BHP Flags Cuts in Coal to Oil Output Amid Commodity Rout

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As commodity prices tumbled this week to a 13-year low, the world’s biggest miner said it will cut production of three of its four most important raw materials.

Petroleum, copper and coal output will fall in fiscal 2016, while iron ore is the only one of its so-called four pillars forecast to post an increase, BHP Billiton Ltd. said Wednesday. The average prices for all its key commodities slid in the first half of the year, BHP said.

Raw material prices have declined about 9 percent in the past two months, driving the Bloomberg Commodities Index down as economic growth slows in China, the largest buyer of metals and energy. Oversupply in some metals markets is likely to persist, holding prices lower, BHP’s Chief Executive Officer Andrew Mackenzie said in a speech last month.

“The four pillars are starting to look a bit crumbly,” Evan Lucas, a Melbourne-based markets strategist at IG Ltd., said by phone. “It’s external market conditions that have pushed this on to him, but what we see now is Andrew Mackenzie asking how has this happened, why is it happening and what can he do to fix it?”

Petroleum output in the year to June 30 will fall 7 percent to 237 million barrels of oil equivalent, with copper production declining 12 percent to 1.5 million metric tons. Coking coal output will slip 6 percent and thermal coal by 2 percent. Iron ore output is forecast to expand by 6 percent.

Trimming Earnings

Citigroup Inc. analysts said production guidance for 2016 was below the bank’s estimates and trimmed their fiscal 2016 underlying earnings forecast by 4 percent to $4.6 billion. They also cut the fiscal 2015 estimate by 8 percent to $8.3 billion.

BHP, which flagged charges and impairments totaling as much as about $4.7 billion for fiscal 2015, dropped 3.7 percent to 1,205 pence by 11:15 a.m. in London. It earlier fell 2.1 percent to close at A$26.27 in Sydney trading, extending its decline this year to 4.3 percent.

U.S. crude slumped on Monday below $50 a barrel for the first time in more than three months, while the LMEX Index of six base metals hit a six-year low earlier this month. The rout has extended to the currencies of economies tied to commodities such as Australia, Canada and Norway.

The weaker oil prices mean BHP will defer development of U.S. onshore gas fields, seeking to hold off output until prices rise, the producer said. Declining copper grades and a coal mine closing will also crimp production.

Investment Cut

Output at BHP’s predominantly gas-rich Haynesville, Fayetteville and Hawkville fields will fall 19 percent in the current fiscal year, while liquids production from U.S. onshore operations has risen in the past 12 months.

The forecast production cuts by BHP show the biggest producers are responding to tumbling prices, according to Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd. If supply gluts ease, it’ll mean some commodities may be at, or approaching, the bottom of the price cycle, he said.

“It looks to be a signal that, outside of iron ore, we are looking at the bottom of the market,” Pervan said in an interview in Melbourne.

BHP said last week it expects to book a pretax impairment of $2.8 billion, mainly related to the Hawkville shale gas field in Texas. It’s also cutting investment in its U.S. onshore unit and the number of active rigs.

The producer’s average realized oil price slumped 49 percent in the six months to June 30 compared with the same period a year earlier, as copper prices fell 16 percent and hard coking coal by 18 percent, the producer said in its statement.

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