SYDNEY, July 17 (Reuters) – Record iron ore output from BHP Billiton and other mining giants appears to defy logic, with demand for the steel-making raw material cooling in top customer China and a price-eroding supply glut looming.
But the sector’s heavy guns are digging more for less to tighten their stranglehold on the world’s second-biggest commodity market, as competitors struggle.
In mining parlance, this is known as a “rebalancing” strategy, designed to improve the operating margins of the majors to such an extent that smaller competitors or new projects may be all but squeezed out.
“The majors want to maximise those economies of scale,” said MineLife sector analyst Gavin Wendt. “As long as they keep margins well ahead of a declining iron ore price, they are winning.” BHP Billiton, Rio Tinto and Fortescue Metals Group, with their iron ore operations in Australia, and Brazil’s Vale are leading the charge.
Seaborne-traded iron ore prices, which have lost 10 percent so far this year, are forecast to hit their lowest in four years by the end of 2013 as these big miners dig deeper and faster.
At the same time, forecasters are warning slowing industrial activity in China will result in weaker overall demand for ore.
But Rio Tinto and BHP are among the most efficient iron ore producers in the world. At current prices of around $130 a tonne, each enjoys a margin of around $80 per tonne.
AHEAD OF SCHEDULE
BHP on Wednesday said expansion of its iron ore division was running ahead of schedule after posting a robust 9 percent rise in ore output to a record 187 million tonnes in the 12 months to June 30. By December it aims to be operating at a 220-million-tonnes-a-year rate.
BHP under the former chief executive, Marius Kloppers, stuck to a policy of mining at maximum rates as long as profits held up.
New BHP Chief Executive Andrew Mackenzie is showing no signs of changing tack.
It was Kloppers who in 2010 almost single-handedly broke the half-century old annual iron ore price-fixing mechanism and replaced it with spot indexing in order to weed out weaker producers.
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