Offshore Capitalist

Lower returns predicted from international mining giants

FORMER BHP Billiton chief executive Chip Goodyear predicts shareholder returns from international mining giants will fall in the next decade.

He says the global mining sector will fragment with entrants such as China’s state owned-enterprises forcing major miners to loosen their grip on individual commodities. But the man who steered the group to its position as the world’s largest mining group between 2003 and 2007 told Shanghai’s Oriental Mining Club last night that he believed demand would continue to grow during the next 10 years.

“In the next decade the industry structure will fragment,” Mr Goodyear said in a rare speech on the future of mining.

“What I mean by this is that the market share held by the largest players in any individual commodity will drop. In growing markets, companies are under less cost pressure, capital is readily available and new supply enters the market.

“That has happened as companies like Kazakhmys, ENRC and Vedanta — companies people had not heard of six years ago — have come to markets and now have multi-billion dollar valuations.”

The last time Mr Goodyear, who travels to China a few times a year, gave a speech there was when he was running BHP.

“In addition, new resources are being developed as prices are incentivising resource development in Mongolia, sub-Saharan Africa and Latin America,” he said.

“And state-owned enterprises and downstream industry players are investing in the raw material to guarantee their supply and cost.

“Eventually this will bring more product to the market controlled by players other than the large producers. In the long run this will negatively impact the returns of all the players.”

His comments come as controversy mounts over his former company’s Pilbara joint venture with its one-time takeover target Rio Tinto, which would concentrate most of the world’s highest quality iron ore in the hands of two players.

He noted that 10 years ago the oil price was $US15 a barrel and iron ore, which recently hit spot prices of $US140 a tonne, was about $US20 per tonne.

“The facts are that there remain several billion people who have an aspiration to improve their quality of life and their standard of living,” he said. “This requires commodities. However, I do want to caution that I do not believe that demand or price will be a straight line up. ”

But he said although prices would stay high, they would not “go to the moon” and resources would cost more to extract. “It takes Mother Nature hundreds of millions to billions of years to create the resources we mine today so for any of us in the room there are no new resources being made.”

via Lower returns predicted from international mining giants | The Australian.

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