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Inputs and inflation

Dr Huw McKay, BHP's Vice Principal of Market Analysis and Economics talks about the external trends that affect our business, such as inflation, uncontrollable unit costs, and utilisation rates.

Key points

  • The maritime industry is refocusing its efforts on sustainability in line with the IMO’s 2020 fuel regulations.
  • The Chilean peso and the Australian dollar depreciated in the first half of 2019.
  • The Australian mining sector employed around 240 thousand people in the 2019 June quarter, well below peak levels.

  • Cost inflation has been modest in Chile and in our conventional petroleum business.
  • Australian mining wages are growing at the same rate as the national average, but we're seeing higher turnover rates in some areas of the business. 
  • General inflationary trends in both capital and operating expenditure are benign.
Small image of a ship at sunset
Maritime freight

The maritime freight industry is now refocusing its efforts on sustainability, highlighted by the onset of the International Maritime Organization's (IMO) 2020 low sulphur fuel regulations.

BHP chartered vessels will be fully compliant with all implemented environmental regulations and we will support regulatory authorities in their efforts to bring about a greener future for the industry.

An intense period of fleet replacement is scheduled to occur toward the end of the 2020s.

This replacement wave offers a unique opportunity to dramatically alter the technological and environmental profile of the dry bulk fleet. If the industry collectively gets this right, halving shipping emissions by 2050 may not seem as far off as it does today.

We have recently released the world’s first bulk carrier tender for LNG–fuelled transport for up to 27 million tonnes of iron ore. Introducing LNG-fuelled ships into BHP’s maritime supply chain will eliminate both nitrogen and sulphur oxide, and significantly reduce CO2 emissions along the busiest global bulk transport routes.

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Small image of electricity pilons in South Australia
The Australian power market

As a wave of new renewable capacity has entered the Australian electricity market, the Australian Government’s focus is on improving the affordability and reliability of supply rather than decarbonising the power grid.

We expect the market will tend towards decarbonisation regardless of government direction.

These factors present challenges to Australia’s international competitiveness and the ability to meet customer expectations.

Victoria and South Australia saw record high prices in the first few months of 2019, and potential retirements of generators could put more stress on the supply/demand balance in the medium term.

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Small image of an iron ore truck
Inputs and inflationary trends

Over the past six months, the uncontrollable element of industry wide operating cost inflation has been broadly steady, reflecting mixed trends across the procurement landscape.

Uncontrollable costs

A number of uncontrollable cost drivers across our minerals business, such as diesel, explosives and steel products, have levelled off in price over the most recent half.

General consumer price inflation has been lower than expected by policy makers across Australia, Chile and the United States.

Labour market

In Australia, total mining sector employment reached 240,000 in the June quarter of 2019. That is about 13 per cent below the cycle peak.

Mining wage growth in Australia has increased from below 2 per cent to 2.3 per cent year-on-year. Within Minerals Australia, pockets of inflation have emerged due to a need for niche skills and higher turnover rates in some segments of the workforce.

In Chile, general inflation has been modest. In the economy more broadly, there is confidence that the capital project pipeline is robust, construction industry confidence is on the rise and recent large scale immigration will have a positive impact on the nation’s trend growth trajectory.

Utilisation rates

Globally, earth moving equipment deliveries have increased strongly in consecutive years, but deliveries are still only half of the cycle peak achieved early this decade.

In the petroleum business, deepwater costs have recovered a little but they remain close to cycle lows. Onshore costs have returned to 85 per cent of peak levels, while offshore cost are just 70 per cent of the way there.

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Economic and Commodity Outlook

Read BHP's economic and commodity outlook in full

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Disclaimer

Data and events referenced on this page are current as of August 13, 2019. The data is compiled from a wide range of publically available and subscription sources, including Bloomberg, Platts, Wood Mackenzie, CRU, Thomson Reuters, Argus, Fertecon, FastMarkets, SMM, AME, Parker Bay, MySteel, LME, COMEX, SHFE, ICE, DCE, SGX and I.H.S Markit, among others. All monetary values are in US dollars unless otherwise specified.


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