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BHP - operational review for the nine months ended
Note: All guidance is subject to potential impacts from COVID-19 during the June 2020 quarter.
- Our highest priority is the safety, health and wellbeing of our workforce and communities. We have taken action to reduce the spread of COVID-19.
- Our financial position is strong. Underpinned by our low-cost operations, our business is resilient and expected to continue to generate solid cash flow.
- Strong underlying operational performance across the portfolio offset the impacts of planned maintenance, natural field decline and wet weather in Australia. Group copper equivalent production was broadly unchanged over the nine months ended March 2020, with volumes for the full year now expected to be in line with last year.
- Record production was achieved at Western Australia Iron Ore (WAIO) and Caval Ridge, while record average concentrator throughput was delivered at Escondida and record ore was stacked at Spence.
- Production guidance for the 2020 financial year remains unchanged for petroleum, iron ore and metallurgical coal. Copper guidance for our operated assets is broadly unchanged and Antamina guidance is under review following temporary suspension of operations due to COVID-19. Energy coal production guidance is under review with Cerrejon placed on temporary care and maintenance due to COVID-19.
- Full year unit cost guidance/(1)/ remains unchanged for the 2020 financial year.
- Our major projects under development in petroleum and iron ore are tracking to plan. As a result of measures put in place to reduce the spread of COVID-19, the Spence Growth Option schedule and timing for completion of *the shafts at Jansen are under review.
- We have flexibility in our capital and exploration expenditure. We are reviewing our guidance for the 2021 financial year and it will be lower than the current guidance of around US$8 billion. We will provide updated guidance with our full year results.
BHP Operational Review for the nine months ended 31 March 2020
Major development projects
At the end of March 2020, BHP had six major projects under development in petroleum, copper, iron ore and potash, with a combined budget of US$11.4 billion over the life of the projects. Our major projects under development in petroleum and iron ore are currently tracking to plan and are subject to potential impacts from COVID-19.
The Spence Growth Option is continuing to progress, however the schedule is under review with first production potentially a few months later than December 2020 as a result of the measures taken to facilitate social distancing protocols. First production is still expected to be in the 2021 financial year.
In March 2020, final shaft lining work at Jansen for two shafts was reduced to focus on one shaft at a time, with reduced crews. This reduction in activity was taken as part of our COVID-19 response plan and was aligned with the Provincial and Federal Government of Canada's emergency measures for COVID-19. It reflects a reduction in the number of contractors and in the need for out-of-Province workers on site. Timing for completion of the shafts continues to be under review. BHP will continue to assess the impacts of COVID-19 and the temporary reduction in activity.
COVID-19 update on operations
At this time, among our global workforce of 72,000 people, BHP has had a small number of confirmed cases of COVID-19, all of whom have either recovered or are recovering well. Our protocols have functioned effectively and there has not been any transmission from these individuals to co-workers.
BHP has taken action to help keep its people, their families and communities safe. Strict health and travel guidelines have been put in place to reduce the spread of COVID-19. While each of our operated sites is different, these measures include:
- Reduced number of people at mine sites and other operational facilities to business critical employees and contractors only.
- Changed rosters to reduce workforce movements. In addition, some non-residential workers have temporarily relocated to the jurisdiction of operation to meet tighter border controls.
- Regular health screenings and temperature checks for workers, for example before boarding planes or buses and when entering sites.
- Strong uptake of social distancing practices and changes to the way we travel to work, operate at work and run accommodation camps including hygiene practices and deep cleaning to reduce the risk of transmission.
- Further information on the measures we have implemented is available at: bhp.com/covid-19.
We continue to monitor the situation and to update our measures based on advice from country-specific health authorities and governments.
Our operations continue to run well. The changes we have put in place have resulted in the deferral of non-critical activity. Our supply chains remain open and we have adequate supplies to operate and maintain critical equipment, with alternative suppliers identified for many of these. Our financial position is strong. As at 31 December 2019/(2)/, net debt was US$12.8 billion, at the lower end of our target range, and cash and cash equivalents were US$14.3 billion. This strong position, combined with our low-cost operations, means our business is resilient and expected to generate solid cash flow through the cycle.
We are in a differentiated position to be able to continue to provide regional jobs, products to customers and payments to suppliers. In doing so, we can help underpin continued economic activity. We have accelerated payments to many of our suppliers and established funds to help support regional and Indigenous communities and health and community services. We are committed to playing our part in the collective response to the COVID-19 pandemic.
Our strong position allows us to continue to invest through the cycle and we have flexibility in our capital and exploration expenditure. We are reviewing our capital and exploration guidance for the 2021 financial year and it will be lower than the current guidance of around US$8 billion. We will provide updated guidance with our full year Results Announcement to be released on 18 August 2020.
Marketing update
Short term economic outlook
The global economy has been dramatically impacted by COVID-19. Many major economies will contract heavily in the June 2020 quarter, including the United States (US), Europe and India. In contrast, China has moved from intensive viral suppression to early indications of economic recovery. The majority of heavy industrial activity had restarted as of the end of March 2020, albeit with considerable variation across provinces and sectors. We note that the developed world in aggregate may have tentatively passed the peak in new COVID-19 cases for wave one infections, while the developing world is unfortunately still in the escalation phase/(4)/.
The arc of recovery will vary widely across countries. Where "hibernation policies"/(5)/ have been enacted, we anticipate a smoother resumption of activity after the first wave than would otherwise have been the case. A considerable amount of monetary, liquidity and fiscal policy support has been mobilised in response to COVID-19. Early indications are that liquidity support measures have been effective in dampening financial volatility. It is still uncertain whether traditional monetary and fiscal stimulus policies will have below-average or above-average multiplier effects. A lower multiplier could result from depressed consumer and business confidence due to the deleterious impact of COVID-19 on both jobs and profitability. A higher multiplier could occur if the lagged impact of stimulus coincides with the release of pent-up demand as economies wake from hibernation, with the important caveat that major second waves are averted. Each is a plausible book-end for assessing where the global economy might be as the 2021 calendar year approaches.
