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Iron ore prices propped up by output drop

Apr 19 2012 08:08
Sydney - Global miners BHP Billiton, Vale and Rio Tinto all posted sharp drops in quarterly iron ore production due to bad weather, a factor that has helped support iron ore prices at relatively high levels despite signs of a softening market.

The falls in output come as competition heats up in global bulk commodities markets due to demand from China for imported industrial raw materials finally showing signs of waning after years of double-digit growth.

At $149.20 a tonne, iron ore prices are 22% below last year's highs.

BHP, Vale and Rio Tinto -- together controlling 70% of the world's seaborne iron ore market - are counting on their super-sized operations to provide economies of scale and an edge over small competitors when demand softens. The more each miner can dig up, the lower the costs and greater the ability to ride out a downturn.

Smaller miners operating in Australia, including Fortescue Metals Group and Atlas Iron, are also expected to unveil weather-related disruptions to production runs in the last quarter.

BC Iron, however, said it was able to maintain production without any major disruptions to its operations over the quarter.

"We have had an underweight position in the resources sector for several months now on our expectations for a slower rate of global growth in 2012 than in 2011 and our scepticism over the current level of commodity prices," said Ben Lyons, an analyst at ATI Asset Management, which manages A$500m.

BHP said on Wednesday its iron ore output fell 8%, while data from Vale showed production down 15%. Rio Tinto reported a 10% drop on Tuesday.

Iron ore miners have been huge beneficiaries of China's rapid growth and urbanisation in recent years. Last month BHP said it saw signs growth in iron ore demand in China was "flattening", triggering falls in global equity markets and commodity-linked currencies such as the Australian dollar.

China demand

China's economy grew at its weakest pace in nearly three years in the first quarter, with the annual rate of expansion slowing more than expected to 8.15 from 8.9% in the previous three months.

Moderating growth could curb China's appetite for iron ore. Imports for the first quarter were up 6% at 187.6 million tonnes, versus a 14.4% increase in the same period last year, based on preliminary data from China's customs bureau.

In Australia, heavy rain and two early-season cyclones that drenched Rio Tinto and BHP iron ore pits early in the last quarter combined with high sea swells generated by cyclone Lua in late March at the key export terminal ports of Dampier, Cape Lambert and Port Hedland to curb mining and delay ship loadings.

BHP's iron ore output totalled 37.9 million tonnes, down from 41.1 million tonnes in the December quarter. Rio's share of production from mines it owns outright and in joint ventures dropped to 45.6 million tonnes in the quarter versus 51.2 million tonnes in the previous quarter.

Vale's first-quarter iron ore production was 70 million tonnes versus 82.9 million tonnes in the fourth quarter.

Brazil's southeastern iron belt was also hit hard by heavy rain blamed for at least 34 deaths. As in Australia's western iron ore region, heavy rains are common in the region between January and March.

Industrial action

BHP also faced weaker production from its collieries in Australia's Bowen Basin supplying steel-making coal, which were constrained by a campaign of industrial action by about a third of the workforce, coupled with the impact of heavy rain on mining and shipping.

"The extent to which industrial action will continue to affect production, sales and unit costs is difficult to predict; however with inventories now severely depleted, the impact on future quarters may be significant," BHP said.

Unions have been staging rolling work stoppages at six mines since June 2011, demanding greater representation and improved working conditions.

BHP earlier this month declared force majeure on deliveries from the mines, which are owned in partnership with Japanese trading house Mitsubishi Corp.

Force majeure is a legal clause relieving companies of immediate supply obligations due to circumstances beyond their control.

In total, mines operated under the partnership have an output capacity of more than 58 million tonnes a year, representing about a fifth of annual global trade in metallurgical, or coking coal.

Coking coal prices have recoiled to around $206 a tonne for deliveries in the current quarter from $235 in the March 2012 quarter and $315 in the third quarter of 2011.

Still, prices are more than twice as high as estimated production costs at the mines of around $80 per tonne, according to analysts.

Copper production rose 3% from a year ago to 281 400 tonnes in the March quarter, which included 87 700 tonnes of mined copper and 47 400 tonnes of copper cathode from the Escondida mine in Chile, the world's largest copper mine, BHP Billiton said.

Only Chile's Codeclo mines more copper.

CLSA analyst Hayden Bairstow said BHP's iron ore yield for the quarter was slightly above his forecast.

"So comparatively, better (than Rio)," he said.
vale  |  bhp billiton  |  rio tinto  |  china economy  |  iron ore  |  steel



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