BHP Billiton’s efforts to push high-cost Chinese iron ore producers out of the market by increasing its own supply are showing first signs of success, with a number of domestic Chinese producers closing in the last few weeks.
Mike Henry, BHP’s president of marketing, says high-cost suppliers have been slow to react to the ramp-up by the lower-cost majors, including BHP, Rio Tinto, Fortescue Metals and Brazil’s Vale. It was important they shut in a “reasonably efficient manner” to avoid a “compounding of supply," he said.
“As a lot of low-cost supply came to market over six to 12 months, (the) response from high-cost suppliers was slower than it has been historically,” Mr Henry said, speaking after a site tour in Port Hedland. “But over the past few weeks, you’re starting to see some of that high-cost supply shut in. That’s one of the things that has helped buoy iron ore prices over the past week or so.”
The iron ore majors are increasing capacity despite iron ore prices having dropped 30 per cent to about $US94 a tonne since the start of the year.
Cementing their dominance
The production ramp-up is in part designed to force higher-cost Chinese and Australian producers out of the market and cement the dominance of the majors. Mr Henry tipped demand for iron ore will grow by 30 to 50 million tonnes this calendar year, well short of the 130 to 150 million tonnes of new low-cost supply forecast to come onto market. He said BHP was not surprised by the recent drop in iron ore prices.
China produces about 350 million tonnes of iron ore each year, and BHP says high-cost supply is anywhere between 100 and 150 million tonnes of that. “(There is) quite a significant overhang of low-cost supply coming to market in the face of a slow but steady increase in demand,” Mr Henry said.
“So it’s really important for the high-cost suppliers to shut in a reasonably efficient manner in the face of that – otherwise you just see a compounding of supply in the market.”
However, Mr Henry said it was hard to put a figure on how much production was shutting in China.
While the brunt of the impact of the ramp-up will be felt by China, high-cost producers in other regions, including Indonesia and the Philippines, would also be affected, he said.
“The bulk of that compression in supply we believe is going to come out of China,” he said.
Locking new competition out
Fairfax Media has reported that Australia’s second-tier iron ore players are concerned that the aggressive production increases by the iron ore majors – and promises of more expansion to come – are locking new competition out of the market by spooking financiers about supply gluts and further spot-price falls.
BHP expects full-year production of 217 million tonnes for the financial year just ended, up on 187 million tonnes in 2012-13. BHP is moving towards an annual rate of 270 million tonnes but has not yet put a date on it.
Mr Henry was in Port Hedland to mark the miner’s billionth tonne of iron ore shipped to Japan – its third-largest customer – almost 50 years after the first shipment, in 1966. The billionth tonne of ore to China is expected to be shipped before the end of the year.
With Mr Henry was BHP’s president of iron ore Jimmy Wilson, who refused to be drawn to comment on job cuts and the rumoured target of 20 per cent reduction in the division’s staff numbers as part of an ongoing review by global consultants McKinsey & Co.
“At the end of the day, our aspiration is to at least hold our headcount the same (about 16,000 iron ore staff) or reduce it while we are increasing our volumes up to the 270 million (tonnes per annum) mark,” Mr Wilson said.
(20min delay)