Is BHP’s job chopping a worry for the future?

On the off chance there was a glimmer of hope that the worst was now behind the mining and mining services sector, BHP Billiton Limited (ASX: BHP) this week firmly reminded investors that the ‘Big Australian’ doesn’t see a turnaround happening anytime soon.

Recent events have occurred which provide insight into BHP’s view on the outlook for commodity prices going forward.

Firstly, a report in The Australian Financial Review (AFR) newspaper that BHP had chopped 170 jobs from iron ore operations at Mount Whaleback just days after 100 workers at its Perth office were let go.

Secondly, the decision to terminate a contract with Downer EDI Limited (ASX: DOW) at the Goonyella coal mine in Queensland which I highlighted here.

These events suggest BHP is moving to limit the fallout from lower commodity prices rather than maintaining operations on the expectation that the return to higher prices is close at hand.

There appears to be at least two factors at play here. One is a productivity drive within BHP which has management looking to operate a very lean, low production cost model. The other factor at play – particularly with regards to coal operations – is cost reduction to maintain viability and profitability.

News of Downer’s contract loss sent the stock down 11% on Wednesday and appeared to send a shiver through the wider mining services sector. Shares in Transfield Services Limited (ASX: TSE) and Monadelphous Group Limited (ASX: MND) fell 5.7% and 4% respectively; in comparison the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) was off just 0.3%.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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