24 de noviembre de 2014 / 12:07 / hace 3 años

RPT-COLUMN-BHP, Rio were right on iron ore demand, wrong on supply: Russell

(Repeats with no changes to text) - Clyde Russell is a Reuters columnist. The views expressed are his own. -

By Clyde Russell

LAUNCESTON, Australia, Nov 24 (Reuters) - What was lacking at BHP Billiton’s annual meeting was an admission that what has effectively happened with iron ore is that the company’s shareholders are subsidising the profits of Chinese steel mills.

Instead, what Chairman Jac Nasser told the media after the AGM on Nov. 20 was iron ore prices were “not inconsistent with the expectations we had built into our long-term investment”.

Both Nasser and Chief Executive Andrew Mackenzie were keen to emphasize the productivity successes at the iron ore business, saying it remains one of BHP’s main profit drivers.

That may well be true, but the message from the executives at last week’s AGM doesn’t quite tally with what BHP was saying in 2011, when it was approving the massive expansion of its iron ore operations in Western Australia.

It was around this time that BHP, its Anglo-Australian rival Rio Tinto, newcomer Fortescue Metals Group and top iron ore miner Brazil’s Vale were all making decisions to radically boost output of the steel-making ingredient.

This unprecedented capacity expansion was based on the two-pronged view that China, which buys about two-thirds of seaborne iron ore, would continue its rapid growth for decades to come, and that low-cost producers would be able to force higher-cost miners from the market.

It has turned out somewhat differently from not only BHP, but also what Rio and others expected back in 2011.

Asian spot iron ore .IO62-CNI=SI has slumped 48 percent in 2014, closing at a fresh 5-year low of $69.80 a tonne on Nov. 21. This is also almost two-thirds below a peak of $191.90 reached in February 2011, which was when the huge new mines were being approved.

The main reason for the price collapse has been the flood of supply that has hit the market this year, coupled with concern over the growth outlook for the Chinese economy.

But it’s mainly the supply, given China’s iron ore demand has actually grown strongly this year, with imports jumping 16.5 percent in the first 10 months to 778.5 million tonnes from the same period last year.

So back in 2011, did BHP expect iron ore prices would slump as much as they have, and what was the company saying then about likely Chinese demand?


Ian Ashby, the former president of BHP’s iron ore business, said in March 2012 that Chinese iron ore import demand would by 977 million tonnes by 2015, which looks to be an extremely accurate forecast, given this year’s demand is likely to be around 930 million tonnes.

Tony Ottaviano, BHP’s vice president for planning, in a presentation in March 2011 said that China’s steel demand would be 700 million tonnes by 2015, which actually may turn out to be too conservative, given output in the first 10 months of this year reached 685.3 million tonnes.

However, Ottaviano also said the growth in iron ore capacity faced challenges in what was then a capital constrained environment, and that he expected that “delivered supply will restore market balance.”

This is where BHP, and the other miners appear to have been wrong, with the new supply additions generally coming on stream, on time and on budget.

Presentations by BHP executives don’t give price forecasts, but certainly there was nothing in the 2011 slides on the company’s website to suggest that it was expecting iron ore to slump as dramatically as it has.

Rio Tinto’s former chief executive, Tom Albanese, and current leader Sam Walsh, who was then head of iron ore, were more forthcoming about where they saw the market, saying in November 2011 that seaborne iron ore supply would have to grow 100 million tonnes per annum for the next eight years.

Given that the growth of global iron ore demand has been concentrated in China, it’s worth noting that import demand in that country grew 67.8 million tonnes in 2011, 58.6 million in 2012 and 74.8 million in 2013.

This year may well be the first year that Chinese iron ore imports have grown by more than 100 million tonnes, assuming this month’s and December’s maintain the strength seen in the first 10 months.

But with China’s economy cooling and residential property construction softening, the likelihood of strong growth in iron ore demand in 2015 is weak.

The longer-term story for iron ore may well still be intact but Albanese’s expectation in 2011 that prices would remain above $100 a tonne, which was shared by many executives and analysts at that time, has been blown out of the water.

While BHP’s Nasser and Mackenzie can tout their success in achieving significant iron ore volumes at low costs, this success has resulted in a transfer of wealth to the Chinese steel mills, many of which are effectively state owned.

It’s hard to believe this is what BHP and the other global miners intended when launching their ambitious expansion plans.

The 36 percent drop in the prices of BHP and Rio Tinto shares from their post-2008 recession highs reached in early 2011 to the close on Nov. 21 are probably proof enough that the miners called the iron ore market incorrectly.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund. (Editing by Himani Sarkar)

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