By Stuart Burns
BHP Billiton (BHP) has nominated a replacement for retiring Chief Executive Marius Kloppers. That says much about the direction that BHP, its Chairman Jac Nasser, and the firm's principal shareholders see the industry heading over the next five to 10 years. We wrote recently on John Authers' predictions in the Financial Times about an end to the commodities super cycle, about how metals in particular could be in for a prolonged period of price stagnation, and about how oil was perhaps the only exception to the decline of the China-driven super cycle. Although the article didn't make much of it, we would also exempt agricultural products like corn and wheat; population growth and water scarcity will continue to drive prices in those sectors.
But metals, the theory goes, are entering a period of more stability, benefiting from significant new mine investment in the last five to 10 years and slower, steadier, less raw-material-intensive growth in China. The internal appointment of Andrew Mackenzie as BHP's new CEO could be seen as supporting that move towards consolidating existing investments -- maximizing returns rather than making grand acquisitions or expansion plans -- and focusing more on oil production in the years ahead. As this FT article explains, Mackenzie -- who spent 22 years at BP (BP) before moving to Rio Tinto (RIO) in 2004 and then to BHP in 2008 -- has an academic record few senior executives in the resources industry can match. He also has, from his wide experience at BP, a deep understanding of oil and gas. As a scientist, he published more than 50 research papers and was acknowledged by the Geological Survey for his "extraordinary and long-lasting contributions" to understanding of "petroleum generation, migration and entrapment," the paper said.
His focus at BHP is said to be on costs and capital discipline, issues he's familiar with from his time running BP's low-margin chemical business and which are critically important given the weaker outlook for commodity prices, the company said. BHP Billiton is most widely known as an iron ore and coking coal producer (principally in Australia, and with extensive copper resources in Chile), but the firm is actually a more diversified resources company than some give it credit for, as the graph below from the FT shows.
Following the ill-timed acquisition of the Fayetteville gas assets from Chesaspeake Energy in 2011 and Petrohawk, an independent U.S. oil and gas company, BHP is now a sizable oil and gas producer in its own right. Those gas assets have been severely written down as gas prices have remained low, forcing the company to take an impairment charge of $2.84 billion against the value of its Fayetteville gas assets last year alone. Even so, the firm is well placed to expand further into the oil sector, particularly unconventional shale bed production, in the years ahead.
What Does This Say for Conventional Metal Mining?
It will remain a core part of BHP's portfolio, but consolidation and maximizing the returns from existing assets will almost certainly be the order going forward. It is unlikely we will see BHP engaged in major mining acquisition activity or, indeed, major mine expansions -- particularly in Australia, where the strong Aussie dollar and rising resource taxes are putting returns under pressure.