BHP has positioned itself as the lowest-cost iron ore producer, with a clear margin over its competitors.
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Its iron ore business will continue to grow, and no doubt continue to expand its customer base outside China – India is the fastest-growing major economy in the world. But China’s continued economic challenges will inhibit BHP’s ability to significantly grow its iron ore earnings.
Mike Henry says China’s property sector, which has imploded over the past four years, seems to be stabilising, albeit at a very low level, and he has some hopes that there might be a return to some growth in the sector in 2026.
China’s economy did, according to its economic agencies, grow 5 per cent last year after the authorities threw a raft of relatively modest measures at it to try to stimulate domestic consumption, but it is very heavily reliant on exports.
Donald Trump has already slapped an additional 10 per cent tariff on China’s exports to the US and has threatened a 60 per cent tariff. His “reciprocal” tariff plan will have a negative impact on the global economy and global trade, which China is now overly reliant on.
While China will almost inevitably do more to stimulate domestic activity, its domestic economic settings and the threatening external environment don’t provide the settings for an early or significant rebound in iron ore prices.
BHP chief Ken Henry is betting on copper, which is little exposed to a particular economy.Credit: Jamila Filippone
Copper is different. As Henry says, demand for copper isn’t exposed to a particular economy. There are multiple buyers and a multitude of uses for a metal that is critical to the 21st century economy.
BHP is at the low end of the cost curve in copper, as it is in all its major commodities. It has what it regards as the world’s largest resource base and a big pipeline of internal development options in Australia, Chile and Argentina that could double its production over the next decade.
It might even have a huge prospective mine in the US, where the long-stalled, Rio Tinto-managed, Resolution mine’s development prospects have been enhanced by the return of Trump to the White House. Resolution, in Arizona, is one of the world’s largest undeveloped copper resources, and BHP owns 45 per cent of it.
Copper has already displaced iron ore as BHP’s major growth engine, if not its major source of earnings, and has the potential to be the future core of its earnings.
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The other commodity key to the group’s future is potash, with first production from the first stage of the massive Jansen project in Canada due late in 2026, with a two-year ramp up to full production. Like copper, there are multiple markets for potash.
The likely disruption to global trade and growth as Trump presses ahead with his trade wars will obviously have some impact on demand for commodities, but BHP’s direct exposure to the US and its tariffs is small — a modest 3 per cent of its revenues.
The fact that the waning of iron ore and waxing of copper and potash don’t line up perfectly in such a volatile external environment could be a drag on BHP’s earnings in the near term.
That’s a challenge for McEwan and Henry over the next couple of years, although BHP’s operational excellence, its strong cash flows, its low debt levels and its lowest-cost producer status within its key commodities means it ought to fare, in relative terms, better than its competitors.
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In almost any circumstances, the BHP portfolio is resilient, which is a tribute to what MacKenzie and Henry achieved over the five years they have worked together.
While waiting for copper and potash to become the dominant drivers of earnings and overall growth, McEwan and Henry could fill in the hiatus with acquisitions. For the new chairman, a significant question he will need to resolve is whether the attempted bid for Anglo-American last year is history or unfinished business.
The alternative is to keep doing what BHP has been doing in recent years, pumping its healthy free cash flows into the organic developments that have powered the increase in its copper volumes, and which will give it a big presence in a new commodity when Jansen comes on stream.
That’s probably the lower-risk and more controllable strategy, even if it might take a bit longer to fully compensate for what’s likely to be a structurally lower contribution from iron ore.
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