UK-Australian resources firm BHP expects that it will take years for Brazilian iron ore exports to return to normal following the disruptions and safety issues that have constrained supplies.
The firm expects price volatility and market uncertainty during the slow return to normal operations. Once this balance is again achieved, the price environment will settle down around the marginal cost of production. To maintain its margins in a lower price environment BHP is focused on cost cutting and has become the lowest cost iron ore producer in the world, according to chief executive Andrew Mackenzie.
BHP pushed down its iron ore costs to $14.16/t in the 2018-19 fiscal year to 30 June from $14.26/t the previous year. It expects costs to be $13-14/t in 2019-20 and to trend below $13/t over the medium term. The 2018-19 reduction in costs was aided by a significant weakening the Australian dollar to an average of US$0.72 from the US$0.75 used in BHP's guidance. At the guidance exchange rate, BHP's cash costs rose to $14.84/t as it faces significant inflationary pressures in Australia mostly associated with higher labour costs.
BHP maintained its iron ore production guidance at 273mn-286mn t on a 100pc basis for 2019-20, despite having operated at 290mn t/yr rate for most of the year to date and for the April-June quarter when adjusting for the impact of Cyclone Veronica on its Australian operations.
Reaching 290mn t/yr on a sustained rate, including allowing for weather impacts, is currently unviable but not out of sight, Mackenzie told investors. The current signalling upgrade in Western Australia's (WA) Pilbara will allow rail to operate at that rate and the introduction of the South Flank mine will give the required mining capacity, but there is still a bottleneck somewhere between the train car dumpers and the stockyards at Port Hedland that the firm is working on, he added.
The move to the 290mn t/yr rate and continued work on maintenance turnarounds should help drive costs down at BHP's iron ore operations by a further $1/t to its medium term goal of under $13/t.
BHP does not expect any further increase in steel production in China in 2019-20, following the increase in 2018-19 that BHP said was because of government-funded infrastructure stimulus designed to protect against disruptions caused by the trade war with the US.
It expects that the price differentials for lower and higher grade ores compared with the 62pc Fe benchmark will increase again and that spreads seen in the past six months are unsustainable. It also expects the premium for lump to remain, as China pursues its environmental policies that require higher grade feedstocks.
BHP reported an average realised price of $66.68/wet metric tonne (wmt) fob Port Hedland 2018-19, up from $56.71/wmt the previous year. Its realised average price increased in the second half to $77.74/wmt compared with $55.62/wmt in July-December.
The Argus ICX price for 62pc Fe fines continued its slide to $88.65/t cfr Qingdao yesterday from a high of $125.20/t on 3 July, after Brazilian firm Vale announced plans to bring supplies back into the seaborne market. The price for the lower grade 58pc Fe fines has fallen to $77.15/t from $115.70/t over the same comparison. This implies the discount for the lower grade ore has widened to $11.50/t from $9.50/t over this period and is back where it was a year ago before Vale's tailings dam collapse at its Feijao iron ore mine in January this year.
BHP's Samarco iron ore mine in Brazil remains closed following its dam collapse in 2015 and the firm has made a provision of $1.9bn relating to the accident.
BHP today announced a full-year underlying profit of $9.1bn for the year to 30 June up from $8.9bn the previous year, driven largely by increased returns from its WA iron ore business.
BHP reported a rise in underlying earnings before interest and tax for its iron ore division to $11.13bn from 8.93bn in 2017-18 driven by higher realised prices. The firm is on track to complete its 80mn t/yr South Flank iron ore project in 2021. The project, which is in the Mining Area C (MAC) hub in the Pilbara, will replace lost capacity as its Yandi mine runs out of mineable ore over the next five to 10 years. South Flank ore is of higher quality than Yandi and closer to MAC ore. This will increase the average grade at WA Iron Ore to 62pc and lump proportion for the overall product mix from around 25pc to 35pc.
