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How Did BHP Benefit from Iron Ore’s Price Rally in 2016?

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Iron ore’s stellar run in 2016

In the previous part of this series, we discussed how BHP Billiton (BHP) produced record iron ore volumes in the half-year ended December 2016. This production has come at an opportune time for the company. During 4Q16, iron ore prices surged ahead. While the momentum built during the whole year carried over to the year-end backed by stimulus provided by the Chinese government, Donald Trump’s win provided an additional push to the prices. The price for the steel-making commodity rose 81% in 2016.

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BHP benefits from surging prices

BHP’s stock lost 35% of its value in 2015 due to plunging commodity prices, including that of iron ore. In 2016, however, the situation reversed and the stock gained 40%, mainly due to higher prices for iron ore, copper, and coal. In its 1H17 production press release, BHP CEO Andrew Mackenzie said “We have performed well during a period of higher prices, with record iron ore volumes achieved at WAIO.[1. Western Australia Iron Ore]”

The prices for the majority of iron ore shipped during 1H17 were linked to the index price of the month of shipment. BHP’s average realized price for iron ore in 1H17 was $55 per ton. This is a 28% improvement from the realized price of $43 per ton achieved during the same period the year prior.

Higher commodity prices and peers

Peers (DBC) Rio Tinto (RIO), Vale (VALE), Freeport-McMoRan (FCX), and Cliffs Natural Resources (CLF) are also taking advantage of higher commodity prices. Rio’s iron ore shipments, for example, rose 8% quarter-over-quarter in 4Q16. Vale inaugurated its biggest mining project, S11D, on December 17, 2016, and it started shipping iron ore in January. In the next part of this series, we’ll take a look at BHP Billiton’s coal production in fiscal 2Q17.

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