BHP warns Australia needs to remain competitive as it mulls Nickel West future

The Australian miner has warned the country is at risk of becoming uncompetitive as new suppliers come to market, while it mulls closing Nickel West.

BHP has warned new rival suppliers will test Australia’s iron ore dominance after prices fell below $US100 a tonne, while a downturn in the nickel industry could see thousands of jobs cut from its West Australian ­operations.

The company used a presentation to shareholders on Monday to caution the global landscape would become more competitive by the end of the decade, as African mines supported by China came online.

BHP executives said Australia needed a competitive framework, including better taxation and balanced industrial relations laws, to ensure domestic miners were financially sustainable.

Investors were told BHP was moving to decide the fate of its Nickel West operations, which could involve shutting down facilities for well into the next decade and laying off the 3000-strong workforce until nickel markets improved.

Nickel prices have come under increasing pressure as Chinese-owned and operated mines in Indonesia have aggressively ramped up output in the past year.

BHP chief executive Mike Henry said Nickel West was losing thousands of dollars for each tonne of nickel produced at a time when significant investment in the business was required.

“On top of that, we’ve got the need for a major smelter rebuild coming towards us, which is many hundreds of millions of dollars in capital expenditure. Looking at this we’ve said it clearly isn’t sustainable,” he said.

“We have to figure out how we make this business more sustainable. Part of that’s bringing costs down and choices we make around capex.”

Mr Henry hoped a decision about whether Nickel West would go into a care and maintenance mode for the rest of the decade would be made as soon as possible, to give certainty to its 3000 staff and external people involved with the operation.

BHP’s outgoing chief financial officer David Lamont said the decision to review the division was necessary given the price slump.

“To put that into context, 30 per cent of the Australian nickel market has gone offline and another 30 per cent is under pressure,” he said.

BHP remained committed to Australia, but said the country needed to ensure it was competitive.

“Part of that care and maintenance is that if we did go down that path, we would stop operating and producing product, but we would have to have an eye to how could we bring it back online if conditions changed.”

BHP flagged a $US2.5bn impairment in relation to the division at its half-year results last month and said the price slump could slow development of the West Musgrave project.

Mr Lamont said mining projects in Australia were at risk because miners faced high corporate tax rates at a time when competition for capital was intense.

“In Australia at the moment, we are facing one of the highest corporate tax rates. And then when you overlay that with royalty regimes that exist at a state-based level, we do get some very high effective tax rates,” he said.

“In Queensland at the moment, it’s in excess of 62 per cent as the effective tax rate. So it’s a high taxing regime.

“Against that, we’ve got to see the reward balancing out against that risk exposure that we have.”

He said Australian miners were being paid 12-15 per cent more than those working for BHP in Canada and the US without any increase in productivity.

Mr Henry said he supported well-paying jobs in Australia, but recent workplace laws introduced by the government could get in the way of enhancing productivity.

“For us to remain competitive in these globally contested markets, there has to be a commensurate productivity uplift associated with that,” he said.

“That’s where we think at times policy can get in the way of enhancing productivity, and that’s our fear about some of the recent changes that are being pursued here in Australia.”

He added BHP always wanted to sit down with the government and other stakeholders to create the right policy settings to support better productivity and ongoing prosperity for the nation.

On Monday, Macquarie Equities downgraded BHP from outperform to neutral with a $42 per share target because of cuts to the medium-term outlook for iron ore, driven by the west African supply response and weaker-than-expected Chinese demand.

Singapore iron ore futures were up 1.3 per cent to $US101.20 per tonne on Monday after diving 15 per cent in the past week.

New chief financial officer Vandita Pant said she saw a balanced market for iron ore, with demand coming from infrastructure projects and parts of the Chinese economy in the past year.

But in the long term she expected a sharp increase in iron ore output, which could act as a headwind for prices.

“For a very long time, we have been saying that China demand is now in a plateau phase and African supply will come in later this decade, and that’s why it’s important that in the commodity market, which is going to become more competitive, we are very well positioned for that,” Ms Pant said.

She said BHP’s status as the lowest-cost producer of iron ore globally would give it a competitive edge, and there were also new markets to explore, including India, which had a big infrastructure program.

“As India continues to build its country’s infrastructure, manufacturing base, steel will continue to increase in production in India,” she said.

“We expect the Indian production of steel to double by the end of this decade.”

Originally published as BHP warns Australia needs to remain competitive as it mulls Nickel West future