orange gradient

Edgar Basto speaks at the Global Iron Ore and Steel Forecast Conference in Perth, Australia

Edgar Basto, Asset President, BHP Billiton Western Australia Iron Ore
Global Iron Ore and Steel Forecast 19th Annual Conference and Exhibition
Perth, Australia, 8 March 2016
For more information read the news release and presentation.

Good morning ladies and gentlemen.

Before I begin I would like to acknowledge the traditional owners of the land we gather on today…the Whadjuk People, and their Elders past and present.

It is my pleasure to be here today for the first time as BHP Billiton’s Asset President Western Australia Iron Ore.

By way of introduction, I have 26 years operational experience in the mining industry. I have been in the WA team for a year, and prior to that I held a number of other roles in BHP Billiton including Chief Operating Officer for Base Metals Americas and Australia, global Vice President of Health Safety Environment Communities and Sustainability, based in Melbourne, and Asset President, Escondida in Chile.

I live here in Perth, with my wife and three sons, who go to school and university.

Please take note of the disclaimer slide, which is important in relation to today’s presentation.


Before I talk to you about Western Australia Iron Ore, I would like to briefly touch on Samarco.

The Company is doing everything it can to support Samarco in rebuilding the impacted communities and restoring the environment affected. 

As part of that effort, we have established a dedicated team led by Dean Dalla Valle, a very senior member of our management team, and over 30 of our top experts based in Brazil.

So far all of the families have been re-accommodated and immediate financial relief and supplies have been provided. 

Last week we announced that an agreement was reached between Samarco, Vale and ourselves with the Brazilian Government for the restoration of the environment and communities that were impacted.

The agreement provides a long term remedial and compensation framework for responding to the tragedy.

Alongside Vale and Samarco, we have commissioned an external investigation into the cause, and will ensure its findings are released to the public.

Key themes

The focus of today's presentation will be:

  • the health and safety of our people and the communities in which we operate are and will always be our top priority;
  • our view of China's steel demand growth as the country transitions to the next phase of development;
  • supply/demand balance driven by China's economy and impact on cost curve what this mean to WAIO and how our tier 1 assets are well positioned to deliver strong results and finally;
  • how our new simplified model will unlock significant productivity benefits.

I will begin by reflecting on the current market environment and the outlook for the global iron ore and steel industry.

Short-term market outlook remains challenging

Following a decade of strong growth, driven by fixed asset investment, the Chinese economy is transitioning into the next phase of its development. 

This phase of growth is underpinned by consumption and services and is inherently less steel intensive. 

The Government’s restructuring plans to deal with over-capacity issues will take time to implement and reduction in excess capacity will mean improved sustainability over time, but variability will remain in the short-term.

Overall steel and pig iron production are expected to be subdued in 2016.  However, over the longer-term we continue to expect Chinese steel production to grow, as I will discuss in more detail shortly.

Recently, this variability has played out as a cyclical downturn in Chinese steel and pig iron production, primarily driven by an oversupplied property market. High housing inventories will now take time to be absorbed. 

On the supply side, we have seen large miners ramping up production, in Australia and Brazil, increasing seaborne exports by approximately 40 per cent between 2010 and 2014. 

Some of the greenfield projects initiated in the past few years are still in their ramp up phase or under construction which will result in further supply to the seaborne market in the short to medium-term.

Lower-cost seaborne supply has gradually displaced higher-cost supply, initially displacing Chinese private mines production and more recently higher-cost seaborne supply. 

In terms of our Company position, BHP Billiton has maintained its share of iron ore exports since the beginning of last decade through a disciplined and responsible program of investment.

It is evident that the supply side has proven to be price sensitive with prices returning to historical long-term averages.  This means we expect further price volatility in the short-term.

Prolonged period of market rebalancing

Looking further ahead, supply growth will continue to outpace demand growth over the next few years.

Incremental lower cost seaborne production will continue to displace higher cost supply and result in a flattening of the cost curve, as we have seen since 2014, with smaller junior seaborne producers remaining under pressure.

The long-term end state of the cost curve will largely depend on the industry’s ability at making further gains in productivity.

In the long-term, iron ore contestable demand is forecast to peak in the middle of next decade, in line with China’s pig iron production before declining afterwards due to a peak in steel production and a greater scrap availability.

As I mentioned, we continue to forecast growth in Chinese steel production into the mid-2020s and peak at around 935 to 985 million tonnes, from around 800 million tonnes in 2015.

