BHP CEO Mike Henry has downplayed his company’s recent acquisition attempts, particularly the failed $47 billion bid for Anglo American, stating that organic growth is the primary focus. However, the ongoing steel crisis in China may make mergers and acquisitions (M&A) more attractive for miners.
China produces about half of the world’s two billion tons of steel annually and is the largest consumer of iron ore, primarily sourced from Australian miners like BHP, Rio Tinto, and Fortescue. Currently, overcapacity in China’s steel industry, exacerbated by a real estate slump, has led to significant financial strain. Reports indicate that as many as 95% of Chinese steel mills are operating at a loss, resulting in a 30% drop in iron ore prices this year, now hovering just below $100 per ton.
This downturn is particularly challenging for Australian miners, with Rio Tinto relying on iron ore for 73% of its EBITDA and Fortescue almost entirely dependent on it. BHP’s reliance is slightly lower at 65%, partly due to its acquisition of Oz Minerals, a copper miner, last year for $6.4 billion.
Had BHP’s bid for Anglo succeeded, it would have further diversified its income sources and reduced iron ore’s share of EBITDA below 60%. BHP is now focusing on developing its copper and potash assets while acquiring early-stage projects, recently spending $2.1 billion on Latin American copper mines.
Despite having a cost advantage—BHP’s all-in iron ore costs are around $40 per ton—shares in BHP and Rio Tinto have fallen nearly 20% this year. In contrast, potential acquisition targets like Freeport-McMoRan and Teck Resources have seen their stock prices rise, making diversification through M&A increasingly costly.