Fortescue Metals Group chief executive Nev Power has criticised what he calls "last man standing" expansion strategies by the major iron ore producers in the Pilbara while defending FMG's own expansion strategy.
Fortescue Metals Group chief executive Nev Power has criticised what he calls "last man standing" expansion strategies by the major iron ore producers in the Pilbara while defending FMG's own expansion strategy.
At an event for stockbroker Morgans in Perth today, Mr Power said he was somewhat amused by last man standing strategies, which he said were counter-intuitive to creating long-term shareholder returns.
“I’m not quite sure why anyone would want to be the last man standing in a low price low return environment,” he said.
“When we don’t see those incentive prices and returns we shouldn’t be investing.
“Investing because you’re more profitable than the next guy seems to be a very poor strategy to me and one that will inevitably lead to self-inflicted wounds, low returns to shareholders and probably replacement of management teams."
When asked directly if he was suggesting people such as BHP Billiton chair Jac Nasser and Rio Tinto chief executive Sam Walsh were likely to lose their jobs, he said no, but expanded on his point.
“I’ve got no beef with any other company that wants to do what they want to do; all I’m saying is that all companies, including us need to look at what shareholder returns are for investor decisions rather than their position in the market or their cost position relative to other competitors,” Mr Power said.
“There is no point continuing to expand just because you’re a dollar cheaper than the guy next door to you.
“When the iron ore price was $US180/tonne there was no significant interest in expanding and when the iron ore price is $US80/t suddenly everybody’s talking about expanding. I find that a little odd.”
BHP Billiton and Rio Tinto have both insisted they are generating good returns for shareholders from the low-cost expansions they are implementing in the Pilbara.
However, Mr Power claimed FMG’s expansion strategy to 155 million tonnes per annum was different from Rio and BHP's respective ramp ups to be the lowest cost producer (at 360mtpa and 290mtpa), because FMG was continuing with an investor return-based strategy it began in 2010 when it regognised unmet demand in the market.
Rio Tinto Iron Ore chief executive Andrew Harding responded to Mr Power’s comments today at a separate event given by Committee for Economic Development of Australia and the Chamber of Minerals and Energy of Western Australia, also held in Perth.
“I don’t feel at all worried about my job, but it clearly is top of mind for him,” Mr Harding said.
“Rio Tinto is a producer of very high-quality product and significantly lower cost production so I can understand why Nev is a little bit distressed, possibly even panicking.”
Mr Harding said Rio also began its expansion strategy in 2010 and had followed its original forecasted volume, timing and costs.
“I completely struggle with where he’s actually coming from,” he said.
“Rio Tinto is clearly doing what we said we would do, rather than doing one thing and saying another.”
Mr Power also echoed comments by Santos today that for Western Australia and the nation to benefit from capitalising on natural gas production for use domestically, changes to the domestic gas reservation policy were needed.
He said he wouldn’t pre-empt government decision, but that the community mandate was growing.
“It’s building momentum now as other people recognise the opportunity and we’ve seen just recently BHP and Rio also supporting that call that there is an opportunity in gas,” Mr Power said.
Earlier this year Mr Power outlined FMG’s “use it or lose it” policy, to encourage gas fields be developed for domestic use, rather than operators sitting on tenements because it wasn’t in their financial interest to develop them for the export market.
FMG has begun building a gas pipeline from the Dampier to Bunbury pipeline to its Solomon Hub in the Pilbara to transition many of its energy assets over to gas and save costs on diesel.
FMG spends about $US800 million per year on its total energy spend, including fuelling its mine trucks and trains and using electricity.
Half of its energy costs, or $US400 million, is spent on diesel for trucks at its five mines, and FMG is exploring converting and buying gas-enabled trucks to reduce this cost as well as its greenhouse gas emissions.
Mr Power said it was likely FMG would acquire new mining trucks that could run on liquefied natural gas or compressed natural gas.
“The other alternative is to convert existing fleet and if the economics are right, perhaps at a midlife rebuild we could convert existing equipment over to gas powered and that could be full gas or in fact a dual-fuel where they run 50 per cent on gas and 50 per cent on diesel or some other blend which allows you to reduce cost without going to full gas,” he said.
Despite low iron ore prices, which have plunged 40 per cent this year, Mr Power said China would continue to demand iron ore.
“The big driver for steel consumption in China that we see going forward is going to be mass transit infrastructure, underground rail systems, high-speed rail, large pieces of infrastructure,” he said.
