Why Iron Ore Supply Growth from Majors Won’t Slow Down Much

Iron ore majors such as BHP Billiton (BHP) (BBL) and Rio Tinto (RIO) have cut their production estimates by ~10 million tons for 2016. But they’re still focused on lifting production in the medium term. Most of the growth for BHP is expected to come from the removal of infrastructure constraints. Rio Tinto is focused on the Hamersley expansion.

The SPDR S&P Global Natural Resources ETF (GNR) tracks the natural resources index. BHP forms 5.0% of its holdings. The SPDR S&P Metals and Mining ETF (XME) also provides exposure to the metals space.

New supply growth is also ramping up. Vale’s (VALE) recent results showed that its S11D project, a 90-million-ton-per-annum iron ore project, is tracking on schedule. Physical progress is reaching 85% at the mine and 64% at S11D logistic sites. Supply should come online in early 2017 with the project reaching its nameplate capacity by 2019.

Vale and BHP’s joint venture project, Samarco, shut down operations following a dam burst in November 2015. It should come online sometime in 2017. It’s worth noting that there are still uncertainties about the exact time of the start.

The Roy Hill project is also ramping up. It has a nameplate capacity of 55 million tons per annum. It shipped its first iron ore in December 2015. Officials of the two companies have maintained that they should reach the nameplate capacity by the end of 2016.

Majors are remaining focused on iron ore volume growth. There’s also a subset of the iron ore supply equation that’s getting renewed attention lately. It’s the growth of supply from non-traditional regions. In the next part of this series, we’ll take a detailed look at this subset along with its likely impact on iron ore prices.