BHP warns of lower iron price

Mining giant BHP Billiton has warned of weaker prices to come for Australia’s biggest export, iron ore.

A reclaimer in a stockyard moves stockpiles of crushed iron ore on a mine site.

Mining giant BHP Billiton has warned of weaker prices to come for Australia’s biggest export, iron ore.

The company’s mixed diagnosis for the steelmaking ingredient came as BHP lifted the cost forecast for its Pilbara iron ore operations, opening up the risk that it could fall further behind rivals Rio Tinto and Fortescue Metals Group on the iron ore cost curve.

The spot price of iron ore this week climbed to $US92.34 a tonne, its highest level since 2014, taking the total rise over the past 12 months to almost 80 per cent.

The strength in the price has confounded many iron ore analysts and experts, and BHP yesterday added its voice to those tipping a price correction in the months ahead.

“The market is likely to come under pressure in the short term from moderating Chinese steel demand growth, high port inventories and incremental low cost supply,” the company said.

BHP added it now expected its basic iron ore unit costs to average less than $US15 a tonne in the 2017 financial year, up from its previous guidance of $US14 a tonne average.

It also lifted the production cost guidance for its Queensland coal business from $US52 a tonne to $US54 a tonne.

Chief executive Andrew Mackenzie said there was still substantial capacity for the miner to reduce its operating costs, but it had opted to change its guidance as a result of a strengthening Australian dollar.

“We see tremendous potential to continue to drive down unit costs in coal and iron ore, but the correction has been made to reflect the impact of foreign exchange and how that translates an ever-decreasing unit cost in Australian dollars into US dollars when we take a full-year view,” Mr Mackenzie said.

The Australian dollar has been slightly stronger against the US dollar so far this year, averaging US75.08c since January 1, compared to US74.4c in the last six months of 2016.

The softer expectations mean Rio Tinto and, in particular, Fortescue can put further distance between themselves and BHP Billiton if they maintain their recent cost trajectories, although both companies are similarly exposed to the Australian dollar fluctuations that are of concern to BHP.

Fortescue last month reaffirmed its guidance for its basic iron ore production costs to average between $US12 and $US13 a tonne this financial year. It produced at an average cost of $US12.54 a tonne in the December quarter, having made massive inroads into its cost base due to a change in the way it mines and processes its iron ore.

Rio Tinto does not provide guidance on its costs, but it noted at its full-year results earlier this month that it had cut its cash costs from $US14.90 a tonne in 2015 to $US13.70 in 2016.

Rio Tinto chief Jean-Sebastien Jacques said at the time that he had no concerns about the health of the Chinese economy.

But he warned that domestic Chinese iron ore production was the big unknown.