The trajectory of further demand growth into the 2020s reflects the fact that China is still a developing country, with steel stock at five tonnes per capita. This is approximately half the level of developed countries, implying that there will be sustained incremental steel demand growth. For example Japan steel stock is currently at 14 tonnes per capita.

Also, it is worth noting that replacement of old stock and exports will be key drivers of long-term steel production.

By sector, we believe that while construction steel demand in China might have peaked, manufacturing sectors like machinery, automotive industry and home appliances will maintain a sustainable growth outlook.

Safe Sustainable operations above all else 

Now turning to BHP Billiton.

Firstly, I am proud to say that the safety of our people does, and will always, come first. At Western Australia Iron Ore, we have reduced our Total Recordable Injury Frequency by seven per cent over the last two years – but it will not stop there.

We are building a culture focused on safe productivity to ensure that as we take steps to become more efficient, everyone goes home safe every day.

As a leader I have learnt the hard way how important safety is, it is the most important leading indicator of performance.  Six years ago and for the first time in my career (and hopefully the last one) I had to inform a woman that her husband and father of her six year old daughter, was not returning home ever. An isolation/lock out procedure wasn’t followed at all and as a result her husband was fatally injured.  She told me he called her moments after the accident to say good bye. This event had a profound impact on me as a leader, the standard I was prepared to accept, the use of simple and proper systems and processes in a very rigorous way to plan, execute and verify work were not good enough.  I learnt that if I had done my job differently, I could have prevented such a terrible event to happen.

I am convinced that safety and sustainability will provide the platform for safe productivity.

We are doing this through embedding benchmark Health, Safety and Environment systems and processes and developing a culture where everyone is a safety leader.

With this platform we are focussed on our culture of safe productivity that is driving sustained results. We have adopted a simple approach which involves:

  • understanding the key value and cost drivers;
  • using benchmarks from outside our own industry, listening carefully to our teams, knowledge sharing to identify the gaps; and
  • executing the required changes safely and sustainably with discipline and speed.

This approach is working extremely well. Since December 2013, we have sustainably delivered 4.3 billion Australian dollars in productivity gains. This is only possible through our empowered people.

We are working hard to improve our culture and our internal surveys tell us we have made significant progress.

In our ability to lead change, we have significantly closed the gap on global high performing companies by more than sixty per cent. We have made similar gains in the areas of engaging with our teams, enabling them and progressing with diversity and inclusion.

In short, our teams are telling us they are experiencing a far better workplace today than when we started our focus on productivity.

We also believe that diversity is critical to accelerating business performance, and we are focusing on making sure everyone understands how a diverse workforce makes us more effective and creates a happier workplace.

We still have a long way to go but we will build on the foundations laid by Jimmy Wilson and our strong business plan.

We recognise that no one knows more about a job than the person that does it, and that the ideas of our people should be heard, implemented and rewarded.

So far, about one in four of our people have contributed a productivity initiative – over 2,300 owners who have generated more than 5,500 improvement ideas.

Out of these ideas, we have executed over 1,500 initiatives over the past two years, and have more than 1,700 in the pipeline.

For example, Chris Warner a business improvement specialist, worked with Josh Eveson from central maintenance to apply a “Formula One” pit stop mindset to haul truck servicing at Mining Area C. This reduced truck service time from five hours to 2.4 hours and increased truck availability by three per cent to 84 per cent.

These learnings were replicated at the Saraji Coal Mine in Queensland where service times were reduced from 8.5 hours to less than an hour. And now, in turn, we are learning from them.

This journey has been exciting to watch and we have seen the culture of our organisation improve as leaders directly support and actively listen to the front line. 

Relentless pursuit of the basics

Technically, our focus is simple and fundamental.

Our structured approach to safely increasing the availability, utilisation and rate of our existing infrastructure will support continued productivity improvements at WAIO.

This is what we call “a relentless pursuit of the basics”.

The better coordination of major plant shut downs across the supply chain is extending the replacement cycle of major components and consumables. 

At Mining Area C Ore Handling Plant 2, we have been able to vastly improve availability over the past 12 months through improvements to maintenance practices.

At our Eastern Ridge mine, we install chute liners with components that have a longer wear-life. Liners are now replaced every nine months instead of every six weeks, reducing the overall replacement cost as well as the risk exposure to our people.

At Port, we have achieved an 80 per cent cost reduction on conveyor belt roller replacements which are now changed based on their condition rather than pre-scheduled timing. 

