According to PricewaterhouseCoopers, the capital spending of top 40 miners is estimated to be $110 billion this year, down 13% from last year. This decrease in capital spending is because of the slowdown in global economic growth. In addition, the demand from China, which consumes 40% of the world’s total ores and metals, is not much of a bright spot. However, the companies are optimistic about the growth of the Chinese economy, because of the government's push for rapid urbanization, and the U.S. construction industry.
BHP Billiton (BHP, Financial) is on schedule with the expansion of its 35 million tons per annum, or Mtpa, Jimblebar project in Pilbara. The production of iron ore is anticipated to start soon. The company plans to overcome the effect of price declines by growing iron ore production volume. The current global price of iron ore is an average $117 per ton, which is expected to be around $112 per ton next year. This declining price trend is because of only 3%-5% growth in the Chinese steel industry, which is the biggest buyer of iron ore in the world.
Spinoff for higher focus on productivity
With the spinoff leading to a simplified portfolio of the company, BHP Billiton will be almost exclusively focused on its exceptionally large, long-life iron ore, copper, coal, petroleum and potash basins. With fewer assets and a greater upstream focus, the Group will be able to reduce costs and improve the productivity of its largest businesses more quickly. As a result, it is expected to generate stronger growth in free cash flow and a superior return on investment.
Capital and exploration expenditure is expected to decline to approximately
US$14.8 billion in the 2015 financial year and be no more than US$14 billion should the proposed demerger be implemented By maintaining an internal focus and concentrating investment in our major basins we believe an average rate of return of greater than 20% is achievable for our favored development options.
We will return excess cash to shareholders in the most efficient way. By ensuring that we start from a position of strength, we will be well placed to implement an enduring program that can be managed in a more consistent and predictable manner
Journey Ahead
Taking the weak growth of China into consideration, steel usage this year is going to increase by 2.9% over last year to 1.454 megaton, or Mt, with the U.S. construction industry being the primary growth driver. Therefore, the company is expected to produce around 220 million tons next year from the current production of 187 mt. Revenue from iron ore is expected to increase from $21.05 billion to $21.79 billion next year.
The global economy grew at a moderate rate in the 2014 financial year. Momentum in the United States, Japan and the United Kingdom was underpinned by central bank monetary policy. Europe’s economy improved marginally, although the recovery was constrained by high levels of unemployment. Emerging markets, including China, experienced a moderate slowdown.
Consumption continued to be supported by higher household incomes while fixed asset investment softened, led by the property sector, as the central bank restricted access to credit. Rapid credit growth in the non-bank financial sector remained an important concern for policy makers
The Japanese economy has responded strongly to expansionary monetary and fiscal policy over the past year. Investment spending and wages increased as corporate profits benefited from the depreciation of the yen, while an increase in the national sales tax in April had a limited impact on consumption. These factors have increased the potential for faster growth in the short term, although a longer-term, sustainable recovery will be contingent on the scale and speed of structural reform
Conclusion
Iron ore prices maybe declining, but BHP Billiton growth and expansion plans seems to be good. Demand of iron ore is like to rise from Asian countries like Japan and China which can always leverage growth of BHP. The stock prices also are quite stable considering the 52 week high-low price band of $57.11 - $57.99 the company has an healthy EPS of 5.18. Investors can always opt for this stock that can provide good returns in future. I would suggest a buy for this stock.
