BHP Says Cost Cutting Needed to Meet Falling Demand for Minerals

BHP Billiton Ltd., the world’s biggest mining company, said a slowdown in demand for minerals over the next five years makes cutting costs and boosting productivity a priority.

“I’m committed to drive an agenda of productivity and that will almost certainly” be a “top theme,” Andrew Mackenzie, the Melbourne-based company’s newly appointed chief executive officer, said in an interview with the Australian Broadcasting Corp. today, according to a transcript.

Faced with falling prices crimping profits, BHP unveiled $1.9 billion in cost savings when it released its half-year results Feb. 20, as net income fell 58 percent after commodity prices declined. Mackenzie, the head of BHP’s copper unit, who previously worked at BP Plc and Rio Tinto Group, takes over from Marius Kloppers on May 10.

While demand in China will remain strong “over the next five years, we are going to go from a growth rate in minerals demand of 15 percent to 20 percent a year to 2 percent to 4 percent a year,” Kloppers said in the joint interview for ABC’s Inside Business program. “That means the suppliers will be able to respond and meet demand and therefore you have to be low cost and you have to take into account that price is not going to help you.”

BHP joined Rio and Anglo American in reporting a drop in earnings as waning global growth last year prompted lower prices and some global miners to slow expansion. BHP sold $4.3 billion of assets in the half and in August put projects estimated to cost about $68 billion on hold.

Investment Choices

“We have a tremendous choice of the things that we can invest in to grow,” said Mackenzie. “We are able to select only the best projects so that we actually do get some of the highest capital productivity and extend Marius’s track record.”

The price of iron ore, BHP’s most profitable unit, averaged 27 percent lower during the six months to Dec. 31, data from The Steel Index shows. Iron ore may tumble to $110 a metric ton by the end of the year, as mines in China boost production, cutting import demand in the world’s largest buyer, Westpac Banking Corp. said this month. Iron ore last traded at $153.60 a ton on Feb. 22.

Mackenzie, 56, had about 12 months enforced gardening leave after Kloppers, 50, poached him from Rio in 2007 to head the copper division. He used the time to master Spanish -- his fifth language -- to help him conduct contract talks in South America as soon as he started, a person familiar with his appointment said last week. He’s uniquely placed to wring more efficiencies out of BHP’s mining and oil operations, which include shale assets in the U.S., the person said last week.

North Sea

Mackenzie obtained a doctorate in chemistry from the University of Bristol in 1980, and has published more than 50 research papers and pioneered extraction techniques in the North Sea for BP, BHP said last week in a statement. He founded the BP Institute at the University of Cambridge as well as institutes at Princeton and Berkeley universities and the California Institute of Technology. He joined Rio in 2004 and, as chief executive of industrial minerals, built a $5 billion titanium mine in Madagascar.

“Andrew was a brilliant academic research scientist who chose to leave the world of academe for the wider world, becoming not only a captain, but dare I say admiral, of industry,” Professor James Maxwell, emeritus professor of chemistry at the University of Bristol, said when Mackenzie was awarded an honorary degree of Doctor of Science in February 2011 at the university.

Shale Gas

BHP is spending $4 billion this fiscal year on its shale gas assets in the U.S., after acquiring the unit for about $20 billion in 2011. Kloppers cleared the decks for his successor by booking a $2.84 billion charge in August on the value of the assets after prices fell to a 10-year low in April. He defended the purchases as a long-term investment in a shale liquids boom that’s now poised to make the U.S. the world’s largest crude producer by 2020.

Some mining company executives and shareholders are paying the price for a $1.1 trillion mergers and acquisitions binge over a decade. Failed deals in aluminum and coal caused $14 billion in writedowns at Rio and cost CEO Tom Albanese his job. Cost overruns contributed to Cynthia Carroll’s departure as CEO of Anglo American, which cut $4 billion off the value of an iron ore project in Brazil. She leaves in April.

Under Kloppers, deals totaling about $200 billion were aborted or rejected, including hostile bids for Rio Tinto and Potash Corp. of Saskatchewan Inc. Kloppers could have remained as CEO if he wanted and nothing pushed him out, according to the person familiar.

BHP’s decision to abandon the bid for Rio Tinto during the depths of the global financial crisis laid the foundations for the company’s growth since then, Kloppers told reporters last week.

Before it's here, it's on the Bloomberg Terminal.