LONDON, Oct 23 (Reuters) - BHP Billiton’s chief executive said its strategy of high-volume iron ore production was the best way to profit in a gloomy market, defending a plan that has come under growing criticism for depressing prices.
Iron ore, the biggest earner for global miner BHP Billiton, has lost about 40 percent of its value this year, reaching five-year lows, as big increases in new supply from top three miners Vale, Rio Tinto and BHP have exceeded lacklustre demand.
Analysts expect the price decline to continue in the next few years under the weight of extra supply.
BHP has said it intends to boost production at existing assets by 65 million tonnes to 290 million a year by June 2017 and plans to cut its production costs to overtake rival Rio Tinto as the cheapest iron ore supplier to China.
“The lowest-cost producer has a right to continue to produce at very high margins in a free market,” BHP Chief Executive Andrew Mackenzie told reporters after the company’s annual general meeting in London.
“We have always been of the view that the iron ore market is more likely to decline than rise, and therefore producing the maximum amount we can now is very sensible.”
The big three miners say their low-cost position means they can still profit in a lower price environment and gain market share at the expense of smaller, less efficient, producers, which are fighting for survival.
But critics including analysts and a few shareholders have increasingly said they are concerned the strategy would backfire on the big miners. They say the steep fall in prices may outweigh any benefit from higher volume sales.
Among them is Western Australia state leader Colin Barnett, who has urged Rio and BHP to rethink their strategies, worried that lower prices will result in less revenue to the state from royalties.
Mackenzie said iron ore prices were likely to decline no matter what, due to additional supply from rivals and to the increased use of steel scrap by major consumer China.
Mackenzie, who got the top job at BHP in 2013, said BHP stopped approving large iron ore projects in 2011 and had shifted its focus to petroleum and copper projects instead.
“We will go ahead with our strategy to increase productivity (in iron) ... because of that, inevitably we’ll see production creep up, but we have no plans to invest in any major project in iron ore going forward,” he said.
Moody’s estimates that over 300 million tonnes of new and expanded iron production will enter the supply pool over the next several years. (editing by Jane Baird)