BHP Group has outlined a long-term strategy focusing on copper, nickel and oil for its growth, in what experts say is a trend for Australian iron ore majors to look to battery minerals for future growth given an unattractive longer-term iron ore outlook.
BHP CFO Peter Beaven said in a May 22 strategy briefing that diversifying will enable the company to have more cash at the bottom of cycles and act counter-cyclically, given cash flow volatility could be reduced by about 30% over 20 years by not being solely reliant on iron ore.
While the timing of things impacting BHP's diversification strategy like transport electrification, stationary power decarbonization and the circular economy are uncertain, Beaven said its geographically and sector-concentrated portfolio puts its long-term cash flow at risk.
BHP's low-cost iron ore and metallurgical coal assets will keep delivering healthy margins and returns, but the company expects those cost curves to flatten.
"We are unlikely to add significant new capacity in iron ore or metallurgical coal beyond productivity tonnes. We should squeeze the maximum value out of the existing invested capital," Beaven said.
Shift away from additional tonnes
S&P Platts raw materials and steel senior pricing editor Hector Forster said there has been a focus in Australia on replenishing and expanding high grade and lower alumina iron ore supplies, rather than materially adding to production of iron ore and metallurgical coal.
Though higher than expected steel output growth in China this year has increased demand just as February's Brazilian iron ore production disruption pushed spot prices in May to hit US$100 per tonne, various demand scenarios expect steel output in China to peak as early as 2019, he said.
The focus on incremental iron ore quality in smaller quantities may meet increasing demand for higher quality iron ore in Asia, with existing seaborne supplies and domestic iron ore in China, as steel and iron production plateaus next decade, he said.
Longer term, higher iron ore output from Carajas and new expansions in northern Brazil may provide more higher quality iron ores and help alleviate lower output in southern Brazil expected now for several years, all of which may be limiting potential for new large scale iron ore mines to be developed.
Wood Mackenzie senior iron ore research analyst Kim Christie said the three years Vale SA should take to change all its tailings dams to dry processing and return production to 2018 levels, combined with expected slowing demand in China, makes investment in significant extra tonnage unattractive.
Thus while Australia's majors will continue to invest in maintenance capex and keep exploring to maintain their existing tonnes — like Fortescue Metals Group Ltd. is doing at Eliwana, Rio Tinto at Koodaideri and BHP's South Flank — Christie said they are looking for growth in battery-related commodities like copper (Rio Tinto and BHP) and lithium and hydrogen (Fortescue).
Eyeing energy commodities
BHP expects energy demand to grow but appears tepid on hydrogen, investment in which will be tempered by renewables. Thermal coal, while still retaining a large market in the foreseeable future, will eventually plateau then decline as "headwinds strengthen," Beaven said.
Yet BHP can still say "with a degree of conviction" that adding options in copper and nickel sulfides as opposed to laterites are "likely to be a sound investment" given demand growth and market tightness due to the difficulty in finding and permitting new supply sources and the cost of developing them, he said.
Though he appeared to rule out lithium due to its abundant supply and cobalt which is being substituted as a cathode material, electric vehicle demand is contributing to BHP's investment thesis in copper, nickel and oil.
BHP Market Analysis & Economics Vice President Huw McKay said in a May 21 company blog that the first 100 million electric vehicles on the road will cut global oil demand by 1.3 million barrels per day, while its mid case electric vehicle production forecast will provide cumulative net copper demand of 17.3 million tonnes out to 2035.
Even so, Beaven said oil field decline will still ensure new capacity is needed, and with few discoveries, BHP believes "attractive rent will continue to be available for well-placed assets."
Given these considerations, its investment strategy will be focused on developing oil projects in the U.S., the greater Gulf of Mexico and Canada; and copper via Olympic Dam expansions, Resolution, Ecuador or its recent Oak Dam copper discovery in South Australia.
BHP will also invest in gas close to ullage in existing downstream liquefied natural gas facilities for a "relatively quick" payback. There is a growing market for gas in the medium term, but Beaven said that could be bypassed as a transition fuel to clean energy.
S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.