Tuesday, March 10, 2015

BHP Defends Iron Strategy as Good for Australia Amid Surplus

BHP Defends Iron Strategy as Good for Australia Amid Surplus

BHP Billiton Ltd., the world’s largest mining company, defended its strategy of boosting iron ore supplies at a time of falling prices, saying a focus on raising output and efficiency was aiding Australia’s competitiveness.

Production from its operations in Western Australia was a record 124 million metric tons in the first half, and may reach 245 million tons in the 2015 financial year, BHP said in a statement on Tuesday as Jimmy Wilson, head of its iron ore business, addressed a conference in Perth. The company is on track to achieve unit 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.

Iron ore sank 47 percent in 2014 and extended losses this year as surging low-cost supplies from BHP, Rio Tinto Group and Fortescue Metals Group Ltd., Australia’s top producers, outpaced demand growth, spurring a surplus just as China slowed. The slump hurt government revenues in Australia, the world’s biggest shipper, while squeezing smaller producers. Iron ore may find a floor at about $50 a ton, Citigroup Inc. told the conference.

“We have no major projects in execution and our growth pathway will be achieved by continuing to make our existing infrastructure more productive,” 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.

Lower Prices

Ore with 62 percent content at Qingdao fell 1.5 percent to $58.58 a dry ton on Monday, declining for a fifth 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.

“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.”

Rio Chief Executive Officer Sam Walsh said last month that if his company reduced output, forfeited supply would be made up by higher-cost competitors, adding that producers made decisions independently. The London-based company, which 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 at conference.

Rio’s View

“The broader Pilbara shows that from January 2011 to December 2014 inclusive, 248 million new tons entered the market from Rio Tinto, BHP Billiton and FMG,” Harding said. Of that increase, “Rio Tinto accounted for 63 million tons, or 25 percent. As you know, some would like you to believe that Rio Tinto has had the largest volume increase in that time. But as you can see, this is simply not the case.”

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, Citigroup Iron Ore & Steel Head Mark Lyons said at the conference. At current prices, an estimated 38 percent of global output isn’t generating cash, according to CRU

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