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BHP OUTLOOK The most significant driver during the last decade has been the resource industry's inability to respond to demand growth, Kloppers explained. "When Chinese demand growth first became evident in 2001 or 2002, mining companies could not respond because they did not have spade-ready projects," Kloppers said. "The companies that had survived the previous decade did so by taking costs, such as exploration and project development, out of the equation. The result was a lag in supply." The rate of capital expenditure in the mining industry lagged the growth in Chinese demand for most of the last decade. "This failure to respond in supply terms led to the sharp reversal in prices [upward]," Kloppers said. "However, a decade later, sus- tained higher prices and returns have changed behavior. The prospect of returns attracted capital. In the last five years, the nat- ural resources sector has rebuilt its pipelines." Mining companies now are finding that the fundamentals have changed again, Kloppers explained. "Shifts in terms of trade have strengthened some producer currencies," Kloppers said. "The increase in developmental activity has dramatically escalated cap- ital and operating costs. Host governments have continued to pile on royalties and more onerous regulatory burdens." As a result, the industry now has a different set of challenges looking forward. The mining sector probably has more projects than cash flows, Kloppers explained. "It has investible options in places where it did not have them before, but those options have varying qualities," Kloppers said. "People will have to make choic- es and quite a range of outcomes are possible." Making Informed Decisions BHP has choices to make too. The company will prioritize its invest- ments where it has political and fiscal stability, a sustainable advan- tage, and where it has the best returns vs. the risks it has assumed, Kloppers explained. "For us, if our criteria cannot be met in one Iron ore: a window of opportunity Source: World Steel Association; BHP Billiton analysis. www.e-mj.com JUNE 2012 • E&MJ; 101