Responding to China's steel needs

January 21, 2008: BHP Billiton intends to invest $15bn (£7.7bn) on its iron ore mining operations in Western Australia's Pilbara region to help fulfill record demand, led by China, from world steelmakers, reported the Financial Times.

The company intends to invest in mines and rail and port infrastructure to increase its annual production from the Pilbara from 150 million tons to 300 million tons by 2015. It wishes to ship 120 million tons in 2008. BHP Billiton is attempting to take over rival Rio Tinto.

BHP and Rio are investing in the Pilbara to increase output rates. The rates have failed to keep pace with world demand, have helped push iron ore prices to record highs. Australian-listed Fortescue Metals, will ship iron ore to China from about May after its investment of A$2.5bn (£1.1bn) on the construction phase.

BHP's president of iron ore, Ian Ashby did not confirm BHP's spending commitments. $105 a ton will be required to develop output from 150 million tons to 300 million tons would be. Some of the capital invested would help extend capacity beyond 2015.

Ashby did not comment on how BHP's investment plans might change in the event it succeeds in its £65 billion indicative bid for Tinto.

The iron ore operations of Rio are central to BHP's interests. The combined operations would lead to large cost savings and avoid infrastructure duplication. The combined operations between them operates 18 mines, thousands of kilometres of rail track and three ports,

BHP chief executive, Marius Kloppers promised its customers more iron ore, more quickly if the deal goes ahead.

BHP invested $6.3 billion on capital expenditure in the last fiscal. The company has about $70 billion of projects in the pipeline over the long term.

According to Ashby 20 percent of the global asset base of BHP, escorted by its iron operations, was in Western Australia.

"The business is one of the jewels in the crown. It is performing ahead of target," he said.

Ashby sought to challenge Rio's claims on the week ended on January 18, 2008 that the company's Pilbara operations were superior to those of its predator's.

Rio has allotted at least $10bn to boost its annual production from 220 million tons to 320 million tons, mostly at its Cape Lambert site.

According to him BHP's iron ore operations were higher-margin than Rio's and Vale's, "We get more value from every tonne of ore on ship," he added.

Although China accounts for about 50 percent of the iron ore transported from the Pilbara. The capacity restraints in Western Australia have forced Chinese steelmakers to get more Brazilian ore.

The delivery is more expensive as Brazil is almost three times farther away from China than Australia.

An executive director at Fortescue, Graeme Rowley mentioned that his company had established 35 customer relationships, led by Baosteel, which has promised to buying 20m tons.

"Western Australia used to have about 70 per cent of Chinese demand for iron ore but now we have only about 40 percent," stated Rowley.

Source: The Financial Times