Iron or demand
Low-cost iron ore miners BHP Billiton and Rio Tinto are accomplished experts digging up the ferro-raw material. By analysing everything from the efficiency of workers operating excavators to the quality of ore being loaded onto giant tippers, both have squeezed out more profit and insulated themselves from the commodity price downturn. Since 2012, BHP has reduced unit production costs by 50 percent to $15 per tonne. Rio is equally aggressive in lowering unit costs to around $16 per tonne.
They are much less good at consumption estimates. But with prices hitting 10-year lows, the investment case for both depends on them getting ahead of China’s demand curve.
Insights are all the more important since BHP has more than doubled output in the past five years. The Anglo-Australian mining giant expects to produce 270 million tonnes of the ferro-raw material in the 2016 financial year. Rio, meanwhile, expects to produce 340 million tonnes of iron ore this year.
As time passes and it becomes harder to eke production efficiencies, large iron ore miners will have to lean much more heavily on the way they demonstrate their understanding of their customers, especially in China. Historically, this was a matter of interpreting Beijing GDP figures and extrapolating forward. Yes, both BHP and Rio are becoming more granular in their approach. Analysis, for instance, is being done on prevailing construction preferences, and the volumes of steel used. The amount of scrap metals that will be reprocessed is looked at. Even the growing demand for car parking space in high-rise apartments is assessed.
Assessing these and other factors will have increasing significance on the bottom line. Until BHP and Rio show they have acquired the full set of analytical skills and demonstrate they can better balance the market demand dynamics, the two may find themselves looking out of touch on China.