BHP sees retreat in iron ore prices on new supply

BHP BILLITON expects iron ore prices to begin retreating as “well-telegraphed” new supply hits the market from Australia and Brazil.

“Some of that supply is late, but we have every confidence it will arrive,” said Huw McKay, BHP’s vice-president of market analysis and economics.

“We do expect it will weigh on price from where we are, and we’ll be closer to the middle of the range that we think about, rather at the top of the range, which is where the price is now.”

Unexpected rally The remarks by BHP add to a chorus of banks calling time on an unexpected rally after prices soared this year to trade around $60 (R867) a ton over the last month after three years of declines.

Citigroup and Morgan Stanley have flagged iron ore weakening towards the end of the year as more supply is shipped, with Westpac Banking predicting a slump below 2015’s low of $38.30.

After a “unique” year, the underperformance of supply was expected to reverse over the next 12 to 18 months, McKay said recently. “We still see new low-cost tons reaching the market later this year and definitely through calendar 2017.”

We see low-cost tons reaching the market later this year and definitely through… 2017.

There were prospects for increased ore supply from Vale, which was expected to start output from its S11D project before the year-end, and from Australian billionaire Gina Rinehart’s Roy Hill, according to Morgan Stanley. The bank estimated that prices might drop to $40 as the approach of winter in China typically blunted steel demand and output.

“The market has been caught short in China because delivery towards supply targets had been so – almost metronomic – in recent years,” McKay said. “I don’t think there was much allowance for the fact that supply might undershoot.”

Ore with 62 percent content delivered to Qingdao rallied 36 percent this year to $59.39 on Friday, according to the Metal Bulletin. This year policymakers in China added stimulus, presiding over a revival in the property market and boosting the outlook for steel consumption and prices.

High volatility “For next year… we see the composition in end-use a little different,” McKay said. “Machinery is actually very weak… it’s infrastructure and housing and automobile that’s doing ok. We expect machinery to catch up a bit… but housing will be slower.”

McKay is part of BHP’s marketing team in Singapore, which is led by the president of marketing and supply, Arnoud Balhuizen.

Apart from iron ore, the oil market was set to rebalance over the next 12 to 18 months, with high volatility expected, Balhuizen said.

Oil prices fell to the lowest since 2003 in February, forcing BHP to cut operating rigs in the US and trim capital expenditure by about 44 percent this financial year.

BHP Billiton shares gained 0.93 percent yesterday to R192.46.