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BHP Billiton’s and Rio Tinto’s Take on Iron Ore Prices

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Nov. 30 2016, Updated 11:04 a.m. ET

BHP Billiton’s and Rio Tinto’s take

Rio Tinto (RIO) announced that operations at its Hope Downs 4 mine in Western Australia will be shut down for two weeks over Christmas. The company hopes to achieve the fiscal production it’s guided for before that and the break should allow it to reduce operating expenses and maximize cash.

BHP Billiton (BHP) CEO Andrew Mackenzie feels that the recent surge in iron ore and coking coal prices should cool down. According to Bloomberg, he said that “the reality is that once some of things go through, unless we see more supply disruptions, the market fundamentals would suggest some of those current numbers will drift back,” echoing what he has said previously. He has predicted that there will be at least ten years’ iron ore oversupply before demand-supply balances itself. He also feels that iron ore would be one of the commodities that would take the longest to stabilize.

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Burgeoning supplies

Many smaller players sprang up to take advantage of the attractive margins miners were earning. China’s slow growth after 2014 and burgeoning supplies from miners contributed to iron ore prices’ coming under increasing pressure.

However, since the start of 2016, commodity prices (COMT), including iron ore’s, have remained elevated compared with last year’s historical lows. BHP’s CEO has commented on this, saying that the rally is not sustainable.

S11D coming

The capacity expansion undertaken during iron ore’s heyday hasn’t come online yet. Vale’s (VALE) 90-million-ton-per-year S11D project is one of these projects. It will come online later this year, with a full ramp-up occurring over the next couple of years.

This project and Australia’s Roy Hill project will keep the iron ore supply buoyant, but demand is not expected to keep pace. This is the main reason that many market participants, including iron ore miners such as Rio Tinto (RIO), BHP, and Anglo American (AAUKY), believe that the current iron ore price rally is not sustainable.

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