still impossible to predict with precision where we will be in fifty years.

Population growth higher global incomes and a greater thirst for renewable energy will sustain our success for decades to come. While change is constant there remains one certainty. The world will always demand commodities, they are the building blocks of modern life.

As an industry it is our responsibility to be at the forefront of innovation so that we safely, efficiently and sustainably deliver our commodities to the world, throughout any cycle.

And that is why at BHP we invest primarily in politically stable regions with good governance for the safe, low cost, environmentally-benign, high-volume, long-term production of high-quality commodities for steel-making, electrification, renewables and agriculture. All to meet the wants of a growing population!

We invest in the skills, culture, systems and processes the gender balance of a modernising optimistic workforce that pulls the future towards us!

Thank you.