Clyde Russell is a Reuters columnist. The views expressed are his own.
LAUNCESTON, Australia, Aug 20 (Reuters) – BHP Billiton’s plans to spin-off unwanted assets may have received a tepid welcome from investors, but the real news from the mining giant’s results is the limits to cost-cutting.
Delving into BHP’s results presentation on Tuesday shows the company has been successful in cutting expenses, with a 12 percent cut in cash costs at the flagship Western Australian iron ore operations, while the Queensland coal business recorded a 24 percent drop.
BHP said its productivity-led volume and cost efficiencies were $2.9 billion in the year to end June 2014, beating its target by $1.1 billion. Given the company’s net income for the period was $13.4 billion, the $2.9 billion in savings represents about 22 percent of the profit, which certainly looks impressive.
The problem comes when you start to look at the savings achieved, the potential for further cost-cutting and the likely trajectory of commodity prices.
BHP said it produced a record 225 million tonnes of iron ore in the 2014 financial year, which resulted in revenue of just under $23 billion, or roughly 34 percent of the group’s total revenue.
The miner said it achieved a realised iron ore price of $103 a tonne for the year, which was 6 percent below the prior financial year.
However, Asian spot iron ore .IO62-CNI=SI prices have fallen 31 percent this year to $93 a tonne on Tuesday, and the consensus is that they will remain below $100 for the foreseeable future as big miners such as BHP, Anglo-Australian rival Rio Tinto and Brazil’s Vale ramp up output even as Chinese demand growth weakens.
Put another way, a tonne of iron ore is currently $41.20 a tonne less than it was at the start of the year, while BHP’s cost cutting resulted in a saving of about $3.53 a tonne over the year to end June.
BHP’s presentation also provides a useful calculator of the impact of price changes in commodities on its expected profit for the year to end June 2015.
Every $1 drop in the price of iron ore wipes $135 million off net profit after tax. The company plans to increase iron ore output to 245 million tonnes in the 2015 year, a gain of 20 million tonnes.
But the extra revenue generated from this output boost seems likely to be overshadowed by the lower profits from a weaker iron ore price.
If BHP achieves a selling price of $96 per tonne for iron ore in the current financial year, which is the consensus forecast price for 2015 in a Reuters poll of analysts, this means a drop of $7 a tonne from the 2014 financial year.
For the rest of this column, click here: http://in.reuters.com/article/2014/08/20/column-russell-bhp-billiton-commodities-idINL4N0QQ29Q20140820