BHP iron ore output to defy virus impact
Iron ore wars back in full swing as BHP flags a rise in Pilbara exports and Brazil’s Vale promises a dramatic increase in output.
The iron ore wars are back in full swing as BHP flags a rise in Pilbara exports as Brazil’s Vale promises a dramatic increase in its own output over the next six months.
BHP said on Tuesday its WA iron operations had hit new production records in the 12 months to the end of June despite the coronavirus, saying its mines had produced 281 million tonnes of iron ore in the period and shipped 283.3 million tonnes to customers.
Its strong run from the Pilbara, amid this year’s strong prices, have buoyed hopes of a strong dividend in August. But, with Vale promising a sharp increase to its export rate over the next six months and stockpiles rising in China – lifting almost 2 per cent to 112 million tonnes at the end of last week, according to Shanghai Steelhome E-commerce figures, the highest levels in several months – iron ore’s bull run could be coming to an end.
BHP flagged a creep in iron ore production for the current financial year in Tuesday’s quarterly results, saying it expected to ship 276 to 286 million tonnes for the fiscal year. The top of that range is in line with guidance given for last financial year, but BHP the lower end of its guidance is 3 million tonnes more than that issued for the 2019-20 year.
And Vale on Tuesday stuck by its 2020 guidance of 310 to 330 million tonnes, albeit likely towards the lower end of the range, but still flagging a 60 per cent lift in its export rate over the next six months as the threat of the coronavirus to its operations recedes.
Vale, which last year lost its top spot as the world’s biggest iron ore producer, said its Brazilian mines produced 25.1 million tonnes in June, an annualised run rate of 300mt, or 8mt ahead of its average rate across the quarter, and 23 per cent ahead of its average production across the previous three quarters.
Its guidance comes after Rio Tinto reported improved Pilbara production in the June quarter, and ahead of Fortescue Metal Group’s annual production next week – also expected to be an annual record.
BHP said its analysis of preliminary shipping data suggested total Australian exports hit a record rate of 1,072 million tonnes per annum in June as majors and juniors alike took advantage of high prices.
Shaw and Partners mining analyst Peter O’Connor said in a client note on Tuesday the Vale guidance was a “red flag” for iron ore bulls, despite doubts on whether Vale can reach its targets.
“Fade the iron ore price strength. The number of red flags is now building – we have been alert for a while but now becoming a tad alarmed,” he said.
And while BHP joined Rio in expressing confidence in China’s recovery from the coronavirus crisis, it was downbeat on the speed of recovery of the US economy, flagging a patchy global economic recovery likely led by countries that responded to the pandemic with hard lockdowns.
BHP said its internal economic forecasts were in line with those of the International Monetary Fund, which tips a 4.9 per cent contraction in the global economy in 2020 followed by a 5.4 per cent rebound in 2021.
“If this case eventuated, the world economy would be around 6 per cent smaller, on average, in the 2021 calendar year than it would otherwise have been if COVID-19 had not occurred,” BHP said.
“The pace and scope of recovery will vary across countries. Where “hibernation policies” have been enacted, we anticipate a smoother resumption of activity after the first wave.”
BHP said total costs associated with the impact of the coronavirus could top $US150m across its global operations, with the company set to take a $US100 to $150m after-tax charge on its annual accounts related to COVID-19.
And the price the company lifted substantially for the financial year as iron ore prices stayed high for most of the period. Excluding shipping costs, BHP realised an average $US77.36 a wet metric tonne for its iron ore during the year, up 16 per cent from the previous year, suggesting BHP could be in a strong position to return solid dividends for the year despite taking a hit on the overwhelming majority of its other commodities, where prices tumbled.
It realised an average $US49.53 a barrel for crude oil and condensate, down 26 per cent, and $US7.26 per thousand standard cubic feet (mscf) for LNG, down 23 per cent. Metallurgical coal yielded an average $US1330.97 a tonne, down from $US179.67 a tonne, with thermal coal off 27 per cent to $US57.10.
BHP said uncertainty over China’s import policies remained a key issue for coal prices and sales, and suggested thermal coal’s rough run was likely to continue.
“The energy coal market is in a difficult state. The (Newcastle benchmark) price recently fell below the levels reached during the 2015-16 downturn. Wood Mackenzie has estimated that at late June 2020 spot prices around two-thirds of seaborne supply was likely to be earning negative margins. Short term increases in producer currencies and diesel prices have amplified cost challenges,” the company said.
It also flagged a dramatic fall in copper output for the coming year, as ongoing issues with COVID-19 hurt its South American operations, including its flagship Escondida mine.
BHP said annual copper output from Escondida was likely to fall 13 to 21 per cent in the current year, partially offset by an improving performance from its Olympic Dam mine South Australia.
BHP shares closed up 42c to $38.80 on Tuesday.
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