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Resources giants must merge argues BHP chief Marius Kloppers

Times Online
August 19, 2008

Resources giants must merge argues BHP chief Marius Kloppers

The world’s largest resources companies will be forced into a new wave of mega-mergers as it becomes harder to find new assets, the head of the biggest mining group has predicted.

Marius Kloppers, chief executive of BHP Billiton, said yesterday that production volumes at several big resources companies had fallen and the only way they could overcome this was to seek deals with rivals.

Most of the world’s easily exploitable oil, gas and minerals fields have been discovered and many have reached peak production. New discoveries are not keeping pace with production, so total assets are falling.

According to Mr Kloppers: “Some of our competitors are struggling to keep output levels up. BP, Rio and Shell are struggling to stay where they are.”

The mining sector has been the first to begin the next phase of consolidation. BHP has made a £70 billion bid for Rio Tinto, the world’s second-largest miner, and this year talks broke down between Vale and Xstrata, both of which are top five producers.

However, there have been no mega-deals in the oil and gas sector since the wave that created BP Amoco, ChevronTexaco, TotalFinaElf and ExxonMobil nearly a decade ago.

Mr Kloppers said: “I’ve been a little surprised that there have not been more deals. It is getting more difficult to find new resources in minerals, metals and oil so I see more consolidation over the next couple of years. Scale is very important when you need to produce things more cheaply.”

There have long been rumours linking Shell with a possible bid for BP or British Gas. ExxonMobil is also thought to have looked at BP. Mr Kloppers suggested that political concern over the market power of enlarged companies, particularly with oil prices remaining high, had held up attempts to make the deals reality.

His comments came as BHP reported a 12.4 per cent increase in profits to $15.4 billion (£8.2 billion) for the year to June 30. The company’s petroleum division delivered an 82 per cent increase in earnings to $5.5 billion, thanks to increased production and a doubling of oil prices during the year.

The results were the seventh successive year of record earnings for BHP, but could have been even better if not for a series of one-off problems at its stainless steel materials division. These included floods in Queensland that made ore too wet to move, a strike in Colombia and furnace maintenance in Western Australia. Earnings in the division fell 65 per cent to $1.3billion, but Mr Kloppers said that he expected a recovery this year.

The strong set of results, combined with a 49 per cent rise in dividend to 70 cents a share, helped to lift BHP’s share price by 8p to £15.37. However, that is still 30 per cent down on the company’s price in May. Investors have become worried that Western demand for exported goods from China will fall, reducing Chinese growth and its need for raw materials.

China contributed 20 per cent of BHP’s revenues last year and its rapidly increasing appetite for raw materials has helped to push up commodity prices worldwide. BHP has estimated that this will continue as China develops its infrastructure. The company expects demand for steel raw materials to double by 2015.

Mr Kloppers said: “China’s economy is driven by domestic demand and we are quite confident about the long term.” However, BHP did admit that a downturn in Western economies could result in some weakening in demand for raw materials from Asia’s export industries.

Despite Mr Kloppers’s comments on the necessity for consolidation in the resources sector, BHP is unlikely to get involved in bidding for Lonmin, the platinum producer. Xstrata has offered £5 billion to buy Lonmin. Impala, the world’s second-largest platinum miner, is also rumoured to be on the market.

Mr Kloppers is known to be concerned by the deep mining techniques used in the platinum industry, which are a more dangerous working environment than open-cast pits.

BHP had 11 fatalities last year, with five as a result of a helicopter crash in Angola. The company has introduced strict rules on the use of helicopters.

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