BHP Billiton, the world’s biggest mining company, painted a bleak near-term outlook for iron ore producers after posting a larger-than-expected 52 per cent fall in annual profit.
Steel production in China –the key barometer measuring the health of BHP’s all-important iron ore business – fell 1.3 percent in the second half of the 2015 financial year from a year earlier, triggered largely by a slowing construction sector, the company said.
“In the short term, we expect ongoing economic reforms in China to contribute to periods of market volatility,” BHP Chief Executive Andrew Mackenzie told reporters.
“And, while we remain confident in the long-term outlook for commodities demand as emerging economies continue to urbanise and industrialise, we have lowered our forecast of peak Chinese steel production to between 935 million tonnes and 985 million tonnes in the mid-2020s,” he said.
This backdrop will favour low-cost producers that can benefit from greater economies of scale, according to Mackenzie. Iron ore, the main ingredient in steel-making, has moved from boom to bust in the past 18 months as massive new supply flooded markets. BHP ranks as the world’s third-biggest iron ore producer behind Vale (VALE5.SA) and fellow Anglo Australian group Rio Tinto
Iron ore accounted for more than three quarters of BHP’s fiscal 2015 operating profit of $8.67bn. In iron ore, BHP estimates about 100 million tonnes of seaborne supply will enter the market in 2015, outweighing forecast demand growth.
BHP is targeting an average cash production cost of $15 a tonne in fiscal 2016, among the lowest in the sector, and is lifting overall output by six per cent to 247 million tonnes by next July.