BHP bows to production cuts

BHP Billiton has slashed output at one of its pellet operations in Brazil due to weakened market conditions, which may soon effect the company's Australian operations, a BHP Billiton spokesperson has told MINING DAILY.

BHP Billiton has slashed output at one of its pellet operations in Brazil due to weakened market conditions, which may soon effect the company’s Australian operations, a BHP Billiton spokesperson has told MINING DAILY.

In a statement released by the company on Saturday, BHP Billiton announced a reduction in pellet production at the Samarco joint venture.

The Samarco joint venture between BHP and the Brazilian company Vale, will have two of its older plants temporarily shut down from the end of November 2008 to mid-January 2009, at which time the situation in the markets will be re-assessed.

Samarco’s total iron ore pellet production capacity is 21.6 million tonnes per annum (100 per cent basis). The capacity for the third pellet plant is 7.6 million tonnes per annum (100 per cent basis).

A BHP Billiton spokesperson said that although the decision was not made by BHP Billiton, the company still endorsed the verdict.

“There is no doubt that these are very challenging times for the industry. Uncertainty around the short-term outlook remains,” the spokesperson said.

“In recent times, we have seen steel makers cut production and this will eventually flow through to everyone in the industry. However, if anything material changes we will, of course, announce it.”

An IBISWORLD analyst told MINING DAILY that mining companies may experience the flow through effect sooner rather than later.

“Negotiated iron ore prices will fall for the next contract year (starting April 1, 2009) given that the United States and much of the European Union are in recession and that growth elsewhere will be pretty grim through 2009,” the analyst said.

“At this stage, the price decline could easily be about 20% – after an increase of about 85% for the year starting April 2008.

“The rationale for the price decline is that falling or low growth will depress the demand for steel and therefore also for iron ore. Sales volumes are also likely to expand less rapidly than previously expected in 2008-09 and 2009-10.

“For Australian producers this means that iron ore revenue will contract in 2009-10 (perhaps by 10%).

While the outlook seems fairly grim, the analyst said there is still light at the end of the tunnel, predicting industry revenue to expand more strongly in 2008-09 than previously forecast because of the much weaker exchange rate.

“In the medium term, it is expected that industry output and exports will continue to expand strongly – although growth in China has come down from its recent highs, it is still very strong.

“Plus the spending package announced by the Chinese government has a fairly heavy bias towards building and infrastructure, which means continued demand for steel and iron.

This is good news for major miners including Rio Tinto and Fortescue Metals who have all slashed production of their hematite iron ore operations by 10% this month.

BHP has also admitted that its shipments from the Pilbara could fall by up to 28% in the last two months of the year, but has said it will attempt to replace those cancelled orders with lower-priced spot sales.

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