Jimmy Wilson, BHP Billiton President Iron Ore
Originally Run in The Australian, 3 June 2015
There has been a lot of commentary on the iron ore market in recent weeks and different views have been debated and critiqued. I think it is now a good time to step back and look at the fundamentals.
Iron ore is a strong contributor to the Australian economy and it trades in a global market. Like all free markets, supply and demand determine price. As the debate around iron ore has intensified, it is appropriate to reflect on the facts behind this important Australian industry.
China’s growth story is well documented - over the past 15 years, we have witnessed a once in a life time increase in demand from our largest trading partner. China’s industrialisation stimulated a massive increase in global iron ore production (seaborne and domestic), more than doubling from 950 million tonnes per annum (Mtpa) in 2000 to 2200 Mtpa in 2014.
These market fundamentals incentivised new iron ore producers to enter the market, and encouraged existing players to expand their operations, to meet this unprecedented demand. It also encouraged domestic Chinese iron ore production to peak at over 400 million tonnes in 2013. Over this time, Western Australia increased its global seaborne market share from 35 per cent to 51 per cent, with excellent cooperation between government and the private sector, in a free market.
As eventually happens in commodity cycles, iron ore supply growth eventually exceeded demand growth in around 2011. The outcome - as expected by everyone who follows the industry - has been a flattening of the cost curve. The result? A reduction in price. Put another way, mean price reversion will occur in a free market.
And the price of iron ore has never been watched so closely – so let’s reflect on the facts. Between 1980 and 2005, the price of iron ore leaving Port Hedland (in 2015 dollar terms, what we call ‘real Free on board Pilbara’) averaged US$30 per dry metric tonne (dmt). For the 10-year period from 2005 to 2015, the price of iron ore averaged US$96 per dmt. And driven by the Chinese industrialisation, we even saw once-in-a-generation prices that peaked at more than US$180 per dmt.
As history and basic economy theory has taught us - as more low cost supply was added to meet Chinese demand, the price of iron ore moved back towards the historical long-term average. When we look back over the last 35 years, we see the price has averaged around US$49 per dmt. So the reality is that today’s price still compares favourably with the long-term average, and very favourably with the price before China’s industrialisation.
It is in Australia’s best interest for the country’s iron ore producers to remain competitive
Australia is not the only supplier of iron ore. In a free market, our customers have other supply options in countries like Brazil, China, India and South Africa.
We absolutely, and unequivocally, believe that BHP Billiton and Australia must improve productivity to remain competitive. BHP Billiton’s US$25 billion capital investment over the last decade in our Western Australian iron ore business was made because of our confidence in the long term future of iron ore. Our iron ore resource underpins our expectation that we can mine for more than 100 years and our confidence in the business, and the market, is unchanged.
None of this is a surprise. In anticipation of supply growth exceeding demand growth and the iron ore price moving towards its historical long term average, we have not approved any major capital growth investments in iron ore since early 2011.
Our focus has been on safely increasing volumes through our world-class existing infrastructure and decreasing costs. In 2012, we deferred around 180 Mtpa of additional production – 110 Mtpa from the Outer Harbour Development and 70 Mtpa by not developing two additional berths in the Port Hedland Inner Harbour. BHP Billiton also recent announced we would defer the Inner Harbour Debottlenecking Project. These are responsible and rational decisions.
In the last few weeks, we heard news of China signing multibillion dollar agreements to fund the development of Brazilian iron ore producer, Vale’s 90 Mtpa S11D mine. Vale will continue to add low-cost, high-quality tonnes to the market. China will continue to invest in Brazil and elsewhere to secure high-quality iron ore at what it considers to be a fair price. This is the reality of competition in a free market.
When it comes to geology and geography, Australia is a lucky country. The Pilbara is home to some of the highest quality iron ore in the world and we are close to our customers, but it is essential that each and every WA producer focus on their individual product quality, reliability of supply and continuously improve to remain competitive in the global market.
BHP Billiton is not flooding the market
While Australian iron ore producers have responded quickly to meet China’s demand, and despite the tens of billions of dollars we have invested in our iron ore business, BHP Billiton’s share of supply in the global seaborne iron ore market has remained constant at about 17 per cent. FMG has successfully grown its share of global seaborne exports to 11 per cent since entering the market in 2007 – they have been the world’s most prolific iron ore growth story between 2007 and the end of 2014 – growing by about 150 Mtpa, compared to BHP Billiton which added 130 Mtpa to its production and Rio Tinto which grew by around 117 Mtpa.
BHP Billiton is not over-supplying or flooding the market. Our strategy to safely increase production through productivity remains commercial, rational and consistent.
We have also taken tough decisions to improve our efficiency and to ensure our iron ore business remains competitive. Today we are generating better margins on almost 2.5 times the volumes compared to the last time the iron ore price averaged around US$50 per tonne in 2006.
Iron Ore is still good for Australia
There can be no doubt that Australian producers and Governments have benefitted from the phenomenal increase in demand for, and the price of, iron ore. BHP Billiton and its shareholders have benefitted. We have also created thousands of employment opportunities. As the country’s largest tax payer, BHP Billiton paid more than $8.7 billion dollars in taxes and royalties in Australia in 2014.
The capital invested by Australian iron ore producers over the last decade has resulted in the construction of significant infrastructure and a significant increase in export volumes and revenue. This is sustainable and will benefit Australia for the long term but only if we remain competitive in the global market.
BHP Billiton is proudly an Australian company that operates internationally, with a multinational, diverse and capable workforce. Hundreds of thousands of Australians and Australian institutions own shares in our Company. A majority of our assets, including our iron ore business, are located in Australia.
Many Australians have a broader connection to BHP Billiton, whether through direct share ownership, superannuation funds, direct employment or a business relationship. By pursuing our strategy of safe productivity, we will remain competitive in the global market over the long-term. This will allow us to continue to contribute strongly to the Australian economy. Surely this is in everyone’s interest.