(FROM THE WALL STREET JOURNAL ASIA 11/19/14)
By Rhiannon Hoyle
OLYMPIC DAM, Australia -- BHP Billiton is making a bold bet on
China's rising middle class, starting here in the red sand dunes of
southern Australia.
Deep beneath the ground at Olympic Dam lies one of the biggest
copper deposits in the world -- and central to a new investment
strategy for the resources company.
From Australia's Outback to the Andes, BHP is rethinking how it
spends the vast earnings generated from supplying the world with
raw materials used in everything from bridges to skyscrapers. Off
the table are any major new investments in producing iron ore and
coal, which have long been the company's cash cows.
Instead, BHP is turning more to copper and petroleum, while
spinning off other businesses from aluminum to manganese into a new
company that may be valued at as much as US$18 billion.
Key to BHP's strategy is the belief that Asia's, and
particularly China's, burgeoning middle class is about to ramp up
spending on consumer goods such as air conditioners and
refrigerators, which require a lot of copper and energy. That
effectively is a bet that China is shifting to a consumer-driven
economy. Household spending accounts for only around 35% of the
Chinese economy versus nearly 70% in the U.S., according to the
World Bank. In contrast, a long-running construction boom in China
that has sustained demand for iron ore and metallurgical coal,
which are ingredients in steel, appears to be losing steam as
Beijing cracks down on real-estate speculation.
The new approach will come under scrutiny Thursday when BHP
hosts its annual meeting with Australian shareholders, many of whom
feel the company isn't doing enough to boost returns.
BHP Chief Executive Andrew Mackenzie also plans at a strategy
briefing for investors in Sydney four days later to flesh out plans
to refocus more on copper.
"Copper demand is going to continue to grow for a really long
time," said Mike Henry, BHP's marketing president. He predicted
that the market would face a significant shortfall by 2018 and
that, without new or expanded mines, global copper demand will
outpace supply for at least a decade.
China will be the driving force for that demand, as it was with
iron ore and coal. The country already buys 40% of global copper
output and could consume more as incomes rise.
BHP also will look to shift new investment into petroleum. The
Anglo-Australian company, which is mulling new projects from the
Gulf of Mexico to Trinidad and Tobago, thinks energy demand will
similarly rise as China's middle class balloons.
"Our confidence in that transition [to a consumer-driven economy
in China] is as strong as it has ever been," Mr. Henry said.
But it is a risky bet.
China's transition to an economy driven by consumer spending is
unlikely to be smooth. The world's second largest economy, behind
that of the U.S., faces an aging population, mounting debt problems
and persistent corruption -- factors that could hobble an economy
that has been an engine of global growth while the U.S. and Europe
have sputtered.
Investors also are wary about mining companies preparing
substantial bets on commodities after recent investments soured,
especially in iron ore, for which prices have slumped to their
lowest level since June 2009.
But BHP expects global copper demand to rise around 50% to 40
million tons by 2030, keeping prices high. Many analysts agree.
Bank of America Merrill Lynch predicts copper prices will rise 20%
to US$8,245 a ton by 2017.
Even if Chinese demand proves disappointing, BHP thinks other
countries will buy more copper. It estimates that 40% of Indian
households will have air conditioners by 2030, compared with fewer
than 10% now. Each unit will require about of copper.
Both the risks and potential rewards of BHP's new strategy can
be seen in the Olympic Dam mine, one of a handful of vast copper
mines that BHP operates around the world. Located near the tiny
Australian town of Roxby Downs, where locals watch out for deadly
king brown snakes and drivers dodge mobs of emus, the Olympic Dam
mine is one of the world's biggest copper resources and among the
largest deposits of uranium and gold.
Digging up its mineral riches is difficult and expensive. Most
of the copper lies deep beneath the surface. BHP gains access to it
through a labyrinth of tunnels some long, resembling a giant,
underground, multistory parking lot. The tunnel system makes
Olympic Dam Australia's biggest subterranean mine and home to the
world's longest automated underground train.
The mine now produces about 185,000 tons of copper a year but
could yield much more if BHP can get the metal out efficiently. In
2012, when Mr. Mackenzie headed the copper business, BHP's board
abandoned a US$30 billion plan to quadruple output by building a
huge open pit, deeming it too expensive.
In Roxby Downs, in a testament to the fallout after the
expansion plan was nixed, mining equipment sits idled and vacant
shops line the main street.
Now, BHP is carrying out a big chemistry experiment hundreds of
miles to the south, in South Australia's capital Adelaide, which
the company hopes will help it produce more copper from Olympic Dam
without such huge costs.
Dozens of columns stand in sheds on an industrial estate north
of Adelaide, filled with rocks from the Olympic Dam site crushed to
the width of a human thumb. BHP and scientists from Bureau Veritas,
a mineral-testing organization, are pouring acid on the rocks to
dissolve the copper and other minerals inside, then recovering the
minerals from the liquid later.
Scientists say it will be years before BHP can do this on a
large scale at Olympic Dam. And even then, it will be a lengthy
process; copper extraction takes around a year to complete via this
method.
That is bolstering expectations of a shortfall in global copper
supply and higher prices, which could boost profits for big
investments in new mines.
"If they are correct and copper is facing an extended period of
deficit, then expansion [of existing copper operations] would be a
no-brainer," said AMP Capital portfolio manager Andy Gardner.
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