BHP Joins Rio in Cutting Ore Output Forecast as Prices Gain

  • Australian iron ore output forecast cut by 4% on bad weather
  • Prices surge over $60 metric ton on China economy optimism

BHP Billiton Ltd., the world’s biggest mining company, cut its iron ore production forecast for its Australian mines by 4 percent because of bad weather and rail network maintenance, adding to bullish signals for the global market.

Output from its mines in Western Australia may be 260 million metric tons this fiscal year, Melbourne-based BHP said Wednesday in a statement. Rio Tinto Group lowered its iron ore production forecasts Tuesday, citing delays in implementing a driverless train system in the nation’s Pilbara region.

Iron ore has extended a rally above $60 a metric ton as steel prices and output surged in China after policy makers bolstered growth and the property sector rebounded. The forecast reduction by Rio, the world’s second-biggest exporter, may see market sentiment turn more positive, especially with BHP’s expected cut, according to an UBS AG report Tuesday.

“To see output come down is, from a price perspective, a better option considering how much of a fright there has been in the iron ore market,” Evan Lucas, a Melbourne-based market strategist at IG Ltd., said by telephone. “China is clearly restocking and that is part of what we are seeing in the iron ore price. We still believe that medium term it is probably not sustainable.”

Fresh Highs

BHP gained 3.4 percent in Sydney to close at A$20.34, the highest close since Nov. 20. Iron ore with 62 percent content delivered to Qingdao climbed 4.1 percent to $62.85 a dry ton on Tuesday, the highest since March 8, according to Metal Bulletin Ltd. The gain follows a 3.6 percent jump on Monday and takes this year’s advance to 44 percent.

Iron ore’s rally in 2016 follows three years of declining prices as the world’s largest producers including Rio and BHP expanded low-cost supply, squeezing competitors and adding to a glut. Steel prices in China pushed to fresh highs on Tuesday as rebar futures in Shanghai gained 4.3 percent to the highest close in more than a year.

BHP lowered its full-year guidance for its attributable iron ore to 229 million tons, down from a January forecast of 237 million, it said Wednesday in its quarterly production report. In Western Australia, BHP’s rail renewal and maintenance program will take two years and will help deliver an increase in annual system capacity to 290 million tons over time.

Subdue Ability

“The rail maintenance program could subdue BHP’s ability to grow iron-ore volumes beyond the current run rate over the next two years,” Macquarie Group Ltd. said in a note to clients.

Third-quarter iron ore output fell 10 percent to 53.1 million tons, missing the median estimate of 55.95 million tons among six analysts surveyed by Bloomberg. BHP is the third-largest producer behind Vale SA and Rio.

“The productivity of our company continues to improve notwithstanding the disruption largely caused by adverse weather this quarter,” Chief Executive Officer Andrew Mackenzie said in the statement. The company is on track to deliver an average unit cost improvement of 14 percent across its major assets, it said.

Iron ore prices may fall in the second half as supply outpaces demand growth, Rio said last week. BHP is more bearish on iron ore than for prices of any of its other products, Mackenzie said in a speech last month. The market faces increasingly severe oversupply, according to Citigroup Inc., which said in a report this week that gains will probably be reversed in the second half.

BHP’s petroleum output fell 3 percent to 59.4 million barrels of oil equivalent in the quarter, the company said That missed the median estimate of 56.1 million barrels among seven analysts. Copper output dropped 12 percent to 405,000 tons as grades declined at the Escondida mine. That beat the 380,350 tons median estimate among six analysts.

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