BHP's Strategy on China

It is rare to see major listed corporations in a key industry make totally different decisions as to the best course to follow. Yet that is what is happening in our mining industry where BHP is taking one path while Rio Tinto, Fortescue and the non-listed Hancock are taking another. There is a likelihood that one path will be wrong.

The largest customer for our iron ore, China, has sent a message that they want to be a big player in green steel. As technology now stands, the economics of green steel are best achieved using magnetite ore rather than the hematite ore which has been the base product of most of our big iron ore miners.

Higher Cost

Australian miners simply dig hematite ore out of the ground and ship it to China and elsewhere—no treatment required. In contrast, for green steel, magnetite ore needs to be upgraded so this comes at a higher cost.

BHP has taken the decision that it will not go down that path. It is staying with its massive low-cost hematite operation which is generating huge profits at current iron ore prices. But even if iron ore prices fall, it will still generate large amounts of cash.

The other iron ore miners all have magnetite projects either in operation or in the pipeline aiming to, in time, produce green steel from magnetite ore. The ore needs first to be beneficiated and then hydrogen used instead of coal to bring it to steel.

The hydrogen required can come from three sources – natural gas, from electrolysis of water to produce hydrogen and oxygen or by mixing the magnetite ore with goethite ore which contains its own hydrogen. The goethite would not produce sufficient hydrogen, but additional hydrogen can come from natural gas.

Goethite ore is common in Australia but most of it also contains asbestos which makes it unusable in the process.

BHP many decades ago put vast sums into upgrading its iron ore and the process didn’t work. It does not want to go down that path again, so its plan is to use the vast cash that spins out of hematite mining to invest in copper, potash and, to a lesser extent, nickel.

South Australia, Chile

It has two major copper projects – one is South Australia which includes the Oz Minerals copper mines, Olympic Dam and Oak Dam. Major SA smelters are planned – possibly driven by nuclear energy. This is a huge investment project.

The rival BHP copper project is in Chile where the ore is lower grade but can be mined open cut and the copper leached out. At this stage BHP is planning to embark on both projects but if it had to choose then Chile and South Australia would be line ball.

If the parliament passes the ALP’s industrial relations legislation, Chile would likely become the better project and South Australia would require much higher copper prices to justify investment.

No Lithium 

BHP also has a 45 per cent interest in the giant Resolution copper mine in Arizona which is managed by Rio Tinto. The mine is being held up by disputes with Native American groups.

As part of the decision to concentrate on a limited number of big projects, BHP, unlike Rio Tinto, has turned its back on lithium believing that the material is too abundant and may not have long term high margins.

It also has not made a plunge into rare earths.

The great risk in the BHP play is that China will move to green steel faster than BHP anticipates. But BHP reassures shareholders that China has erected more than 40 blast furnaces so will need hematite for a long time.

Waiting on China

Meanwhile, in China, demand for iron ore and indeed the level of economic activity in the nation is being boosted by a major government effort to complete the apartments which were sold to Chinese investors by developers who did not have the money to complete the building.

The Chinese government has taken over the role and been brutal in allowing or forcing property developers to collapse. Most of the buildings will be completed between 2024-2025 and given that currently new sales are very low, a big slump in building activity is possible, which in turn will lower the iron ore price and the level of Chinese economic activity.

Of course, China can see this coming and is in the process of putting together a major stimulation of the economy to fill the gap. The fate of the Australian economy and indeed the world economy will depend on the size of the economic stimulation and whether it works.

China’s problem is that consumer confidence is at a low point and industry has greatly reduced its investment. In turn this is leading to very high youth unemployment which can cause social disruption to governments like China.

The future of the world economies, but particularly Australia, will depend on how successful the Chinese are in restimulating their economy.

Voice Debate

Australian companies have decided to defy the stance of the Coalition opposition party on the Voice and fund a major advertising campaign for the ALP. To financially back one party and not the other in a vital election goes against the strategies of large corporate CEOs and is very dangerous.

The Voice body is said to be a way for the Aboriginal and Torres Strait community to make representations to the parliament. But that is almost a side issue.

The real power of the Voice body is its apparent ability to make representations to public servants on almost any subject. And the public servants must consider those representations. The public servants may find they need to inform the Voice body before a decision is made.

The great danger for Australia is that this will clog up the public service and make government extremely difficult.

Clearly this is an issue of great political debate and our large companies have chosen to back the ALP rather than the Coalition, presuming that the Coalition won’t get to power for a long time so will have forgotten the referendum stance of large corporates.

That is a high-risk political strategy which the predecessors of today’s CEOs would never have made. They would fund both sides or stay out altogether.