- Jul 22 2015 at 2:58 PM
- Updated Jul 22 2015 at 2:58 PM
BHP Billiton's iron ore push doesn't mean prices will rise
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Adjusting to the moveable feast of pricing is not what BHP's pedal-to-the-metal production rate is about. Tim Wimborne
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by
Matthew Stevens
The fact
BHP Billiton has easily exceeded its full year iron ore production guidance should not be taken as a sign the Global Australian thinks prices are on the way up.
Given BHP does not publicly comment when it releases its quarterly reports, the best clue we can get as to where prices are heading is to refer back to comments made by iron ore president Jimmy Wilson in October.
Back then The Australian Financial Review asked him where we might expect the iron ore price to end up given the certainty that the market was headed into an extended period of over-supply.
Wilson advised us to study the cost curve, to identify the highest cost major producer and to work on the basis that future pricing would be set by the cost of its most marginal tonnes.
The candidates for the title of the marginal producer are Fortescue Metals Group and Brazil's iron ore monster Vale.
Right now,
Vale is producing some ore at as much as $U60 a tonne - however it will replace some of them with super low-cost ore that will come out of its new S11D project.
But across the year it is expected to produce about 340 million tonnes at an average cost of around $US43 each.
Fortescue has been pushing its costs down at a frenetic rate. It is planning to produce about
165 million tonnes this year and is driving to get to its break-even price of $US39 a tonne.
In other words, the price could well fall in the short to medium term from its current level of $US52.
Indeed, Goldman Sachs said overnight on Tuesday that the price is heading down towards $US44 a tonne by the second quarter of calendar 2016 as the supply glut enters a second year.
But to be clear, adjusting to the moveable feast of pricing is not what BHP's pedal-to-the-metal production rate is about.
It's simply about running its massive iron ore machine as productively and profitably as it possibly can.
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