iron ore supply catching demand

...or is it? Some analysts are tipping further price rises. I wonder if BHP is trying to discourage new investment by competitors or perhaps buy one or two on the cheap? Or perhaps the analysts are being too optimistic

Iron supply catching demand, says BHP

* Jamie Freed
* September 17, 2008
*

BHP BILLITON has painted a bullish view of the long-term demand for commodities but has warned that expanding iron ore supply is beginning to catch up with demand.

In a US version of its annual report released yesterday, the chairman, Don Argus, expressed disappointment in BHP's recent share price performance.

BHP shares peaked at a record $49.55 in mid-May but have since fallen 27 per cent, although closing 35c higher at $36.40 yesterday amid a volatile market.

"The 2008 financial year has seen higher average prices for most of our commodities than in the prior year," the report said. "Demand for raw materials in the emerging market economies has remained strong."

But it warned increased iron ore supply from itself, Rio Tinto, Brazil's Vale, Fortescue Metals and Indian suppliers meant the gap between supply and demand was starting to close.

Nevertheless, BHP lowered the cut-off grades on its iron ore reserves. A spokeswoman, Samantha Evans, said the grade sold would not change despite the lower average grade of its reserves: "Our blending strategy enables us to better utilise the resource by including lower-grade material in the same product. It's as a result of some proprietary mine-planning software."

Changes in commodity prices over the year meant BHP was able to add to its manganese reserves, but it was forced to slash the expected life of its Mt Keith mine in Western Australia by three years after some of the deeper reserves were rendered uneconomic by the lower nickel price.

BHP's chief executive, Marius Kloppers, said the $US15.4 billion ($19.6 billion) record annual profit was "outstanding" in the context of a challenging supply environment which included unexpected disruptions, rising costs and a weaker US dollar.

But he added BHP's safety performance was not acceptable, citing the deaths of 11 workers last year and four since the start of this financial year.

"[This year] we are making even greater efforts to improve our safety performance," he said.

The report revealed his remuneration had risen to $US6.87 million last year, up from $US4 million the previous year. He was elevated to the top job in October.

The former chief executive, Chip Goodyear, who left the company in January, received $US6.15 million last year, down from $US7.8 million the previous year.

Mr Argus's remuneration rose to $US920,000 last year, up from $US818,000, maintaining his position as one of Australia's highest-paid chairmen.

Analysts tip iron ore price rise

September 17, 2008 - 1:50PM
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Rio Tinto Ltd and rival BHP Billiton Ltd, the world's second and third largest iron ore producers, are in line for a seventh consecutive annual price rise for the bulk commodity, analysts say.

Goldman Sachs JBWere are predicting an 18 per cent plus price rise for Australian iron ore "fines" in the Japanese financial year starting April 1, 2009, after annual contract talks are concluded.

Demand for the steel making commodity continues to be driven by the rapid urbanisation of China and other developing nations, including India.

"Can iron ore contract prices rise at a time when spot iron ore/steel/scrap prices are all falling and global steel production growth is losing momentum?," Goldman Sachs asked in a client note.

"Our answer is "yes" - it has happened before and can happen again."

The brokerage said that the supply-demand dynamics for high quality seaborne iron ore are robust enough for the large contract suppliers - BHP Billiton, Rio Tinto and Brazil's Vale - to secure a seventh consecutive annual price rise.

BHP Billiton and Rio Tinto this year settled on a 79.88 per cent increase in the price of iron ore fines and a 96.50 per cent increase in the price of iron ore lump with Asian customers.

The rise was the sixth annual increase in contract prices for the steelmaking commodity.