BHP rejects supply restraint in iron

Published May 14, 2015

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Singapore - BHP Billiton Ltd defended its strategy of expanding iron ore output into an oversupplied market as prices decline, saying that the company’s approach was rational and it wouldn’t countenance cutting back on output.

“Our performance will be dependent on being the most efficient supplier and it shouldn’t be dependent on supply restraint,” Alan Chirgwin, iron ore marketing vice president, told a conference. “We have high-quality resources. We have a management team that’s operating in a very cost-disciplined way. We should be taking advantage of those things.”

Iron ore slumped 39 percent in the past 12 months as BHP and Rio Tinto Group in Australia and Brazil’s Vale SA expanded low-cost output to boost sales volumes and cut costs, spurring a surplus as China slowed. The strategy drew criticism from rivals including Fortescue Metals Group Ltd. and Glencore, which said that the approach damages the industry. It’s also drawn flak from political leaders including Colin Barnett, the premier of Western Australia where BHP and Rio operate mines.

“What we’re doing very clearly is we’re operating our enterprise in a very economically rational way,” Chirgwin said in Singapore on Thursday. “We took action, so it wasn’t just words. In 2011, that’s the last time our board approved billions of dollars of additional investment in expansion.”

BHP Chief Executive Officer Andrew Mackenzie said on Tuesday that lower iron ore prices are here to stay as output outpaces weaker growth in demand. The company aims to cut costs 21 percent at its Western Australian operations to $16 a ton in fiscal 2016, Mackenzie said in a separate statement.

Glasenberg’s salvo

Glencore Chief Executive Officer Ivan Glasenberg said on the same day that mining is suffering a crisis of confidence, and oversupplying markets regardless of demand is damaging the credibility of the industry.

“We’ve been very responsible, so I don’t see that Ivan is actually talking at me,” Mackenzie said in a phone interview on Tuesday. “We were very clear in 2011 when we sanctioned our last major project, we haven’t sanctioned anything since then, that we felt the world had turned in iron ore.”

Ore with 62 percent content at Qingdao fell 0.5 percent to $62.58 a dry metric ton on Wednesday, according to Metal Bulletin Ltd. While prices rebounded from a low of $47.08 on April 2, they’re still 67 percent below a 2011 record.

While BHP has said that it will miss a target of raising output to 290 million tons a year by mid-2017 as the company defers port works, it increased its fiscal 2015 forecast to 230 million tons from 225 million.

The deferral by BHP, as well as comments from Vale and Fortescue, probably don’t alter the oversupply story if China’s steel demand growth stalls, Credit Suisse Group AG said in a report on Thursday. The second half looks ominous for prices as more output arrives, it said, predicting a drop to $45 a ton.

BHP shares dropped 1.8 percent to 1,541.5 pence at 9.19am in London, paring gains this year to 11 percent, while Rio fell 1.7 percent to 2,928.5 pence, and is 2.4 percent weaker in 2015. Glencore, which has almost no presence in iron ore while mining copper and coal, is little changed this year.

“We’ve been very transparent with our views on the market,” Chirgwin said in Singapore. “We’ve been very consistent in the way we acted in managing our business, and I can’t speak for the management of other businesses.”

Bloomberg

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