BHP predicts no slowdown in iron-ore production despite plunging prices
The world’s biggest mining company BHP Billiton Ltd. considers there will be no slowdown in the drive by global iron-ore producers to boost production even as prices slump.
Iron ore has plummeted 47 percent this year to near the lowest since 2009 as investment in new mines deepens a global glut. BHP, Rio Tinto Group (RIO) and Vale SA have expanded output in Australia and Brazil, betting the increase will offset falling prices and force high-cost mines worldwide to close.
“Even the iron-ore price where it is today can induce more volume,” Jimmy Wilson, BHP’s president of iron ore, said in an interview broadcast by Australia’s Nine Network. “If that volume doesn’t come from our business, it’s going to come from other businesses around the world and other countries around the world.”
“Organizations have to be competitive and those that can’t be competitive will end up going out of business,” said Wilson.
BHP operates in the iron-rich Pilbara region of Western Australia, the largest production hub for the material in the world. It’s the No. 3 exporter and is spending $2 billion to boost annual production capacity to 290 million metric tons. Iron ore contributes 32 percent of its sales.
“When the prices have been so high over such a long period of time you are going to induce more supply and when that supply comes on, we shouldn’t be awfully surprised,” said Wilson. “This is the commodity cycle.”
According to Macquarie Group Ltd., the market is in the midst of a transition without precedent in recent commodity history as supply surges and some higher-cost mines are displaced, as Bloomberg reports.
At the same time, Goldman Sachs Group Inc. said in a report that as much as 130 million tons of seaborne production capacity, or about 10 percent of current supply, will have to shut in 2015-2016.
While low-cost producers such as BHP, Rio and Vale have more tolerance to absorb lower prices in the near term than Cliffs Natural Resources Inc., Fortescue Metals Group Ltd. and Atlas Iron Ltd., the compression of earnings and cash flow is nonetheless value destructive, Moody’s Investors Service said last month.
