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BHP believes it's unlikely that its nickel operations will be profitable before the end of the decade, as the mining giant weighs up mothballing its Nickel West business after reporting its worst half-year profit result since 2016.
The mining company's pessimism for its nickel business in the short-term follows the release of its half-year earnings report on Tuesday, with its statutory profit slumping by 86 per cent to $1.4 billion — despite its half-year revenue rising by 6 per cent to $41.6 billion driven by higher prices for iron ore and copper.
Its dramatic fall in profit followed two costly one-offs by the company: increasing its provisions for legal costs and compensation over the collapse of the Samarco dam in Brazil in 2015, and writing down the value of its nickel assets in Western Australia to be less than worthless.
Nickel was identified as a key area of growth for BHP last year, but last week confirmed it was reviewing its entire nickel operation — including closing Nickel West altogether, putting more than 3,000 jobs at risk.
But despite the loss against its nickel business and its impact on its half-yearly results, BHP chief executive Mike Henry said nickel has always paled in comparison to iron ore in the company's portfolio.
"Yes, it's been one of the three areas of production growth that we've called out for BHP ... but having said that, it's always been the smallest by some margin business within the BHP portfolio, and in terms of the growth outlook for the company," he told The Business.
"What's happened in the past 12 months is we've seen a real surge in supply of nickel coming out of Indonesia, and that's taken everybody by surprise, it happened more quickly and at lower costs than what market participants were expecting.
"That surge in supply out of Indonesia [is] impacting the highest quality nickel that BHP produces called class one nickel.
"We think that's going to persist for a period of time, potentially until the end of this decade, at which time we'll see the market come back into balance and things will look more positive for nickel again."
Western Australia produces about 5 per cent of the global supply of nickel, which is mainly used to make stainless steel. While the cost of production is high, Western Australia produces one of the purest grades of the metal that makes it suitable to use in the production of batteries.
Despite this, nickel has been a loss-making business for BHP, and the plummeting price of the metal has been exacerbating those losses, Mr Henry said.
As a result, he said the mining giant is at a crossroads where it has to consider its options to prevent more severe losses until profitability returns as forecast by the end of the decade.
But the boss of Australia's biggest company — and the world's largest miner — would not be drawn on a timeline for when it would decide the way forward and provide certainty for thousands of employees.
"A small part of the business, being nickel, has seen market challenges in the past 12 months, and that's resulted in an impairment and a potential move into care and maintenance," he told The Business.
"But there's 17 million Australians who depend upon BHP, either directly as shareholders, or indirectly through superannuation funds, for a successful and high-performing BHP.
"Part of that is ensuring that we're running the base business well, but also where we do have a loss-making business like Nickel West, that we're prudent about how we go about spending shareholder funds in support of that business.
"That creates a real sense of accountability on our part, to ensure that we're taking the right decision, taking into account a range of considerations, both shareholder and other stakeholders, and we're in that process as we speak."
During a briefing to investors on Tuesday morning, Mr Henry said a decision about the Nickel West business was still a few months away.
His comments came after nickel was added to the federal government's critical minerals list on Friday, allowing businesses to apply for a pool of funding, and the WA government delaying 50 per cent of royalty payments for 18 months to assist nickel miners.
The majority of BHP's business comes from iron ore — it accounted for 77 per cent of the miner's underlying earnings for the first half of the financial year, and is the world's largest iron ore miner.
Comparatively, the greatest demand for the raw material used to make steel comes from China, but despite concerns about demand tapering off from world's second-largest economy, the commodity's higher price has been holding up.
But Mr Henry said he's not overly concerned about the apparent slowing of China's economy, but believes the country's steel demand is now "plateauing".
"In spite of the economic softness in China in the past 12 months or so, [we've had] a fifth year running of over a billion tonnes of steel demand and steel production in China, and likely another year ahead of us, again at over a billion tonnes," he told The Business.
"We do believe that Chinese steel demand has moved into a period of plateauing, and that in the medium to long term, it will move into contraction, which is what we've been with other major economies as they develop."
With the future in mind, Mr Henry said that was the motivation for the mining giant to maximise its efficiencies and productivity.
"It's the reason why we've sought to ensure that our iron ore business is operating as productively as possible, and it's right at the low end of the cost curve, because we know that competition in that industry is going to heat up in the years ahead," he told The Business.
"We've successfully established ourselves as the lowest cost, major producer of iron ore globally, and we've held that position for a number of years now, and that business is performing really strongly."
Similarly, Mr Henry said he was not yet forecasting iron ore mined from the Simandou mountain range in West Africa — estimated to contain over 2 billion tonnes of undeveloped high-grade iron ore — to be a major market disruptor for BHP.
"The Simandou tonnes, we are forecasting will come into the market in due course, but the volume coming out from West Simandou and other West African players will be small, relative to exports from Australia," he told The Business.
"We believe that there's going to be a market for ore from the Pilbara for some time."