MARKETS SPECTATOR: BHP's iron advantage

With shipping costs low and iron ore prices and production higher than expected, BHP Billiton is in a good position to see earnings grow.

Could iron ore lift the gloom surrounding BHP Billiton?

Iron ore accounts for about 65 per cent of sales at BHP. The world’s biggest mining company said its annualised iron ore production rate is now approaching 200 million tonnes compared with a 12-month to June 30 forecast of 183 million tonnes.

Iron ore production in the three months to March 31 was up 6 per cent year-on-year and 3 per cent on an annualised basis, according to BHP’s latest production report. Western Australia iron ore achieved “record production”, says the company, for the nine-month period ending March 31. By March 2014 BHP’s annualised production could be up to 220 million tonnes because of the Jimbelbar mine expansion.

Iron ore is currently trading around $US126 per tonne, according to Credit Suisse. Iron ore sales are not just determined by the spot market. Miners also negotiate iron ore sales on a contract basis – that they are loath to disclose – that may or may not be based on the spot price. Credit Suisse forecasts the spot price for iron ore fines this year, cost and freight, will average $US128 a tonne, the same as Citigroup who raised their forecast on Monday from $US120.

BHP, Rio Tinto and Fortescue Metals Group have successfully kept competitors out of China, although a multi billion-dollar mistake by their Brazilian competitors did help their cause. Vale is crying foul because Chinese authorities are not letting their 400,000 deadweight tonne vessels dock at any Chinese port. BHP charters ships. Its costs to rent vessels to carry its iron ore has fallen like a stone. In 2008 the daily rate to hire a 170,000 deadweight tonnes vessel was about $US300,000. Today the same rate is about $US5000 a day.   

The dire predictions of a slump in iron ore prices have yet to materialise. UBS forecasts that in the third quarter this year iron ore prices could go below $US80 a tonne. If BHP’s iron ore production remains as robust as it forecasts and its transport costs and market share remain unaffected along with a better than expected price for the commodity – a lot of 'ifs', admittedly – then the shroud hanging over its stock because of perceived weak Chinese demand may start to lift.