Iron Ore’s $120 Billion Output Race Slows as BHP Halts Port Plan

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BHP Billiton Ltd. is curbing the pace of its iron ore expansion, slowing the final stages of the $120 billion race by the world’s biggest producers to raise output as a supply glut holds prices near a 10-year low.

A planned $600 million project to reduce bottlenecks at Australia’s Port Hedland, the world’s biggest bulk export terminal, will be deferred, meaning BHP will miss a target of raising production to 290 million metric tons a year by mid-2017, the company said today in a statement.

The moves by BHP, Rio Tinto Group and Vale SA to increase market share in the face of the price rout has earned the ire of some investors, political leaders and loss-making rivals. BHP has described the tactic as “squeezing the lemon.”

Today’s decision will “lower the capital expenditure profile a little over the next couple of years to preserve free cash flow to support the dividend and balance sheet,” Andrew Driscoll, head of resources research at CLSA Ltd., said by phone from Perth.

“The side benefit of that is that it’s supportive of the market and is a move against some of the negative public commentary about surplus supply,” he said.

The halt follows Rio Tinto’s move last year to delay an investment decision on the $1 billion Silvergrass mine until 2016 and Fortescue Metals Group Ltd.’s action in November to abandon building a $105 million processing plant.

Relaxing the Chase

In delaying Silvergrass, Rio moved to slow the pace of progress toward its own 360 million ton a year capacity target, according to Wood Mackenzie Ltd.

BHP’s move is “very similar to what Rio have already done,” said Andrew Hodge, a Sydney-based analyst at Wood Mackenzie. “Deferring a decision on Silvergrass effectively means deferring when you are going to hit that 360 million ton target.”

BHP declined 1.1 percent in Sydney trading to A$30.27, trimming its advance this year to 3.1 percent.

With about 160 million tons of production forecast to exit the market this year as higher-cost suppliers shutter mines, the largest companies can relax the chase to raise market share, according to Caue Araujo, Sydney-based iron ore industry director at the research company AME Group.

“The speed of how quickly they’ll meet their production targets can follow market conditions,” Araujo said. “That’s the smart way of doing this.”

Raise Capacity

The project to reduce bottlenecks at Port Hedland had been intended to raise capacity by about 20 million tons, BHP said in October. The expansion had an estimated cost of $600 million, according to RBC Capital Markets.

The company may not be able to meet its planned production goal of 290 million tons without completing the project in the future, according to Wood Mackenzie. Meeting the goal will depend on BHP’s ability to squeeze more capacity from existing infrastructure, according to RBC.

Fortescue’s founder Andrew Forrest has called for a “fair game” on supply, while Western Australia’s premier Colin Barnett last week urged suppliers to curb expansions.

Iron ore prices have slumped by more than half in the past year and there’s little prospect of a long-term rebound with demand for seaborne supplies likely to peak in 2016, according to Goldman Sachs Group Inc.

The global surplus will rise to 108 million tons next year from 74 million tons in 2015, according to HSBC Holdings Plc.

Ore with 62 percent content delivered to China’s Qingdao declined 1 percent to $51.04 a dry metric ton on Tuesday, according to Metal Bulletin Ltd. It fell to $47.08 on April 2, the lowest since 2005.

In the shorter term, the expansion continues, with BHP today raising its Australian output target for the year ended June 30 to 250 million tons.

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