BHP Billiton is upping production to lower costs. Industry insiders say CEO Andrew Mackenzie is crushing his own market. “Does the Rio marketing guy speak to the guy at BHP? Fuck no.”

 

At BHP Billiton's Goonyella coal mine in Queensland, its biggest coal operation, the company has set up pitstops, copied from Formula One, to refuel its massive dump trucks fractionally faster. The pitstops are dotted along the mine's 12 miles of track, minimising downtime to escalate tonnage and drive down costs. In four years, Goonyella has nearly doubled production to 9m tonnes.
     Output growth is just as punchy at BHP's other coal mines in Queensland, including Blackwater, Peak Downs and South Walker Creek, all held under a joint-venture with Japan's Mitsubishi. Its mine managers are wringing efficiencies from their coal wash plants, by never turning them off. BHP wants each one to run for 8,000 hours a year, close to non-stop.
     It is also opening vast new mines, including Daunia and Caval Ridge, which is budgeted to run for 60 years. In total, the cluster of mines have upped production from 24m to 43m tonnes in four years. BHP's coal business is “firing on all

cylinders” and “driving productivity hard”, according to Mike Henry, the group's head of Australia, who oversees coal. “They own the coking coal market,” one competitor says.
     Some question the company's strategy. By maximising tonnage, BHP is crushing its own market. Henry has delivered a 15 per cent cut in coal costs in twelve months, but has been forced to watch $42m evaporate for every dollar move down in the coal price, destroying $917m by the year-end. According to Henry, who previously worked in coal marketing, when it comes to upping production the company has to operate under the “assumption” that “everybody's doing it.” BHP has rolled-out the same maxim in copper and iron ore.

“Hopping Mad”

     According to banking sources, rival mining bosses are “hopping mad” about how BHP is behaving, as the world's largest mining company.
     Collusion laws block mining bosses from sitting down privately to discuss supply restrictions. Mine marketing bosses, who deal with buyers, are meanwhile too competitive to ever co-ordinate. “They're paid through the nose and are always flying God-knows where,” one former metal trading executive says. “Does the Rio marketing guy speak to the guy at BHP? Fuck no. Does the head of iron ore at Rio know what the marketers are doing? Fuck no. That's how it was when we were running prices. Nothing will have changed.”
     But mining bosses can stand up at banking

events and shout out their intentions. At a banking event in Miami earlier this, Glencore's boss Ivan Glasenberg repeatedly stressed that for the industry to generate truly huge amounts of free cash flow, its biggest players need to overcome their tendency to endlessly overproduce.
     Mining companies have spent over a trillion dollars of capital in the last 12 years, according to data by Citi and Morgan Stanley, nearly doubling the supply of most metals. To recoup the capital, the industry must boost cash flow, Glasenberg said, rather than volumes, cashing in on an upswing in prices by not flooding the market. “Volume growth is not an end in itself.” In its latest set of results, Glencore pulled back its own coal output by 5m tonnes, pointedly referring to “curtailments” and “proactive supply reductions”.
     “When the markets do get stronger,” Glasenberg said at the same Miami event three years ago, “let’s keep the market tight for a while. Not that we’re here to create an anti-competitive nature, but we’ve got to get returns... it’s easily done if we just use our brains.”

Brainy Scot

     BHP's chief executive Andrew Mackenzie is pretending not to hear his cue. Known as a brainy Scot, Mackenzie maintains a low-key presence in the industry, saying he wants to make BHP boring and utility-like, implying safe, predictable returns.
     He has repeatedly apologised profusely...