Chinese domestic industrial activity has been improving, spurred on by supportive credit and fiscal policy. The major risk to maintaining that positive trajectory is the possibility of a second wave of infections emerging. That is among the range of pathways that we consider and it is the key caveat for each of our regional outlooks. Indications are that the US and Europe will see a more protracted period of activity disruption, a deeper labour market impact and a flatter trajectory for the recovery once it arrives. India, Japan and South Korea will see negative impacts on industrial activity from their own suppression efforts and those of their trading partners. Negative feedback loops to China from the downturn in the rest of the world are factored in to our range analysis.
Short term commodities outlook
Exchange traded commodities have been sold rapidly down close to, or even through, cash cost support. Bulk prices have been more resilient. Across the portfolio, a combination of economic curtailments and COVID-19 induced disruptions are a partial offset to the demand shock. Based on our bottom-up analysis, informed by engagement with our customers, we expect that steel production ex-China could contract by a double-digit percentage in the 2020 calendar year. Steel makers from a variety of regions, including Europe, the Americas, India and Japan have announced or signalled full shutdowns or curtailments in the June 2020 quarter. This reflects both logistical difficulties created by COVID-19 (e.g. inter-state labour availability in India) as well as collapsing demand in downstream industries such as automotive (e.g. Europe, where at one stage every major auto plant on the Continent was constrained). Some of our customers are choosing to reduce production at their blast furnaces in the face of this demand shock.
In China, blast furnace utilisation rates have increased from around 73 per cent earlier in the year to almost 79 per cent in April. Daily rebar transactions are now at or above normal seasonal levels. Finished inventories are falling as downstream activity improves, although the level is still very high relative to history. While we note that only about 10 per cent of Chinese apparent steel demand/(6)/ is exported in finished products (for example in excavators, ships or wind turbines), the depth of the weakness in global demand will weigh on Chinese flat products manufacturers. Electric-arc furnace utilisation fell as low as 12 per cent, but has now recovered to 56 per cent. If China can avoid a second wave of COVID-19, steel production may rise slightly in the 2020 calendar year.
The Platts 62% Fe Iron Ore Fines price index has been resilient to the COVID-19 shock so far. This outcome reflects solid Chinese pig iron production in the year-to-date (1.7 per cent increase from last year), and a continuation of the relatively soft seaborne supply picture that was in evidence prior to the shock. Port outflows have been roughly 10 per cent higher year-on-year from March 2020 through mid-April 2020. Chinese domestic production had fallen back to less than 190 Mtpa in February 2020, but has since recovered to around 202 Mtpa. That compares to 211 Mtpa in December 2019. Chinese port stocks have declined consistently since February 2020, with the latest weekly data showing an 18 per cent decline (26 Mt) year-on-year. Weakness ex-China is less consequential for price formation in iron ore than in other commodities, with China's 1.1 billion tonne import requirement set against Japan's 120 Mt, Europe's 100 Mt and South Korea's 75 Mt, for example (all figures rounded).
The Platts Premium Low-Volatile Metallurgical Coal price index actually increased during the first few weeks of the COVID-19 outbreak, partly reflecting supply disruptions in China, Mongolia, Australia and elsewhere. However, as COVID-19 began to spread to the major importing regions of Europe, India and developed Asia, the demand side of the equation has begun to outweigh constrained supply. As the velocity of demand disruption accelerated in late March 2020 and early April 2020, prices have returned to the lows seen in the second half of the 2019 calendar year. The geographic diversification of metallurgical coal demand is a long term advantage but an impediment under today's unique circumstances.
Copper prices fell sharply to levels close to cost support in March 2020 amidst depressed macro investor sentiment. They have since stabilised a little above the March lows. Our judgement, informed by our regular customer engagements, is that the decline in ex-China demand will be less severe than for steel. Conversely, in China, copper demand could be marginally weaker than steel in the 2020 calendar year, based partly on copper's greater exposure to indirect exports (approximately 20 per cent versus approximately 10 per cent), although recent trends within our customer base have been promising relative to top-down expectations. On the supply side, evidence of both economic curtailments and COVID-19 related disruptions have emerged. We note that marginal sources of supply behaved quite rationally during the 2015/16 downturn, with a number of smaller, higher cost operations across multiple continents choosing to curtail/(7)/. Additionally, we observe that prices that are challenging for higher cost mines are also associated with lower availability of scrap. This is another mechanism whereby the copper market dynamically rebalances at times of stress.
Crude oil fundamentals shifted abruptly in March 2020 as the result of collapsing transport activity on the demand side and the unexpected flip of the OPEC Plus grouping from supply discipline to a price war. After crashing in March 2020, prices have exhibited considerable two-way volatility in April 2020, with speculation of a grand bargain to curtail global supply offset by the physical reality of the current glut. Notwithstanding the April 9 2020 agreement by OPEC Plus to cut output by 10 MMbpd, with possibly more to come from G-20 producers, such is the scale of the demand loss that global storage capacity is expected to be tested over coming weeks and months. It is possible that differentials for inland crudes that are disadvantaged with respect to storage availability will remain historically wide over this phase of market adjustment. Large and small producers alike have announced sharp cuts in capital spending in response to the price decline.
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| Closing price data source: JSE Ltd. All other statistics calculated by ProfileData. |
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