Mike Henry leads BHP Billiton’s efforts to mine one of its most important resources: data.
As metals prices have retreated from their supercycle peaks, BHP and other mining groups are scrabbling for ways to maintain profits by bearing down on costs and reversing an alarming decline in productivity. Labour productivity in Australia, for example, has gone down between 30 and 50 per cent over a decade, according to Mr Henry, BHP’s president of marketing and technology.
Miners also know that shareholders, irritated by cost blowouts and low returns over the latter years of the commodity supercycle, prefer to hear about companies sweating the small stuff, looking for low-cost and incremental improvements rather than about the next big acquisition.
BHP’s search for efficiency is leading it to crunch all sorts of data – down to the way its trucks are driven to limit maintenance downtime – to find and spread the best ways of working. This month the final 17,000 of BHP’s 42,000 staff were connected to a software platform put in place over the past six years that allows operating information from around its operations to be compared.
“It is the first time that we have actually had the ability to measure business performance in a common fashion and at a granular level across the whole of the business,” says Mr Henry in a Financial Times interview. “One of our advantages should be the scale we have, and for almost any individual business process or work process, I am confident that there would be an example of either best practice or very good practice somewhere across the global organisation.”
Mr Henry says miners have always cut costs when prices fall but struggled to maintain higher productivity this way. “It is a top-down blunt instrument,” he says. “We are adopting a different approach. We have put the platform in place; we are working at bottom-up, and we believe that is going to better enable us to make this sustainable.”
Some of the data analysis is aimed at taking out production bottlenecks so miners can raise production cheaply. In coal, BHP claims to have improved truck use at one mine by 25 per cent through systems tracking each vehicle and scheduling repairs more efficiently. In iron ore, one mine improved the efficiency of its train loading by 20 per cent in just three months this year, and is using mobile crushing units at mines to get the most out of capacity.
Mr Henry acknowledges miners may lag behind other industries in using data. “With perfect hindsight, you would want to have this in place from day one, but the reality is that within the resources and minerals industry currently, this is certainly going to be at the good end of the spectrum,” he says.
Reporting quarterly production figures on Tuesday, ahead of its annual UK shareholder meeting on Thursday, BHP said iron ore output was up 23 per cent year on year and should now be 5m tonnes higher than forecast at 212m tonnes this year. “Debottlenecking” should help to raise iron ore output to 220m tonnes by the end of 2015, and ultimately to between 260m and 270m tonnes, BHP said.
Iron ore generated nearly one-third of group revenue last year and this year the price of the key steelmaking ingredient has exceeded the most optimistic of forecasts, averaging more than $135 a tonne and boosting profits at BHP, Rio Tinto and Fortescue Metals Group. Analysts estimate that underlying iron ore demand in China has been running at 6 per cent to 8 per cent this year but with a large amount of supply due to come on stream most analysts believe the price will fall next year.
Speaking before Tuesday’s figures, Mr Henry says BHP is “certainly not expecting” Chinese steel production to remain at current elevated levels.
“Iron ore has surprised a little bit to the upside this year, and if you look at why …it was because steel production – running at 785m tonnes annualised – was well above what most people, including ourselves were looking for,” he says. “We were looking for 750m or 760m tonnes.
“Our general view has always been that you will see steel growth rates in China fall back down to the 3 per cent to 4 per cent level, so roughly 50 per cent of GDP growth. I would see this year as being a little bit of an anomaly in that regard.”
Mr Henry says a sharp iron ore destock is unlikely. “We do not have a situation like we had a year ago when iron ore inventories were sitting at higher levels, steel inventories were sitting at higher levels,” he says, adding that customers in China were more comfortable running lower stocks because they could rely on market liquidity for security of supply.
On copper, another key commodity for BHP, Mr Henry says the long-run fundamentals were “hugely positive” because of declining ore grades and 3 per cent annual demand growth.
“People expect that you will need to add just over 1m tonnes of copper to the market each year for the foreseeable future, so that is equivalent to bringing on a new Escondida [the world’s largest copper mine] and there are not many Escondidas out there.
“Production is going to be met from smaller, poorer-grade operations than it has been historically, and the effect of that will be to keep long prices up.”
Mr Henry insists BHP is under no pressure to sell non-core operations after divesting $6.5bn of assets last year. “There is no fire sale out there,” he says.
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