Wednesday saw mining giant BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) release its operational review for the nine months ended March 31, 2015, and it includes at least one big surprise for investors: BHP will be slowing its iron ore expansion program.
Specifically, the company said it will be deferring its Inner Harbour Debottlenecking project, with the move leading to “a slower path to system capacity of 290 Mtpa,” which the company originally planned to reach by 2017. It’s doing so on the back of a 16-percent increase in Western Australian Iron Ore (WAIO) production — output rose to a record 188 million tonnes, and WAIO production for 2015 is now expected to come in at 250 million tonnes.
As investors who’ve been watching the iron ore space know, the move is unexpected largely due to the fact that BHP — along with fellow major miners Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) and Vale (NYSE:VALE) — has been relentlessly upping its iron ore output in a bid to become the lowest-cost producer of the metal. That activity has pushed the iron ore price near 10-year lows in recent weeks.
Given that context, it’s not hard to see why the metal’s price rose following BHP’s announcement. Indeed, The Sydney Morning Herald reported that the news spurred the iron ore price up by 5.9 percent, to US$54.04 per metric ton — that’s it’s biggest jump since October 2012.
However, while BHP’s expansion slowdown is undeniably good news for the long-suffering iron ore market, it’s important to note that the company’s goal of becoming the metal’s lowest-cost producer remains firmly intact. CEO Andrew Mackenzie said in Wednesday’s release, “[i]n Iron Ore, our focus remains on producing at the lowest possible cost with Western Australian Iron Ore unit costs now below US$20 per tonne as we continue to improve productivity.”
Other comments made by Mackenzie indicate that he’s by no means cowed by competition from the likes of Rio Tinto and Vale. He cited China’s “unprecedented demand growth” as the catalyst for BHP’s increased iron ore output, and noted, “[d]espite the subsequent increase in supply-side competition, these low-cost expansions continue to deliver attractive margins and returns through the cycle.”
Furthermore, it’s worth noting that BHP’s move comes just after Rio Tinto’s announcement that expansion infrastructure at its Pilbara operation “is nearing completion and remains on track for delivery by the end of the first half of 2015.” All in all, the company expects 2015 output of 350 million tonnes from its Canadian and Australian operations. Meanwhile, Vale just reported record Q1 iron ore production of 77.4 million metric tons.
That said, some market watchers are encouraged by the news from BHP and believe it will prove a boon to the industry moving forward. For instance, Australian Treasurer Joe Hockey praised the company’s action, telling the Australian Financial Review, “I’m glad that the producers in Australia are taking a more reasonable approach to production leavers.” He added, “[o]bviously the price of iron ore is going to have an impact on our budget and we expect our producers to behave collectively in a mature fashion.”
Furthermore, Andrew Hodge, a Wood Mackenzie analyst, told the Financial Times, “BHP’s message is that it wants to conserve capital and it is about value rather than volume. Taking some tonnes out of the market may have a positive impact on prices.”
Whether that happens remains to be seen, but market watchers are no doubt enjoying the iron ore price bump no matter how short the respite may end up being.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.