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‘The Answer to That Is No’ | BHP Stands by Iron-Ore Expansion

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March 10, 2015

Cranes unload iron ore from a ship at a port in Rizhao, Shandong province February 7, 2015, Image (c) Reuters

By Jasmine Ng

(Bloomberg) — BHP Billiton Ltd. defended its strategy of boosting iron-ore output at a time of falling prices and global oversupply, saying that cutting back to reverse the drop would penalize shareholders in the world’s largest mining company.

Should the Melbourne-based company reduce output of the steelmaking raw material, supply would be filled by others, Jimmy Wilson, head of BHP’s iron-ore business, said at a media briefing in Perth, Australia, on Tuesday. Earlier, Wilson told a conference in the city that raising production while also improving efficiency was aiding Australia’s competitiveness.

Iron ore sank 47 percent in 2014 and extended losses this year as surging low-cost supply from BHP and Rio Tinto Group, Australia’s top producers, spurred a surplus just as demand growth slowed in China. Wilson’s remarks, which echoed comments last month from Rio Chief Executive Officer Sam Walsh, signal there will be no change of course from BHP even as prices drop. Iron ore may find a floor at about $50 a metric ton, Citigroup Inc.’s Mark Lyons told the conference.

“Do we see value in us pulling back our volume with the objective of increasing the price?” said Wilson. “The answer to that is absolutely no. If we pull back our volume, that volume will be filled by other companies. At the end of the day, we will be penalizing, in essence, our shareholders.”

Price Slips

Ore with 62 percent content at Qingdao slid 0.7 percent to $58.15 a dry ton on Tuesday, falling a sixth day, according to data from Metal Bulletin Ltd. That’s the lowest price since at least May 2008, when Metal Bulletin started compiling weekly prices. The commodity is 18 percent lower this year.

“The market will always go back into balance,” Wilson told reporters at the briefing. “The majors are not struggling to sell their products at this stage,” he said, referring to the industry’s largest suppliers.

BHP shares are 8 percent higher in London this year after losing 26 percent in 2014 as iron ore collapsed. Last month, the company reported better-than-expected underlying profit of $5.4 billion in the six months to Dec. 31, compared with $7.8 billion a year earlier. The stock traded down 2.9 percent at 1,499.5 pence as of 1:37 p.m. local time.

“Is there any chance the major producers will reassess and downgrade their plans, given where the price is? We think not,” Laura Brooks, a senior consultant at CRU Group, told the conference. “One reason for this is that competitive pressure is driving producers to seek cost reductions, and volume is critical if unit costs are to be cut.”

Record Output

Production from operations in Western Australia was a record 124 million tons in the first half, and may reach 245 million tons in the 2015 financial year, BHP said in a statement on Tuesday before Wilson’s address. The company is on schedule to achieve cash costs below $20 a ton, BHP said.

“With this strategy, we are maintaining Australia’s competitive position in the global market and providing the revenue, royalties, employment and innovation that is so important for this country’s future,” said Wilson.

BHP anticipated the increased supply of seaborne ore and approved the last of its major capital investments in the Pilbara in 2011, it said. Further growth will come from making existing infrastructure more productive, Wilson said.

“Beyond the 290 mark, we don’t see ourselves going too far beyond that,” Wilson said, referring to an annual capacity target. There will be “continued productivity, but there will be no capital, no capital, to grow volumes,” he said.

Walsh’s View

Rio’s Walsh said last month that if his company reduced output, forfeited supply would be made up by higher-cost competitors. The London-based company, which also mines in the ore-rich Pilbara region, is on track to deliver 330 million tons of output by 2015 and 350 million tons by 2017, Iron Ore Chief Executive Andrew Harding said at the conference.

The global surplus will surge to 437 million tons in 2018 from 184 million tons this year, Morgan Stanley said on Feb. 22. Global seaborne supply is projected to increase 4.6 percent in 2015, topping the 3 percent growth in demand, according to the bank, which sees iron ore averaging $79 a ton this year.

There’s a floor for prices at about $50 a ton, said Lyons, Citigroup’s head of iron ore and steel. At current prices, an estimated 38 percent of global output isn’t generating cash, according to CRU.

“The big guys are saying: ‘We’ve got huge margins, so we’ll keep pumping out iron ore because we’re still making money’,” said Justin Smirk, a senior economist at Westpac Banking Corp. “He who has the lowest cost wins.”

–With assistance from Phoebe Sedgman in Melbourne.

Copyright 2015 Bloomberg.

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