BHP blinks as casualties mount in iron ore war

Published Feb 26, 2015

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Thomas Biesheuvel and Jesse Riseborough

THE FIRST fractures are appearing in an escalating iron ore price war that is putting more producers out of business.

The biggest mining companies led by Rio Tinto, BHP Billiton and Vale have persisted with multibillion-dollar expansion plans, citing still-healthy earnings even in the wake of a price collapse.

Now, for the first time, one of the big three has voiced concern they may have gone too far.

“I do fear that other competitors have an awful lot more capital waiting in the wings to invest in expanding,” Andrew Mackenzie, the chief executive of BHP, the world’s largest mining company, told analysts on a conference call on Tuesday after reporting a 35 percent decline in underlying profit from the iron ore division. “We do look to the future and see a degree of pressure downwards on iron ore prices.”

BHP, Rio and Vale have been squeezing smaller rivals in their quest for market share, while demand growth in China, the biggest consumer, slows. From Sierra Leone’s jungle to Sweden’s Lapland, abandoned mines are beginning to dot the global landscape.

“They wanted to make sure no one else entered the market and to maximise their own market share,” Seth Rosenfeld, an analyst at Jefferies International in London, said. “They’ve now done that as they’re expanding and no one else is.”

Having embarked on $120 billion (R1.4 trillion) of spending on new projects since 2011, the biggest producers have so far refused to blink in the face of a worsening outlook.

Plans to expand giant rail, port and mine projects in Australia and Brazil are largely undisturbed, the producers content to see higher-cost rivals go out of business before they rein back investment in their most profitable divisions.

While Mackenzie said BHP was “all but done on investing” in iron ore and would focus on oil and copper projects, the company was progressing with an expansion in Western Australia that would see it produce 225 million tons of iron ore this financial year. That’s double what it produced in financial 2007. The company on Tuesday reported a 35 percent drop in underlying profit from its iron ore unit in the six months to December to $4.2bn.

Most profitable

Smaller, higher-cost producers have been forced to react to the price slump. About 170 million tons, or 12 percent of the global seaborne trade last year, has been shuttered, according to Morgan Stanley.

There have been 22 projects cancelled or postponed in the past six months with a total capacity of 140 million tons, according to Bloomberg.

High-cost

producers have clung on as long as they could, aided by a 50 percent collapse in the oil price last year and declines in currencies in Australia and Brazil, which lowered the cost of mining in the world’s two biggest producers of the raw material.

Still

, for many it is too late. Sierra Leone’s fledgling iron ore industry has been among the hardest-hit losing 25 million tons of annual capacity after its biggest producers ran out of cash. – Bloomberg

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