BHP joins Rio in iron ore output cut, eases oversupplied market
By James Regan
SYDNEY (Reuters) - Mining giant BHP Billiton followed rival Rio Tinto in trimming its iron ore output guidance on Wednesday, helping to ease pressure on an oversupplied market.
The world's no. 3 producer cut its Western Australia iron ore production for the year to June 30, 2016 by 10 million tonnes to 260 million tonnes, blaming a cyclone that ripped through the Pilbara iron ore region in January coupled with accelerated railway maintenance work.
Analysts said the output cut, along with Rio Tinto's lowered production guidance for 2017 on Tuesday, would help support iron ore prices, which have staged a recovery this year on restocking by Chinese steel mills.
"In our view this potentially highlights a value over volume strategy from BHP, which is likely to be supportive of a tighter iron ore balance next year," J.P. Morgan said in a client note.
Together with Brazil's Vale , the big three miners have trimmed about 55 million tonnes of expected iron ore output in recent months, equivalent to the output from the new Roy Hill mine built by Australian billionaire Gina Rinehart.
"Talk to any iron ore bear in the market and they will tell you Vale and Roy Hill are flooding the market. Just remove those tonnes by cuts to BHP and Rio and that thesis is broken," said Macquarie Bank analyst Hayden Bairstow.
BHP's latest production cut means the company is set to produce less iron ore year-on-year for the first time since a merger with Billiton in 2001.
BHP also lowered its iron ore target by 10 million tonnes in January following the deadly Samarco dam disaster in Brazil.
Rio Tinto on Tuesday cut its 2017 production guidance by 10 million to 20 million tonnes due to delays in its shift to driverless trains.
Vale said in December said it would produce 340 million to 350 million tonnes in 2016, down from a target of 376 million tonnes, although still in line with 345.9 million tonnes in 2015. Some analysts expect the miner will cut its guidance further when it releases an operations update later on Wednesday.
Iron ore prices have jumped 45 percent this year, but the industry has been virtually unanimous in predicting a return to lower prices given the scale of oversupply in the industry.
"Demand has been overtaking supply as the determining factor for iron ore prices, that's a reason why the price is stronger," said a commodities trader specialising in bulk commodities such as iron ore and coal. "What BHP has done is make that even more evident."
Shaw and Partners analyst Peter O'Connor said the production cuts were driving iron ore prices "30-40 percent ahead of consensus expectations."
Despite the latest curtailments, Royal Bank of Canada analysts still see a mounting supply imbalance - growing globally to 161 million tonnes this year from an estimated 88 million in 2015.
(Reporting by James Regan; Editing by Richard Pullin)
