Are good assets enough? Mike Oppenheimer President, BHP Billiton Energy Coal JB Were Conference August 2, 2002 Sydney

Transcription

1 Are good assets enough? Mike Oppenheimer President, BHP Billiton Energy Coal JB Were Conference August 2, 2002 Sydney

2 Response to Global Energy Coal Industry change? Market evolution Energy convergence Global supply side changes Most profound change in seaborne trade - but also in major domestic markets.. is a world-class asset portfolio sufficient for success?

3 Energy coal has a future Cons Climate change issues Gas perceived as being a clean fuel Pros Competitive Low price volatility Abundant Easy to store and transport Largest share of global generation Electricity and generation fuel demand 1999 = Market Share Coal 36% 32% Gas 18% 26% Gas Electricity Other Fuel Coal CAGR ( ) 3.8% 2.7% 1.5% 1.3% Source: EIA International Energy Outlook 2002 Conclusion Coal is relevant Substitution is not the answer Clean coal solutions being developed

4 Energy coal market growth to continue Total energy coal market ~ 3100 mtpa* Europe 0% China US 1.5% 5% Rest of Asia 5% 1% South Africa 1% Australia Seaborne market (384 mtpa) Domestic market Power generation coal market growth (2000/05 CAGR) Source: McCloskey s Steam Coal Forecaster, IEA ; * Excludes Lignite

5 BHP Billiton Energy Coal portfolio Provides multi-source supply to key markets 33 Mtpa New New Mexico Mtpa Mtpa Traded 2 Mtpa Mtpa 12 Mtpa 1 Mtpa Colombia 7 Mtpa Mtpa Kalimantan 9 Mtpa Mtpa QLD/NSW Coal Coal 4 Mtpa Mtpa BHBP seaborne trade Operated Ingwe Ingwe Mtpa Mtpa Hunter Valley Valley 5 Mtpa Mtpa Export Supply Non operated Domestic Supply Marketed

6 Tier one supply positions Delivered cash cost - US$/t $ $45 Europe Optimum Douglas Middleburg Cerrejon Norte Koornfontein Mt Asia Carbones del Cerrejon Rietspruit 74 Venezuela USA Colombia South Africa Market 123 Mt (2002) Source: Delivered cash cost - US$/t Future Mount Arthur North Indicative China supply cost 0 Mt AME 2002 FOB cash costs plus freight (excludes China, Russia and Poland) China cost band BHP Billiton estimate Bayswater 189 Canada USA Indonesia Australia Market 224 Mt (2002)

7 Major focus on enhancing competitive position HSEC 10 point safety plan Community relations integral to business success Operating Excellence Actively identifying and improving global business processes Six Sigma Plus improvement methodology Knowledge transfer across BHBP coal assets Knowledge networks and benchmarking across CSGs Leverage Infrastructure & Logistics Rail, storage, barging & shipping Influencing non-operated assets

8 Europe A market undergoing considerable change European Energy Coal Import Domestic CAGR ( ) Demand declining imports growing slowly Kyoto already influencing market 350 EU subsidy reduction program Mt (6.3%) Energy market convergence Power generation growth from gas Strong coal/gas competition % Deregulation and liberalisation Emergence of spot and derivative markets Changing customer buying patterns Source: IEA Coal Information 2001

9 Asia - Strong demand growth Asian Energy Coal CAGR ( ) (5.7%) 10.7% Increasing flexibility in coal purchasing China penetration spot purchases Mt % Lack of pipeline gas alternatives LNG competitiveness % Nuclear concerns Slowly embracing deregulation 0 Asian market model emerging Environmental consideration on the rise Import - Japan Import - Other Import - Korea Domestic Japan only Kyoto Annex B country Source: IEA Coal Information 2001

10 Domestic markets complement export positions Participation in high value and/or growth markets Optimisation of export/domestic product mix $30 Mature, high value Growth, high value Indicative spark spread US$/MWh Australia US South Africa Mature, export/domestic optimisation China % Electricity coal demand growth Mt Domestic thermal market

11 Market evolution Classic Commodity Market led Supplier value FOB LT contract Equity coal FOB Spot Own coal Delivered into plant Partnership Supply optionality Freight and supply arbitrage Equity and non-equity coal

12 Global supply changing Consolidation in Australian, South African and Colombian supply Contraction of European domestic industry China The new swing producer? Exports grew rapidly in the last two years (export prices > domestic prices) Current year volumes down (export prices < domestic prices) Russian supply into Europe and Asia is growing Poland continues to export into Europe Limits to continued Indonesian export growth New supply constrained at LT trend pricing

13 Are good assets enough? Market led approach required = World class asset portfolio + Market driven mindset

14 Market driven mindset Production driven Market driven Dig and Deliver Volume at gate Sweat the assets Sell what you produce Volume based pricing Compete with producers Match supply to meet demand Volume, location and timing to meet customer needs Value is created throughout the whole value chain Produce what you can sell Value based pricing Compete with producers, traders, and alternative fuels Match customers risk profile Customer solutions

15 BHP Billiton Energy Coal A strategy to succeed in the changing market Asset Portfolio Export Markets Domestic Markets Innovation & Leveraged Growth Extract full value from asset & project portfolio Grow share of high value markets Grow in selected domestic markets Leverage knowledge and global position World class assets Market positions Global logistics Energy liquidity Specialist skills BHP Billiton Charter, capabilities, cross-commodity commodity opportunities

16 Strategic delivery to date Boschmanskrans approved Sale ofmatla/glisa to Black Empowerment Carbones del Cerrejon acquisition Carbocol acquisition Kwagga approved BHP Billiton Merger Mt Arthur North approved Intercor acquisition Lake Mines divestment Rietspruit closure Positioned to deal in convergent European energy market Renegotiate San Juan contracts San Juan Underground approved Secured Arutmin marketing Establish Hague & Singapore marketing hubs PT Arutmin divestment Complete first structured marketing deal Integrated Cerrejon Coal fully functional New Projects Portfolio Actions Marketing activities

17 We can leverage market & customer experience New Mexico Synergistic relationship (mine mouth generation) Asia Relationship marketing Europe Liberalised Convergent energy Australia Quasi-regulated Experience and capabilities for all stages of market evolution South Africa Regulated

18 BHPB participates in all areas of an evolving market derivatives market Established over past 3 years Volume will exceed physical trading this year 4 direct sales Declined from 90% to 75% over 5 years 75% 1% 1 power generators 2 24% non-commoditised coal traders Coal producers Power generators Trading houses 3 commoditised exchange GlobalCoal

19 Example - Customer centric marketing The deal Just in time coal service Customer value Close purchasing dept Risk free sourcing Reduced inventory costs BHPB value commodity $ + service $ Supply partnership Multisource optionality Freight arbitrage Benefits transferable Participation in customer expansion

20 Wrap up Coal has a future Global supply and demand are evolving World class assets fundamental but not sufficient for long term success Mind-set change needed strategies, market positions and capabilities