BHP : Marketing - speech, 3 October 2022

Steel and iron ore market outlook / Steel debarbonisation pathways

Presentation &

Speech

3 October 2022

BHP

A great many things will change over the next 30 years in commodity value chains.

The unfolding of the decarbonisation giga-trend, and the mega-trends that sit beneath it, will bring radical change in their wake.

The evolution of China's underlying demand for resources will be a second highly influential force.

The rapid expected increase in Indian and south-east Asian demand will also leave an indelible imprint on commodity markets - as will developments in the rest of the populous and ambitious emerging world.

Dealing with the impacts of physical climate change will also matter - as will the replacement of long-life capital in high income countries.

The steel value chain will be at the centre of each of these developments - and it will undergo considerable change itself:

• in technology,
• in demand and supply centres,
• in power sources, in metallic mix, and in its emissions profile.

But versus the completely revolutionary change we foresee in some areas of the energy and industrial system, it is likely that change in the steel value chain will feel more evolutionary than revolutionary, for at least two decades, and probably for longer in the emerging world.

My remarks will progress as follows:

• I will give a brief overview of where the steel value chain fits within the context of national and global economic development.
• That will then flow into a view of the outlook for steel.
• I will then discuss the iron ore market.

I will argue that the key medium-term beliefs that the iron ore industry and the wider eco-system held four years ago were all incorrect; and that an understanding of how we got to today's surprising starting point is vital to comprehend what is potentially to come.

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BHP

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BHP

The secular fundamentals of population growth, urbanisation and rising living standards will continue to underpin demand for resources, including steel, for decades to come. The decarbonisation giga-trend will also require a vast mobilization of metal supply.

Yes, that is the second time I have said "giga-trend". Decarbonising our society is that consequential. If I can use some corporate terminology to explain this, to qualify as a giga-trend, you need to have mega-trends reporting to you.

The decarbonisation of power and the electrification of transport are megatrends in their own right, but they "report" to the wider societal objective.

The link between the end-use of mining products and decarbonisation is usually raised in the context of critical minerals like copper and nickel.

Less well understood is the fact that the demand for steel is also generally higher under Paris-aligned scenarios than in cases associated with higher degrees of global warming.

For example, in BHP's 1.5 degree scenario, the demand for steel is indeed slightly higher than under the base case.

In broad brush strokes, our base case sees the growth in annual steel demand essentially keeping pace with population growth out to 2050: a CAGR of roughly three-quarters of a percentage point.

Cumulative demand on a 30 year over 30 year basis is expected to almost double between now and mid-century.

You will see multiple references to the 30/30 metric throughout the presentation.

It measures cumulative change in blocks that are three decades long: the 30 years to 2050 versus the 30 years prior to the pandemic.

To be clear, these are not annual run rates. Run rates, I feel, underestimate the amount of effort and capital that needs to be deployed for a massive commodity business to just stand still, let alone grow.

You can usefully think of the 30/30 metric as a comparison of the area underneath the curve that the annual run rates create.

And in addition to our planning ranges, which capture the various BAU cases we run to assess demand, supply and price uncertainty in our internal protocols, you will also see data from 5 of the bespoke scenarios that we use to complement, critique and strengthen our planning ranges.

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Portfolio positively leveraged to megatrends (continued)

They are:

• our official BHP 1.5 degree case, which is now incorporated into central planning deliberations, as flagged in the Climate Transition Action Plan (CTAP),
• the disruptive "Climate Crisis" scenario that we first discussed in our Climate Change Report,
• the "Deep Green" hypothetical that also featured heavily in our CTAP, and
• two scenarios that map to specific, rounded global warming outcomes of 2 and 3 degrees respectively.

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