BHP braces for coronavirus impact but says China demand is strengthening
BHP is bracing for a ‘sharp’ contraction in the US, Europe and India to hit its outlook, but says Chinese demand is strengthening.
Global mining giant BHP says it expects a “sharp” contraction in the US, Europe and India to hit the outlook for its commodities, particularly metallurgical coal, but says Chinese demand is strengthening.
BHP is forecasting a double-digit fall in global steel output outside of China in 2020, but says the world’s biggest steel producer is continuing to ramp up output as it returns its industrial heartland to full capacity from curtailments due to the coronavirus crisis.
The mining giant released its March quarter production report on Tuesday, flagging a pullback on capital spending on its oil and gas projects in response to the collapse of the oil price, but saying its WA iron ore operations hit a production record in the nine months to the end of March, despite the early impacts of COVID-19.
While iron ore prices remain high, BHP flagged concerns about the impact of the coronavirus on metallurgical coal prices due to flagging demand in India, in particular, where the steel industry has taken a big hit on coronavirus shutdowns.
BHP sold $US2.5bn worth of products to India last financial year, and the country remains a key market for the company’s metallurgical coal, which earned it $US7.7bn ($12.2bn) in the same period.
Metallurgical prices have tumbled in the last few weeks, which BHP attributes largely to falling demand outside of China.
“As COVID-19 began to spread to the major importing regions of Europe, India and developed Asia, the demand side of the equation has begun to outweigh constrained supply,” the company said.
“As the velocity of demand disruption accelerated in late March 2020 and early April 2020, prices have returned to the lows seen in the second half of the 2019 calendar year,” BHP said in its March quarter production review.
Oil prices tumbled to below $US10 a barrel for some US regional products this week and BHP said that, although its long-term commitment to its oil and gas division was unchanged, it was preparing changes to its five-year plan to reflect the oil price shock.
BHP noted its support for Woodside’s decision to defer work on the Scarborough gas field off the coast of WA, and said it was preparing to slash its exploration and evaluation spending in the division by about 30 per cent, with $US200m worth of spending under review for the 2021 financial year.
But the company’s flagship iron ore division hit fresh production records by the end of the March period, BHP said, with output lifting 4 per cent to 68mt from the same period a year ago, and 205mt for the nine months to the end of March, a record amount.
And while prices have so-far held up, BHP said it expected the global steel sector to contract in 2021 due to the impact of the coronavirus.
“Based on our bottom-up analysis, informed by engagement with our customers, we expect that steel production ex-China could contract by a double-digit percentage in the 2020 calendar year. Steelmakers from a variety of regions, including Europe, the Americas, India and Japan have announced or signalled full shutdowns or curtailments in the June 2020 quarter,” BHP said.
“Some of our customers are choosing to reduce production at their blast furnaces in the face of this demand shock.”
But China may still book increased annual steel production in 2020, BHP said, if it can avoid a second wave of COVID-19 infections.
“In China, blast furnace utilisation rates have increased from around 73 per cent earlier in the year to almost 79 per cent in April. Daily rebar transactions are now at or above normal seasonal levels. Finished inventories are falling as downstream activity improves, although the level is still very high relative to history,” BHP said on Tuesday.
While BHP’s iron ore division maintained its output in the March period, heavy rain over its Queensland coal mines took a toll, producing only 16mt for the period, down 7 per cent from the same time in 2019 and 16 per cent from the three months to the end of December.
BHP said it expected annual output at its Queensland coking coal operations to be at the bottom of previous production guidance of 41 to 45mt.
Production also fell at its Mt Arthur thermal coal mine in NSW due to the impact of the state’s bushfires and as BHP chases higher grade coal from the operation. Mr Athur produced 4mt for the period, down 13 per cent from 2019.
BHP withdrew production guidance from its Cerrejon thermal coal mine in Columbia as it is temporarily closed in response to coronavirus restrictions.
BHP shares closed down 77c, or 2.5 per cent, to $30.05 on Tuesday.