We have been able to lift the rate of our car dumpers by around 10 per cent which is a great result for our port inflow capability and again reflects improved planning and scheduling.

All of these improvements resulted in an increase of six percent for Western Australia Iron Ore production to a record 131 million tonnes on a 100 per cent basis, for the first half of financial year 2016.

The value of the marginal tonne remains high as we work to debottleneck our port, rail and mines.

Given wet weather events at the beginning of the year, we continue to monitor progress against our financial year 2016 production guidance of 270 million tonnes per annum with no fixed-plant investment.

Work has started on the installation of a new primary crusher and extra conveying capacity at Jimblebar, and costs are included in our average annual sustaining capital expenditure.

The ramp-up of additional capacity at the Jimblebar mining hub, and further improvements in the efficiency of the integrated supply chain, will deliver an increase in system capacity to 290 million tonnes per annum over time.

Continuing to deliver exceptional performance

Our Tier 1 assets support consistently low-cost, high-margin operations and our recent results reflect persistence in a challenging environment.

Our resource position is a distinct competitive advantage, enabling sustained delivery of a high-quality product, at low cost, from our mining hubs for decades to come.

The geographic concentration of our orebodies requires only a simple supply chain model and ultimately drives low unit cash costs.

The scalability of our resources facilitates low-cost sustaining and growth options and we expect our sustaining capital to be four US dollars per tonne over the medium-term.

Western Australia Iron Ore remains a key pillar of a simplified BHP Billiton, and continues to deliver exceptional results.

We delivered 1.8 billion US dollars of underlying EBIT in the first half of financial year 2016 at a margin of 34 per cent.

Our productivity drive, as well as favourable exchange rate movements, has resulted in a reduction of our unit cash cost by 47 per cent since the beginning of calendar year 2013 to 15.2 US dollars per tonne in the first half of financial year 2016 (excluding freight and royalties).

We have maintained our EBITDA margin above 50 per cent despite the iron ore price halving since 2012.

It is this margin which is important to profit generation, and reflects the all-in cost of producing our high-quality products and sets us apart from our peers.

We have further to go to reduce costs, and there is significantly more upside to come. 

Productivity will be expedited under BHP Billiton’s simplified organisational structure

Finally, today I want to talk about our new operating model and how it will take Western Australia Iron Ore to the next level of productivity.

Our strategy for Western Australia Iron Ore remains unchanged, and will be delivered against a backdrop of the foundations for productivity that have already been laid.

Our minerals production operations will be organised into two regional units; Minerals Australia and Minerals Americas, as well as our Petroleum operations as a third unit.

Minerals Australia is led by Mike Henry, who joins us here today.

We have also created two new centres of excellence; for maintenance – to drive future safety and operating costs – and projects – to deliver further efficiency in our capital costs.

The new model is the next step towards a more streamlined and simpler Company, which positions us to respond to the challenges and opportunities of a rapidly changing global market. 

It frees our assets to focus on Safety, Volume and Cost, and at Western Australia Iron Ore we have the right people, the right assets and the right plan to deliver this with confidence.

The new model also allows our functional activities to become more efficient and share best practice through better integration.

These organisational changes will allow the Company to become more agile through the improved capability and expertise in both our assets and functions.

Our business is committed to working with our State and local governments, and our communities, for a sustainable future.

We are fortunate to operate world-class assets in a stable geo-political environment and we have a strong relationship with the State.

We remain strong supporters of the communities in which we operate, and have invested 300 million Australian dollars over the past five years in a range of health, indigenous development and education programs and infrastructure projects.

We are proud of the contribution we have made, and continue to make in Western Australia. And despite the challenging market conditions faced by the industry, BHP Billiton is unwavering in its commitment to the State and our local communities.

Key themes

So in conclusion:

  • As China works through its transition, the short-term market will remain variable and challenging.
  • Further low-cost supply coming online is exceeding demand growth and will flatten the cost curve further as cost deflation continues.
  • Longer-term, there will be a prolonged period of market rebalancing.
  • Western Australia Iron Ore has the right people and right assets to deliver strong results well into the future. 
  • Our asset position is fundamental to our high-quality, low-cost products that translate into sustained margins.
  • Our strategy remains unchanged; our people have already set the foundation for next level productivity and through our simplified structure we will expedite further savings.

Finally, as I lead the Western Australia Iron Ore team into our next level of performance, I am committed to delivering a safer, more productive, more efficient business that will be sustainable into the future.

Thank you.

For more information, see the news release and presentation.