LAUNCESTON, Australia, Nov 24 (Reuters) – What was lacking at BHP Billiton’s annual meeting was an admission that what has effectively happened with iron ore is that the company’sshareholders are subsidising the profits of Chinese steel mills.
Instead, what Chairman Jac Nasser told the media after the AGM on Nov. 20 was iron ore prices were “not inconsistent with the expectations we had built into our long-term investment”. Both Nasser and Chief Executive Andrew Mackenzie were keen to emphasize the productivity successes at the iron ore business, saying it remains one of BHP’s main profit drivers.
That may well be true, but the message from the executives at last week’s AGM doesn’t quite tally with what BHP was saying in 2011, when it was approving the massive expansion of its iron ore operations in Western Australia.
It was around this time that BHP, its Anglo-Australian rival Rio Tinto, newcomer Fortescue Metals Group and top iron ore miner Brazil’s Vale were all making decisions to radically boost output of the steel-making ingredient.
This unprecedented capacity expansion was based on the two-pronged view that China, which buys about two-thirds of seaborne iron ore, would continue its rapid growth for decades to come, and that low-cost producers would be able to force higher-cost miners from the market.
It has turned out somewhat differently from not only BHP, but also what Rio and others expected back in 2011.
Asian spot iron ore .IO62-CNI=SI has slumped 48 percent in 2014, closing at a fresh 5-year low of $69.80 a tonne on Nov. 21. This is also almost two-thirds below a peak of $191.90 reached in February 2011, which was when the huge new mines were being approved.
The main reason for the price collapse has been the flood of supply that has hit the market this year, coupled with concern over the growth outlook for the Chinese economy.
But it’s mainly the supply, given China’s iron ore demand has actually grown strongly this year, with imports jumping 16.5 percent in the first 10 months to 778.5 million tonnes from the same period last year.
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