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South32 chief upbeat on manganese, coal demand

With manganese and coal being two main contributors to South32 Ltd.'s swing to a US$620 million first half profit, CEO Graham Kerr expected the demand for the two commodities to continue to improve this year.

"There will be a push towards higher quality production in China and we think that suits our businesses in manganese and metallurgical coal," Kerr told reporters during an earnings conference call on Feb. 16.

For the first half, the company said manganese and coal boosted its revenue by US$230 million and US$313 million, respectively, adding to revenue from continuing operations totaling US$3.22 billion in the period. Of the group's US$691 million underlying EBIT, manganese and coal accounted for 36.6% and 34.3%, respectively.

South32 posted a 37.8% year-over-year jump in manganese ore production in the second quarter, in response to price hikes. Kerr said the company has the flexibility to further increase ore output.

"We will watch the market with interest. If demand decreases, then we will probably not increase [production] at the same pace as we did in the first half ... we can actually increase more," Kerr said.

Over the long term, Kerr also identified metallurgical coal, aluminum and nickel as attractive opportunities, noting that coal demand would be backed by continued growth in the Chinese steel sector and a shortage of metallurgical coal in India.

"China is targeting the aluminum industry in terms of both pollution and profitability, which would have a positive impact for the industry," Kerr added.

While being upbeat on the demand side, the chief executive expected commodity prices to be volatile this year and reiterated that the company would be focused on cost control.

"If you look at where we are today versus 12 months ago, the cycle in terms of which product has earned more money has changed quite a lot," he said, adding that cost cutting would be one main contributor to its earnings for at least three years out.

In terms of the restructuring work after the demerger from BHP Billiton Group, Kerr said the company "stands somewhere at three or four out of ten on the whole journey".

"We have yet to really tap the productivity benefits. We are still realizing it," he said.