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In a bold and stunning presentation today, BHP Billiton (LSE:BLT) lived up to its slogan of “Resourcing the Future“. In its coal review, the company revealed that it is shifting gears to align the company operations to be in snyc with their projected outlook for supply and demand for metallurgical coal.
Frankly, I am impressed with the management team of BHP, whose coal division is led by Dean Dalla Valle. In a world of “grab all you can” you might think that the world’s largest producer of coal would be tempted to increase its presence by going after more market share currently held by competitors. But BHP has taken the higher – and might I add – the wiser road. The company “has ruled out further expansion of its coal mining business for now,” to focus on a “capital expenditure profile [that] will trend towards the rate required to sustain our operations in the medium to long term,” according to VP of Finance, Gideon Oberholzer.
Dalla Valle told those in attendance that the company will not be considering an new major projects whilst under the new plan, and that current “assets must earn their right to remain in the portfolio.”
One of the driving factors behind BHP’s decision is the outlook for what has previously been a voracious appetite for coal in China. It’s not so much that China’s appetite might wane as BHP foresees it, in the not too distant future, but China is eventually going to be able to feed much of its demand from its own mines. Not only that, but BHP anticipates that the abundance of scrap metal for use in steel production is going increase dramatically, which China will use to its own benefit. BHP expects Chinese demand for steel production – and therefore, coal – will peak by 2025.
Whilst any number of companies, and analysts as well, are suggesting that India could be the next country to generate a spike in demand for metallurgical coal, but BHP disagrees. Based on an already slower demand than expected, BHP’s is less inclined to accept that India shows quite the same promise that others may think.
Now, if you think that it is hard to turn a large ship around quickly, how much harder and how much longer does it take it a company with a market cap of £40.9 billion? Which is why it is so important that a company like BHP must not allow itself to be in a reactionary position. Instead of reacting, it must anticipate. To wit, from this point forward, BHP “will pull the productivity lever hard, with an extreme focus on operating performance.” The company expects to “substantially increase” its free cash flow by maximizing current capacity, exploring and implementing significant operational cost savings, and simply its portfolio by selling off non-core and less productive assets. Although no new capital projects will be started, all of those currently in progress will continue on to completion.
BHP’s share price fell slightly on the London exchange today by 0.18% to 1,935.0 just before 2:00 pm. I expect that its general upward trend will continue as investors realize the company’s increased profitability as we move forward.
