BHP says price to stay below $100 for foreseeable future

Two top executives from BHP Billiton, Jimmy Wilson, president of iron ore at left, and Mike Henry, president of marketing and technology, attended the ceremony in Shanghai

Two top executives from BHP Billiton, Jimmy Wilson, president of iron ore at left, and Mike Henry, president of marketing and technology, attended the ceremony in Shanghai

Michael Sainsbury

Australia’s BHP Billiton, one of the world’s biggest mining companies, expects the price of iron ore to stay below $100 per metric ton for the foreseeable future, following a fall of nearly 50% this year.

Two top executives from BHP Billiton, Jimmy Wilson, president of iron ore at left, and Mike Henry, president of marketing and technology, attended the ceremony in Shanghai

Mike Henry, the company’s marketing and technology president, made the comment during an interview given by BHP senior executives Dec. 11 as the company celebrated shipping its 1 billionth metric ton of iron ore to China.

Surging supply and a slowdown in the Chinese economy have slashed iron ore prices from $134 per metric ton at the start of 2014 to $68.90 on Dec. 10 — a fall of 48.5% for the year to date. Analysts are forecasting further falls, with Citigroup, a U.S. bank, predicting an average of $65 for 2015.

BHP iron ore president Jimmy Wilson would not be drawn on the company’s forecast for the average iron ore price next year. But he admitted that reduction in forward pricing estimates by analysts “was appropriate.”

” What we have seen over the past decade is that supply could not keep up with demand; what we are seeing now is that supply has caught up with demand,” Wilson said. Henry agreed, saying it was highly unlikely that iron ore would breach the $100 per metric ton mark in the foreseeable future.

“We would not be advocating for prices to kick up over $100, that would defy rational economics,” Henry said. He added that it would be “hard to see it [a $100 price] happening again”.

Henry said BHP was confident that the Chinese economy would provide demand for its growing output of iron ore, which is the world’s second most shipped commodity after oil. He said BHP was not surprised by the Chinese slowdown, which is widely expected to reduce growth in gross domestic product to less than 7.5% for the year — the lowest level since 1991, according to the World Bank.

“Our estimate of this year was 7.2% to 7.3%,” Henry said, adding that the miner expected Chinese growth to stabilize at between 7% and 7.5% for the “foreseeable future”, before “falling away to the sixes [between 6% and 6.9%] over time.”

Investment was slowing while consumption remained steady, he said, as China sought to rebalance its investment-dependent economy. “We can see that the Chinese government has a very clear understanding of what needs to happen for that shift to occur,” Henry said. He added that Beijing was “adopting a resolve in driving forward that reform.”

However, BHP and its Australian rival Rio Tinto are at odds with many market analysts about the level at which Chinese steel production will peak. China is the world largest consumer and importer of iron ore, which is the key component in steelmaking.

Henry said BHP believed that Chinese steel production would top out at between 1 billion and 1.1 billion metric tons — considerably higher than many forecasts by independent analysts, which range down to about 850 million metric tons.

Wilson estimated that iron ore supply would expand by 100 to 120 metric tons in 2015, as additional output flows from mining projects commissioned during the Chinese construction boom. He said that would compare with only 30 to 50 million metric tons of additional demand generated by growth of between 0.5% and 1.5% in Chinese steel consumption.

However, Wilson forecast that annual Chinese steel consumption growth would return to an average of 3.5% in coming years.

The collapse of iron ore prices is a key issue for BHP, which is the world’s third largest producer of the commodity. The company also produces a range of other resources products, and has been forced to absorb widespread falls in prices as the so-called commodities super-cycle has turned sour over the past 18 months.

Oil, for example, fell below $65 a barrel on Dec. 10 for the first time in five years, and is tipped to go lower. “We forecast [oil] prices to range between $60-80/barrel in 2015, with the potential to dip below $60/barrel nearer-term,” analysts at ANZ, an Australian bank, wrote in client note on Dec 11.

BHP claims that its broad portfolio puts it in a better position than many other companies. BHP’s output includes copper, which is forecast by analyst to out-perform most other metals in coming years, and a full suite of energy assets — oil, gas, coal, and uranium. It is also developing a mining project in Canada that will produce potash, a sought-after agricultural fertilizer.

Henry also backed the reform program set out by Japanese Prime Minister Shinzo Abe’s Liberal Democratic Party ahead of the country’s impending general election, despite an announcement on Dec. 8 that the economy had contracted at an annualized rate of 1.9% in the third quarter of 2014.

“Listening to customers there, Japanese business remains reasonably optimistic about ongoing reforms and ongoing resilience in the economy,” Henry said. “We [have] to keep that in context in that the economy in Japan is better than it has been for many, many years,” he said.

This story was originally published by Nikkei Asian Review, asia.nikkei.com, 11 December 2014