BHP joins Rio, Vale in iron ore sales slumpFont Size: Decrease...

BHP joins Rio, Vale in iron ore sales slumpFont Size: Decrease Increase Print Page: Print Matt Chambers | November 15, 2008
Article from: The Australian
BHP Billiton has admitted it is facing first-half iron ore sales losses of up to $US600 million ($920 million), finally falling in with Rio Tinto and Vale, as Chinese steel mills struggle to make contracted purchases in a slowing economy.

BHP Billiton's chief financial officer Alberto Calderon says the global financial crisi will affect commodities demand for up to two years
The global financial crisis had also become much worse than most people thought and was expected to weigh on commodities demand for up to two years, BHP's chief commercial officer, Alberto Calderon, said yesterday.

Speaking to The Weekend Australian from London, Mr Calderon confirmed that credit issues had led some steel mills to ask for shipment deferrals and that this would reduce iron ore sales by up to 6 million tonnes by the end of the year.

The comments are the first public acknowledgement from BHP that it will have to join its $US90 billion takeover target Rio and Brazilian giant Vale in pulling back iron ore sales as Chinese demand plummets.

Rio last week said it would drop both its 2008 sales target and annual production rate by 20 million tonnes, leading analysts to cut full-year profit forecasts by up to $US1 billion.

Mr Calderon stressed BHP would not be cutting production and that the only reason the extra shipments would not be sold this year was that it would take time to sell them on to spot markets.

BHP has been selling iron ore on to the spot market despite prices falling well below $US100-a-tonne annual contract prices.

This has led to accusations that the only reason it has not pulled back was because it is scared of rubbing EU competition regulators the wrong way after saying a combined BHP-Rio would bring more product to market.

Mr Calderon denied the claims and said as long as spot sales made money, BHP would continue to sell.

"I am adamant you don't cut production -- there's no reason for a low-cost producer to cut, and this has nothing to do with the EU," Mr Calderon said.

"If you make money and you are investing a lot of capital, you don't subsidise high marginal-cost producers, who you see in China dramatically reducing (output) right now."

In recent weeks. BHP sold several capesize shiploads on to the spot market, where prices are at $US69 a tonne after falling as low as $US63.50 at the end of October.

Last week, The Australian revealed that despite BHP's insistence it was business as usual in the Pilbara, October shipments were at a 10-month low, with November shipments also likely to be lower.

Mr Calderon said this was purely due to operational problems, including a blocked rail-car emptier and ship loader.

But after a review late last week, shipments are now expected to slow markedly until the end of the year due to deferral requests.

"We are hearing from customers, big customers, in China with very, very high stocks, and we are hearing some customers are having difficulty opening letters of credit," Mr Calderon said.

"I had a meeting with my marketing team during the last two days and our estimate is that for this calendar year we may have deferrals for up to 5 per cent of our full-year budget (of 130 million tonnes)," Mr Calderon added.

At current benchmark prices, this would cost the company $US600 million in sales this half.

BHP was the last of the big three iron ore miners to slash sales estimates but has cut a lot less than Rio and also Vale, which said it would shut down 30million tonnes of annual production.

Mr Calderon said this was due to BHP's good relationships with steel mills after adherence to benchmark contracts during price negotiations as spot prices rose to $US200 a tonne.

There has been a lot of speculation that Rio and Vale have been the first to feel the pinch of Chinese demand, as payback for their hard-line tactics on price negotiations.

Rio sold the maximum amount of its contacts allowed on to the then more lucrative spot markets, while Vale tried to force another contract increase on steel mills after Rio and BHP held out for a better price.

Mr Calderon said any lost sales would be deferred until the second half and that BHP would try to minimise losses to less than the estimated 6 million tonnes this half.

In the financial year to October, BHP shipped 43.4million tonnes of ore, meaning in the last two months it will ship an average of 7.9 million tonnes a month to reach its new estimate of about 59 million tonnes for the half. That is a drop of 20 per cent from October and the lowest rate since March last year.

Despite some optimism that credit issues and a post-Olympics slump would improve, China, the rapidly growing powerhouse that sparked the commodities boom of the past five years, now looks unlikely to pull global commodities demand out of the mire for one to two years, Mr Calderon said.

"The situation, particularly on this side of the world, and particularly in Russia, is looking grim and I think it is only going to get worse," he said.

"I think we're in for tough times, much longer than people think, much, much more intense than people think."

He said in Moscow, cranes were paralysed and companies were not paying their workers.

"You see the payment system falling apart, which is what you saw in the crisis of the 90s," he said.

Turning to the coming round of iron ore negotiations, Mr Calderon described a Credit Suisse forecast of no change to prices issued earlier this month as "probably relatively optimistic".

He pointed to the slight gain in spot prices, which had been in freefall from more than $US100 at the start of October, as a good sign.

"Negotiations are still months away," he said. "What we want is the dust to settle."