BHP’s Growing Focus on Copper

For some time now, market watchers have noticed BHP Billiton’s (NYSE:BHP,ASX:BHP,LSE:BLT) growing interest in copper, but on Thursday, the company specifically talked about how it expects to favor the red metal much more than iron in the near future. 

According to Bloomberg, BHP CEO Andrew Mackenzie told reporters in China, “[a]s we go forward, we’re likely to invest a lot more in copper than we are in iron ore.” Driving that decision is the company’s forecast for increasing copper demand from China. Meanwhile, iron prices continue to languish near five-year lows.

The miner announced earlier this year that it will focus on the “four pillars” of iron ore, copper, coal and petroleum as it spins off some of its other assets in a proposed demerger (the new company will be named South32).

China’s growing middle class?

Further explaining the move to Chinese reporters, Mackenzie said, “[w]e expect growth in demand for copper in China to be faster than growth in demand for steel and then for iron ore as China moves more into a consumption phase and uses a lot more electricity … [a]s your patterns of demand growth change, we will change our patterns of investment to supply and meet that demand.”

To be sure, even though firms such as Goldman Sachs (NYSE:GS) are calling for an end to the commodities supercycle on the back of a slowdown in China — with some analysts even saying there could be a drop in commodities demand as China shifts from an investor-driven to a consumer-driven economy — BHP is still positive on copper. Indeed, BHP’s marketing president, Mike Henry, told The Wall Street Journal last month that the company is forecasting a significant copper deficit by 2018. “Copper demand is going to continue to grow for a really long time,” he stated.

More copper

Long term, Bank of America Merrill Lynch has predicted that copper prices will rise by 20 percent by 2017, while BHP sees global demand going up by 50 percent by 2030. With that mindset, it certainly makes sense to be investing in copper, and BHP is doing just that.

Its Olympic Dam project holds one of the world’s largest copper resources, and the uranium and gold reserves at Olympic are also some of the biggest in the world. The mine produces about 185,000 tonnes of copper per year, but BHP is investing in reducing costs to get even more copper out of the project. In the northern hemisphere, the Resolution copper mine in Arizona (majority owned by Rio Tinto (NYSE:RIO,ASX:RIO,LSE:RIO)) could be poised to move forward as a key land swap bill is expected to pass in the US senate.

Meanwhile, BHP has continued to up its iron production in an attempt to beat out Rio as the lowest-cost producer, which certainly hasn’t been helping iron ore prices. Glencore (LSE:GLEN) CEO Ivan Glasenberg criticized the company for expanding production during an address at Glencore’s latest investor day.

To be sure, it’s worth taking notice when the biggest mining company in the world shifts its focus to a certain commodity. Copper investors will certainly be watching what BHP does next to see whether its interest in the red metal will translate to positivity for juniors and mid-tier producers.

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.