“The very strong growth in supply is more than enough to create a bit of an excess and therefore to drive the price lower,” Andrew Mackenzie, chief executive officer of the Melbourne-based company said today on an analyst web cast. “There may be a few ups and down in the next quarter or two, perhaps a little bit of a recovery in that demand but we still see some issues arising from new supply.”
The forecast is the latest sign that the largest producers of the steelmaking raw material are preparing for lower earnings from their major product. Supply increases by companies including BHP, Rio Tinto Group and Vale SA may push the global seaborne surplus of iron ore to 90 million metric tons this year from a balanced market in 2013, UBS AG estimates.
“Any major producer that recognizes a substantial, price-changing surplus forming in its market, is likely to be assessing its own capacity to tolerate and respond to weaker prices,” Tom Price, a Sydney-based commodity market analyst said in an e-mail. “As a large, low-cost iron ore producer, BHP Billiton’s iron ore business is well placed to cope in the short-term with even substantially lower prices.”
Benchmark iron ore prices to China have dropped 7.3 percent this year to $124.40 a metric ton yesterday and are forecast to decline every year until at least 2017, according to data compiled by Bloomberg.
Mackenzie’s comments echo expectations by Rio Tinto Group CEO Sam Walsh, who in December said new capacity will lower prices during 2014.
Iron ore is the most profitable unit for both companies, generating 52 percent of BHP’s underlying earnings before interest and tax for the six months to Dec. 31. Rio, the second-largest producer, last year got 77 percent of its earnings before interest, tax, depreciation and amortization from iron ore.
Vale, Rio Tinto and BHP, which together supply about two-thirds of seaborne iron ore, are nearing the end of an investment splurge on new mines and port facilities to meet demand from China, the biggest consumer.
In China, which buys about 60 percent of seaborne iron ore, demand growth from steelmakers has slowed as the government implements policies to move away from building new roads, bridges and rail roads toward a consumption-led economy.
China to Slow
China’s steel production rate will rise 3 percent to almost 800 million tons this year, according to UBS’ Price. That compares with an expected 12 percent lift in global seaborne iron ore supply to 1.347 billion tons. This includes a 18 percent boost from Australia, the biggest exporter.
“Chinese steel production growth rates are expected to decelerate to levels considerably below gross domestic product growth in the short-term as the economy matures following a period of steel-intensive, infrastructure-led growth,” BHP said today in its half-year earnings statement. The company reported a 31 percent rise in underlying earnings of $7.8 billion, beating analyst expectations of $6.9 billion.
Vale, the biggest iron ore exporter, expects prices may “oscillate” but doesn’t see “any chance” of the commodity dropping below $110 a ton, according to comments yesterday by Jose Carlos Martins, Vale’s executive director for ferrous and strategy.
“BHP certainly doesn’t sound as bullish as what some of the other miners say regarding future prices,” Christian Lelong, a Sydney-based commodity analyst with Goldman Sachs Group Inc., said by phone.
Analysts expect China, the mining industry’s biggest customer, to grow at the slowest pace in 24 years in 2014. The ruling Communist Party is trying to balance reining in a credit boom while maintaining expansion above Premier Li Keqiang’s 7 percent “bottom line” to sustain employment.
China’s tighter credit controls and improved environmental regulations may help iron ore importers of high-quality iron ore, Mackenzie said.
“There’s a lot of work that the government is doing, in some cases using the debt market to lead to some form of restructuring of the iron ore and the steel industry,” he said. This will mean “in the medium-term, more supply of iron ore from outside the country,” he said.
To contact the reporter on this story: Elisabeth Behrmann in Sydney at firstname.lastname@example.org