BHP Powers Ahead With Iron Ore Output Gains, Pressuring Prices

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BHP Billiton Ltd., the world’s biggest mining company, is powering ahead with boosting its iron ore output, adding to a global glut and keeping pressure on prices.

Output will rise 6 percent to 247 million tons in fiscal 2016, from 233 million tons last year, the Melbourne-based producer said Wednesday in a statement. Output from its Western Australian mines, including third-party tons, will jump to 270 million tons.

Expansions by the largest producers, including BHP, Vale SA and Rio Tinto Group, are adding to a global surplus as demand stagnates in China, the biggest buyer. BHP realized an average price of $53 a ton for its iron ore in the six months to June, down 24 percent from $70 in the first half.

“Iron ore at $50 a ton is still offering a very good margin for them,” David Lennox, a Sydney-based analyst at Fat Prophets said by phone after the statement was released. “It’s not as brilliant as it once was, but they are still making money out of it, and that’s the key.”

BHP fell 1.2 percent to A$26.50 at 10:01 a.m in Sydney, extending its decline this year to 3.5 percent.

The global surplus will rise to 83.2 million tons in 2020 from a forecast 58.1 million tons this year, according to Morgan Stanley forecasts. The seaborne market will hit 1.4 billion tons in 2015, it predicts. BHP expects further productivity improvements will lift its output, including third-party tons, to 290 million tons over time.

Bear Market

Benchmark iron ore prices returned to a bear market this month and this month touched the lowest since at least 2009.

Iron ore of 62 percent delivered to Qingdao fell to $44.59 a dry ton on July 8, the lowest since at least May 2009, and was at $52.10 a ton on Tuesday, according to Metal Bulletin Ltd. Compared with the annual benchmarks that preceded recent spot trading, the July 8 price would be the lowest since 2005, data compiled by Clarkson Plc show.

BHP expects to book an after-tax net loss of about $2.1 billion on the demerger of assets into South32 Ltd., which began trading in May, according to the statement. BHP had earlier said the separation would incur a one-off after-tax cost of $641 million, according to a March filing.

The producer also expects to book additional charges of as much as $650 million against its underlying attributable profit on its copper, petroleum and U.S. onshore operations. Weaker commodity prices will also trim earnings in the year to July by about $382 million, BHP said.

It follows an announcement last week that BHP expects to book a pretax impairment of $2.8 billion mainly related to the Hawkville shale gas field in Texas.

Petroleum output in the year to July 2016 will fall 7 percent to 237 million barrels of oil equivalent from 256 million barrels, as copper production declines 12 percent to 1.5 million tons from 1.7 million tons, BHP said.

“They are perhaps acknowledging that we are seeing some turmoil inside those markets in terms of supply,” Fat Prophets’ Lennox said. “They are being cautious in winding back their guidance.”

(A previous version of this story was corrected to make clear realized iron ore prices had fallen in the third paragraph.)

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