Iron ore prices have halved in the last year alone and yet BHP Billiton (ASX:BHP) has reiterated their strategy concerning the commodity at the Global Iron Ore and Steel Forecast conference in Perth. The underlying price of the key ingredient for steelmaking has dropped to almost seven year lows as Chinese and broader global demand has tapered off while production has increased. At the Global Iron Ore and Steel Forecast conference, a Citigroup analyst said they believed iron ore may bottom out at $50.00 per ton. But BHP believes they are on track to maintain a unit cash cost below $20 per ton. “With this strategy, we are maintaining Australia’s competitive position in the global market and providing revenue, royalties, employment and innovation that is so important for this country’s future” Jimmy Wilson, head of BHP’s iron ore division, told the conference.
BHP Billiton is not showing any signs of reducing its production operations. Their operations in Western Australia have reached record levels, with 124m tons produced in the first half with a possibility of 245m tons for 2015. Laura Brooks, a senior consultant at CRU Group, doesn’t believe the major mining companies have any reason to slow their production operations. “One reason for this is that competitive pressure is driving out producers to seek cost reductions, and volume is critical if unit costs are to be cut” she told the conference. Global demand for iron ore is slipping while the global supply is booming. As the price continues to fall, BHP is seeking to improve profits and remain competitive by lowering unit cash costs and other production costs rather than reduce iron ore production overall. BHP is trading up slightly from a dip at the beginning of the year, but still somewhat near 6 year lows at 31.91.
Author: Imran Valibhoy
Mar 10, 2015
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.