Ignore what was a solid third-quarter production update from BHP and instead look at the warning issued by the company’s CEO about future demand from major customer economies.
While the company’s third-quarter production report saw BHP maintain its guidance for key commodities such as petroleum, iron ore and hard coking coal, the real problem down the track into 2020-21 is the weakening demand across the globe and the company is preparing to batten down the hatches.
CEO Mike Henry said that although demand in China had “strengthened in recent weeks”, the company expected other major economies including the United States, Europe, and India to contract “sharply” in the June 2020 quarter due to the impact of the virus.
“The situation remains fluid,” he said. “However, with our strong financial position and low-cost operations, our business is resilient, with capacity to generate solid cash flow through this period and emerge well-placed as the global economy recover.”
In its commentary, the company said “The arc of recovery will vary widely across countries. Where “hibernation policies” 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.”
The COVID-19 pandemic impact has already seen production at a coal mine in Colombia and a huge copper-zinc mine in Peru temporarily halted, while the $US2.5 billion Spence Growth Option (a copper mine in northern Chile) schedule and timing for completion of the shafts at the Jansen potash project in Canada are under review.
As well, BHP said it would scale back its $US8 billion spending budget previously set for the 2020-21 financial year, with details to given be in August when the full-year results will be released.
The most likely cuts will be in the oil division where several projects can be slowed or spending delayed.
The company made it clear it doing everything to keep its workplaces and their communities safe during the COVID-19 pandemic
CEO Henry said in the statement yesterday “We have implemented extensive measures across our operations to keep our people and communities safe from COVID-19.
“Working closely with relevant authorities and medical experts, strict travel and working practice arrangements have been established, including deferral of non-critical activity on our operating sites to support social distancing, revised rosters to reduce people traveling to site, more intensive site cleaning and health checks.
“I am encouraged to know that the small number of colleagues from our 72,000 strong global workforce who have tested positive for the virus have recovered or are recovering well,” Mr. Henry said.
“The coupling of our disciplined controls, the commitment of people across BHP, and our financial strength has enabled us to continue to safely operate and supply our customers with the critical resources they require, and to continue to provide jobs and an underpinning of economic activity both locally and around the world.
“We have accelerated payments to many of our suppliers and have established COVID-19 relief funds to help our communities and local health and social services.
Since March 31, BHP and its partners, Glencore, Teck and Mitsubishi have suspended operations at the huge Antamina copper-zinc mine in the Peruvian Andes.
The report was prepared and released as global oil prices fell with the price of US crude plunging into negative territory (because of too many sellers and no buyers) before drifting back above zero.
According to the report, BHP’s copper production was broadly unchanged over the nine months ended March 2020. As a result, volumes for the full year are now expected to be in line with last year.
BHP said it achieved record production at Western Australia Iron Ore (WAIO) and Caval Ridge with 60.03 million tonnes produced in the quarter which was up 7% on the 56 million tonnes produced in the first quarter of 2019. For the nine months to March production is up 7% at 181.43 million tonnes.
BHP said it is track to meet its 242 to 253 million tonnes full year guidance by June 30. The Western Australia operations have maintained production despite the impact of tropical cyclones Blake and Damien in the first quarter.
Copper guidance for its operated assets is broadly unchanged and Antamina guidance is under review following temporary suspension of operations due to COVID-19. BHP has forecast copper production at between 1.7 million and 1.8 million tonnes this financial year. The temporary closure at Antamina will see that cut.
Energy coal production guidance is also under review with the Cerrejón operation (Colombia) placed on temporary care and maintenance due to COVID-19.
The company said the major projects under development in petroleum and iron ore remain on track.
BHP shares ended the day down 2.5% to $30.05.