re AYSI($1.41): Giant Aussie-miner BHP keeps pedal to the metal...suggesting solid biz prospects for AYSI, IMO
No let-up in Pilbara iron ore output
Three months after providing some support for the iron ore market by flagging slower expansion, BHP Billiton has dashed the hopes of anyone thinking it was pulling back from an oversupplied market, exceeding full-year guidance and flagging more iron ore production this year than many analysts had been expecting.
BHPs fourth-quarter production report, released yesterday, showed its 86 per cent owned mines in Western Australias Pilbara region produced 253.5 million tonnes of iron ore in 2014-15, up from 225.1 million tonnes the year before.
While it only beat expectations by a couple of million tonnes and guidance by 2.5 million, full-year production was up 9 million tonnes from guidance issued at the start of the financial year. The surprise, for many in the market, was this years guidance of 270 million tonnes.
That target rate is the extent of BHPs previously stated ambition before it could undertake a Port Hedland debottlenecking program and Jimblebar mine expansion to move from 270 million to 290 million tonnes by the end of 2016-17.
But that debottlenecking was deferred indefinitely in BHPs previous quarterly report, released in April.
The fact BHP is already flagging 270 million tonnes a year has surprised many, with Credit Suisse previously expecting 2015-16 production of 264 million tonnes and UBS flagging 258 million.
That said, Deutsche Bank had been expecting 269 million tonnes and Citi had forecast 275 million.
When BHP deferred the inner harbour project, it said it would mean a slower ramp-up to 290 million tonnes.
But if the guidance-busting record of BHPs iron ore boss Jimmy Wilson is anything to go buy, you can bet he will be trying to get to 290 million tonnes as close to the original timetable as possible.
Further productivity improvements are expected to contribute to an increase in system capacity to 290 million tonnes per year over time, BHP said yesterday.
Just as the April announcement of the 290 million tonnes deferral had an instant positive effect on Chinese iron ore futures trading, Dalian iron ore futures slid 3 per cent yesterday after the news BHP was expanding more rapidly than most thought, indicating spot iron ore prices compiled from the days physical trading were in for a fall overnight.
Better productivity will be the sole source of volume growth at Western Australia Iron Ore in the 2016 financial year, with production forecast to increase by 7 per cent and unit costs are expected to fall to $US16 per tonne (from about $US20 last financial year), BHP managing director Andrew Mackenzie said yesterday.
The $US16 per tonne target had previously been revealed by Mr Mackenzie and does not include other factors, including freight, that push BHPs all-in costs to around $US26 a tonne.That still provides healthy margins at iron ore prices around current levels of $US50 a tonne.
Pressure mounts to keep cutting costs
Nothing better illustrates the strategies being pursued by BHP Billiton and Rio Tinto more than the key statistic in BHPs annual operating review.
Even as commodity prices have slumped heavily over the past several years, production volumes in its core portfolio have grown 27 per cent.
That includes a 9 per cent increase in volumes in the year to June, underscoring the continuing intense focus on squeezing more volume from the groups existing production infrastructure to generate productivity benefits to at least partly offset the impact of the steep falls in prices.
In iron ore, where the strategies being pursued by BHP and Rio have been most contentious, the focus on volume-driven productivity gains was reflected not just in BHP bettering its April forecast that it would produce 250 million tonnes of ore from its Pilbara operations by 4 million tonnes a 13 per cent increase on 2013-14 but by its reaffirmation that it expects to produce 270 million tonnes this financial year while lowering its unit costs to $US16 a tonne.
It still believes it can achieve output of 290 million tonnes from the Pilbara complex over time without any material capital investment. Rio, while poor weather has impacted its operations, expects to produce about 340 million tonnes for 2014 and now has the infrastructure in place to produce 360 million tonnes.
Both the big miners are very conscious that the sectors response to the plunge in prices BHPs average iron price for the 2015 financial year was $US61 a tonne against the $US103 a tonne the business yielded in 2014 and the current price of about $US52 a tonne creates pressure on them to continue to lower unit costs to retain their position at the low end of a flattening cost curve.
While it is perhaps taking longer than might have been expected, a sustained period of prices around or below $US50 a tonne will drive out a lot of marginal tonnes and will rebalance the supply-demand equation long before the reduced but still-substantial profitability of their businesses is threatened.
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