Resources giant BHP Billiton Limited (ASX: BHP) says it is aiming to bypass Rio Tinto Limited (ASX: RIO) in lowering its iron ore production costs.
Deutsche Bank estimates BHP's all in cash costs at US$51 a tonne, compared to Rio's US$45 a tonne. Other analysts estimate BHP breaks even at US$55 per tonne, compared to Rio at US$44 per tonne.
Brazilian giant Vale has estimated costs at around US$75 a tonne, mainly because it has to ship the ore further from Brazil to China. That's slightly higher than Fortescue Metal Group Limited's (ASX: FMG) estimated cost of US$72 a tonne, but a key factor to take into account is the ore quality between the miners.
Most of Fortescue's ore is sold at lower than spot prices, due to its lower iron ore content. The current discount price has blown out, with Rio offering discounts of between 6% and 13% for its lower grade product, and Fortescue offering customers a 14% discount, compared to the average of 2% last year.
Getting back to BHP, the company's head of iron ore, Jimmy Wilson says the miner wants to compete with Rio on the cost of production side, 'the margin per tonne that we make'. He has told Fairfax media that he'd be disappointed if it [eliminating the gap] took more than a couple of years. Mr Wilson also noted that the big miners weren't standing still either, with Rio, Fortescue and Vale all working on reducing their production costs.
Deutsche Bank analysts suggest Rio could lower their costs by a further US$2 to US$3 per tonne, with more automation, benefits from economies of scale as it moves from 295 million tonnes to 360 million tonnes as well as blending ores and newer mines.
BHP will have its work cut out for it, and is reported to be considering resurrecting its $20 billion outer harbour project at Port Hedland. But lower costs will insulate the big miners even more from lower iron ore prices, something juniors like Atlas Iron Limited (ASX: AGO) and Mount Gibson Iron Limited (ASX: MGX) will be highly envious of.
