BHP Billiton chief executive Andrew Mackenzie says iron ore prices are unlikely to climb back above $US100 a tonne but the company is readying to spend an extra $US3.25 billion ($3.5bn) to bring more ore on to the market in a bigger-than-expected expansion of its West Australian mines.
As iron ore prices last week slid to about $US90 a tonne and approached five-year lows, Mr Mackenzie said he was not counting on a price floor forming.
At the same time, in a declaration largely lost amid BHP’s plans for a $US14bn spin-out of non-core assets, the world’s biggest miner says it is looking to expand its Pilbara iron ore mines and ports to annual capacity of 290 million tonnes a year.
This is up from a previous target to grow to 270 million tonnes and at a forecast capital cost that is dramatically lower than guidance given to analysts a year ago.
“We would say it is quite unlikely that we would see prices north of $US100 a tonne, so our forecasts are obviously based on something below that,” Mr Mackenzie told British media when asked if there might be a price floor around current price levels.
Despite the downbeat outlook for a commodity that averaged $US135 a tonne last year, BHP looks more likely to go ahead with its planned expansion, which will be on top of plans to boost output to 225 million tonnes a year. This, combined with the company’s low operating costs of about $US40 a tonne, means prices would have to fall lower than anyone was predicting for the expansion to not look attractive.
On Friday night, iron ore prices slipped $US1.80 to $90.10 a tonne as Chinese steel mills continued to run down iron ore inventory amid low steel prices, uncertain demand and expanded production from BHP, Rio Tinto and Fortescue Metals Group.
The iron ore price, which has shed $US45 a tonne this year, is only at a two-month low. But if it fell another $US1.20, it would be at a two-year low, and if it dropped below $US86.70, it would be at its lowest since 2009.
Macquarie analysts said steel orders were softer in August and inventories remained higher than two months ago, meaning that more run-downs and continued lack of buying were possible.
“Mills do report that they plan to increase purchasing activity of both iron ore and coking coal, although whether this happens or not will almost certainly depend on how demand conditions evolve in the coming weeks,” the bank said in a note to clients.
BHP says work on debottlenecking meant it could build the 65 million-tonne-a-year expansion for less than $US50 a tonne of annual capacity. This is at a cost of less than half the guidance of $US100-$US120 an annual tonne that BHP gave analysts at briefings last year.
“We have looked at quite big capital costs and so on, but by just sitting back with what we’ve got and making what we’ve got much more productive, we’ve seen our way through to achieving that with minimal capital,” Mr Mackenzie told Business Spectator.
The looming $US3.25bn expenditure, which BHP will give more detail on in a November investor tour of the Pilbara, would give the company an extra $US5.85bn of annual revenue, meaning capital costs could be quickly paid back given the iron ore unit’s high margins.
BHP last week said a 6 per cent fall in the iron ore price cut $US864 million from earnings before interest and tax, but this was countered by a $US1.8bn EBIT gain from adding 40 million tonnes of ore for total production of 203 million tonnes. Production is expected to rise to 225 million tonnes this year. The debottlenecking the expansion would involve would be mainly at the port and from piggybacking off investments from previous expansions.
Source: The Australian
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