BHP Billiton Ltd. (BHP) mapped out a "window of opportunity" for iron ore producers to profit from China's forecast crude steel production growth, as the Asian nation moves to consumption-led economic growth from investment-led economic growth.
The comments made by Marius Kloppers, chief executive of the world's largest mining company by market capitalization, come at time when investors have begun to query whether the roughly decade-long commodities boom spurred by China's rapid industrialization and urbanization may be peaking or coming to an end.
Speaking at the Bank of America Merrill Lynch 2012 Global Metals, Mining and Steel Conference in Miami Beach, Fla., Kloppers said that the "long term drivers of [commodities] demand remain intact," evidenced by expectations that urbanization will continue apace over the next 19 years. But as developing economies mature and transit to consumption-led growth, per capita steel consumption will peak and demand for other commodities such as copper will plateau later on, he noted.
He forecast that China, the world's largest steel producer and consumer, will still be a key driver behind demand for iron ore, a key steelmaking raw ingredient. Chinese crude steel production is forecast to grow to 1.1 billion metric tons annually by 2025, from about 700 million tons in 2011 and 150 million tons a year in 2000.
The forecast rise in Chinese crude steel production, albeit slower, should still boost demand for sea-borne iron ore by 650 million tons a year by 2025, according to his presentation.
"The outlook provides a major opportunity for BHP Billiton and our competitors," he said. BHP is the third-largest producer of iron ore traded overseas after Brazil's Vale SA (VALE) and Anglo-Australian Rio Tinto PLC (RIO) respectively.
Kloppers said that post 2025 steel scrap will become an increasingly important consideration and will in part constrain iron ore consumption in the very long term.
"It is on this basis that we test the economics of our iron ore development options," he noted.
BHP has earmarked $7.3 billion to boost output from its West Australian iron ore operations, which contribute a significant amount to earnings and profitability, as part of a multi-billion-dollar capital expenditure plan encompassing 22 major projects.
But the company has been dogged by concerns that the giant projects will increasingly consume its cash and may offer weak returns, as its earnings growth appears to have peaked with the recent fall in prices of many commodities. Some shareholders have been critical of the company's strategy, including plans to invest around $80 billion on growth over five years and the acquisition last year of shale-gas assets in the U.S.
Kloppers reaffirmed in his presentation that projects would be approved "in a sequence that maximizes value, reduces risk and balances short- and long-term returns."
Any investment will be framed within the company's commitment to maintaining a solid A credit rating and a progressive dividend.
Kloppers also said that BHP will continue to review divestment options and its business structure with a viewing to focusing on simple and scalable business opportunities.
Source: Dow Jones