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Cost cutting and productivity priorities against mineral slowdown

BHP’s incoming CEO
Andrew Mackenzie (left)
and predecessor Marius
Melbourne, Australia — 25 February 2013 – BHP Billiton Limited (BHP) “’ the world’s biggest mining company “’ says an expected slowdown in demand for minerals over the next five years makes cutting costs and boosting productivity priorities.

“I’m committed to drive an agenda of productivity and that will almost certainly be a top theme,” the company’s incoming CEO Andrew Mackenzie, said in an interview with the Australian Broadcasting Corporation, according to a transcript quoted by Bloomberg News.

Faced with falling prices and crimping profits, BHP unveiled US$1.9 billion in cost savings when it released its half-year results as net income fell 58% after commodity prices declined. Mackenzie “’ currently head of BHP’s copper unit, who previously worked at BP plc (BP/) 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 to 20% pa to 2 to 4% a year,” Kloppers said in the joint interview for ABC’s Inside Business programme. “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 US$4.3 billion of assets in the half and in August put projects estimated to cost about US$68 billion on hold.

 “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% lower during the six months to December 31, data from The Steel Index shows. Iron ore may tumble to US$110 a metric tonne by the end of the year, as mines in China boost production, cutting import demand in the world’s largest buyer, Westpac Banking Corporation (WBC) said earlier this month. Iron ore last traded at US$153.60 a tonne on February 22.

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

Under Kloppers, deals totalling about US$200 billion were aborted or rejected, including hostile bids for Rio Tinto and Potash Corporation of Saskatchewan Inc.

Source: Bloomberg News. For more information, click here.