BHP Billiton taps the brakes on iron ore expansion

BHP Billiton is slowing the pace of its planned expansion in iron ore production in a bid to conserve cash as commodity prices slump and demand in China weakens.

The Anglo-Australian company said on Wednesday that it was deferring spending at its main port in Western Australia, making it the first big miner to delay a planned output expansion. The move will slow its progress towards boosting production to 290m tonnes a year by mid-2017.

"Our focus remains on producing at the lowest possible cost, with Western Australia Iron Ore unit costs now below US$20 per tonne, as we continue to improve productivity," said Andrew Mackenzie, BHP chief executive.

Shares in BHP were down 1.4 per cent on the Australian Stock Exchange mid-afternoon in Sydney.

BHP, the world's biggest miner by value, said deferring capital spending on boosting capacity at the harbour would enable its proposed 20m-tonne-a-year expansion to be done at a lower capital cost.

The decision follows a halving of iron ore prices over the past year and comes amid increasingly desperate calls from rival iron ore miners for BHP and Rio Tinto to cap their production in an effort to stabilise prices.

"BHP's message is that it wants to conserve capital and it is about value rather than volume," said Andrew Hodge, analyst at Wood MacKenzie.

He added: "Taking some tonnes out of the market may have a positive impact on prices."

However, UBS said in a note that it interpreted the deferral decision as a conscious move by BHP to hit the 290m tonnes a year target by squeezing existing assets further.

BHP, Rio and Brazil's Vale have all ramped up production of iron ore over the past decade to meet rising demand in Asia. This has led to a glut in iron ore supply just as China's economic growth is slowing and demand for steel is waning.

On Wednesday BHP increased its forecast for the amount of iron ore it would produce in the year through June to 225m tonnes. That guidance represents a 13 per cent rise in production in the current year from the prior 12 months, and is 5m tonnes above its previous expectations.

BHP also raised projections for Western Australian iron ore production to 250m tonnes, 2 per cent higher than earlier guidance. It added that further capacity growth could lift that figure to 270m tonnes without extra investments in its plants.  

BHP and Rio have both defended their strategy of continuing to expand iron ore production, arguing they remain profitable at current prices and that higher-cost miners should exit the industry.

This week Rio said it planned to proceed with expansion plans that would see it ship 350m tonnes of iron ore in 2015.

But Fortescue, Australia's third-biggest iron ore miner, has accused the companies of destroying sharehodler value by pushing up production at a time of falling prices. The company still must refinance its US$7.5bn net debt following a decision last month to pull a bond issue.

Spot prices for iron ore peaked in February 2011 at about US$190 and have fallen to US$50 a tonne.

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