uploads///Iron ore prices

Inside BHP Billiton’s Iron Ore Price Concerns

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Nov. 20 2020, Updated 3:27 p.m. ET

Iron ore prices in 2016

Iron ore prices were very strong in 2016 and have remained so year-to-date. Prices increased by more than 80% in 2016, despite the majority of the market participants believing the contrary. Higher-than-expected Chinese demand, which was supported by a government stimulus, and lower-than-anticipated production growth from iron ore giants led this rally. In part, the rally was also supported by speculative activities in iron ore futures trading.

Higher-than-expected Chinese demand, which was supported by a government stimulus, and lower-than-anticipated production growth from iron ore giants led this rally. In part, the rally was also supported by speculative activities in iron ore futures trading.

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BHP’s take

BHP Billiton (BHP) believes that the surge in iron ore prices will likely cool down. The company stated in the results press release that iron ore prices are likely to come under pressure in the short-term. The company noted three main factors that could lead to this outcome:

  • moderating Chinese steel demand growth
  • high iron ore port inventories
  • incremental low-cost supply

BHP CEO (chief executive officer) Andrew Mackenzie predicted that in 2016 there will be at least ten years of iron ore oversupply before the demand and supply find a balance. Mackenzie also feels that iron ore will be one of the commodities (COMT) (DBC) that will take the longest to stabilize.

During the fiscal 1H17 earnings call, the company’s CFO (chief financial officer), Peter Beaven, also said that iron ore and coal are trading above their long-term forecasts.

Other mining peers

According to Bloomberg, Rio Tinto (RIO) CFO Chris Lynch has suggested that iron ore prices will not collapse, as many expect. Lynch believes that the Chinese economy will remain strong, which will support demand for higher-quality products. Specifically, Lynch stated: “I wouldn’t necessarily say that it’s going to fall off a cliff.”

Meanwhile, Vale (VALE) inaugurated its biggest mining project, S11D, on December 17, 2016. It has started to ship volumes from its S11D project, which should boost export volumes. But low-cost supplies and additional ore certainly won’t likely bode well for iron ore prices going forward.

Cliffs Natural Resources (CLF), on the other hand, is most positive on the outlook of iron ore prices. Its CEO, Lourenco Goncalves, mentioned the following during its 4Q16 earnings call: “We finally have sanity back in the seaborne iron ore market. I truly commend Rio Tinto and Vale for eliminating their reckless behavior that had infected the market for a number of years and destroyed several billions of dollars in equity value.”

In the next part, we’ll see what BHP is doing to take advantage of the surge in prices in the coal market.

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