×

BHP cuts production costs in response to metal price dive

BHP Billiton, the world's largest mining company, said on Tuesday it would slash its iron ore production cost further and cut spending to better withstand a downturn in commodity prices.

Giant iron ore producer BHP and rival Rio Tinto are locked in a battle to become the lowest cost iron producer. At the same time, they are increasing production of the steel ingredient, hoping to squeeze out competitors and gain market share.

Getty Images

BHP Billiton Chief Executive Andrew Mackenzie dismissed criticism that such a strategy was fuelling the sharp slump in iron ore prices.

"We operate in highly competitive and cyclical markets, where earnings outperformance through the cycle depends on being the most efficient supplier, not supply restraint," Mackenzie said, speaking at an investor conference in Barcelona.

"In this environment we are well prepared for the possibility of an extended period of lower prices in several commodities."

Read MoreBHP Billiton: Iron ore spot price is fair value

Conserving capital has been a theme in the mining sector since metals prices started to cool in 2011 as the commodity supercycle came to an end.

BHP said it would reduce its capital and exploration expenditure to $9 billion in the 2016 financial year from $12.6 billion in 2015 as it completes its growth projects.

The Anglo-Australian mining company said also it expected to reduce iron ore unit costs at its Western Australia operations by 21 percent to $16 per tonne in the 2016 financial year, from just below $20 per tonne last month.

"That's is an incredibly low cost. That's targeting even lower levels than Rio," said Investec analyst Hunter Hillcoat.

Rival Rio Tinto, the lowest cost iron producer, had an average cash cost of $19.50 a tonne in 2014, and forecasts it will be about $17 a tonne this year.

Read MoreBHP Billiton sees evolution of iron ore market

Analyst Paul Young at Deutsche Bank in Sydney said he expected Rio to still be ahead of BHP in 2016, forecasting its cost will fall to $13-14 a tonne.

Both producers have been helped in their cost-cutting efforts by weaker oil prices and a lower Australian dollar against the U.S. dollar. But competitors have benefited from these too.

"I don't expect these cuts to result in higher margins for BHP and Rio," said Liberum analyst Richard Knights. "Costs are being cut aggressively by marginal producers as well which in an oversupplied market, leaves more room for the price to fall."