Jesse Riseborough and David Stringer London
LOWER iron ore prices are here to stay as new mine production outpaces weaker growth in demand, according to the world’s biggest mining company.
“The growth in demand for iron ore is happening at a slower rate than the addition of low-cost supply,” BHP Billiton chief executive Andrew Mackenzie said on Tuesday.
“We’re bearish about iron ore prices in the medium-to-long term,” he said.
Iron ore has collapsed 53 percent since the start of 2014 as top suppliers including BHP expanded output to squeeze out higher-cost competitors, deepening a worldwide glut of the key raw material used in steel.
Analysts from Goldman Sachs to Morgan Stanley and UBS have trimmed long-term price forecasts this year as the outlook for the market worsens.
“He makes very sensible and accurate comments,” Richard Knights, a mining analyst at Liberum Capital, said.
Overcapacity
“There’s just a huge amount of overcapacity. It’s very clear that for at least the next three years the new supply additions are going to drastically outstrip any incremental demand growth,” he said.
At least 350 million tons of new supply is scheduled to enter the market through 2018, according to Bloomberg Intelligence.
China, the biggest consumer, imported 307.3 million tons of iron ore in the first four months of the year, a 0.7 percent increase on the same period a year earlier.
Additions to supply by producers including BHP and Brazil’s Vale have brought criticism from competitors, as well as governments that see their natural resources being sold off cheaply.
Australia’s Senate would be asked today to authorise an inquiry to examine the price collapse that would seek evidence from suppliers including BHP and Rio Tinto, independent senator Nick Xenophon said.
“We need to look at issue of whether market behaviours have been problematic,” said Xenophon, who has proposed the inquiry. “Whether the iron ore price has been artificially depressed as a result of behaviour of some of the key market participants.”
If approved, the planned inquiry would also study the impact on Australia’s tax revenue, Xenophon said.
The decline was projected to cut tax receipts by about A$20 billion (R192bn) in the next financial year, according to Treasurer Joe Hockey.
Cutting costs
To counter the price slump, BHP has focused on cutting costs and Mackenzie has outlined a new target that will allow the firm to compete with Rio as the lowest-cost supplier.
BHP wants to cut costs by 21 percent at its Western Australian operations to $16 a ton in financial 2016. Rio was mining for $17 a ton, chief executive Sam Walsh said last month.
Fortescue Metals, the fourth-largest supplier, was targeting $18 a ton under the same measure, which it said included mining, processing, rail and port costs.
“I definitely would say it is not the floor,” Mackenzie said, referring to BHP’s $16 target. “The long-term strategy has to be to continue to drive costs lower where you can through productivity and technology.”
BHP’s total capital spending will be cut to $9bn in financial 2016, the lowest since 2008, from $12.6bn in the year to June.
Rio was also continuing to focus on reducing costs, Walsh said yesterday at a conference in Barcelona. The producer would complete an infrastructure expansion within weeks and did not currently foresee further investment aimed at raising volumes, he said.
“The only way you could see a reversion to significantly higher prices would be have a large amount of existing capacity permanently taken off line,” Knights said. – Bloomberg