Iron ore prices shocked to the upside last year, with BHP saying \u2018contestable demand\u2019 has eluded bearish estimates for the past five years
\nBHP CEO Mike Henry is bullish on India as a growing hub for steel production, but coking coal could do better out of the narrative than iron ore
\nIron ore prices fall hard on Tuesday despite Chinese rate cut<\/p>\n
BHP\u2019s top number cruncher Huw McKay has a warning for anyone predicting the era of the iron ore miner will be done and dusted as China moves to curb the steel output whose growth has made the world\u2019s biggest miner so successful.<\/p>\n
The Big Australian is targeting a ramp up in iron ore production over the coming years. After producing in the order of 142Mt in the Pilbara last year, placing it on track for full year guidance of 282-294Mt, the miner has its sights set on hitting a rate of 305Mt medium term, with studies on a ramp up to 330Mtpa due by FY25.<\/p>\n
That may seem ill-advised in the knowledge other Pilbara miners like Rio Tinto (ASX:RIO)<\/a>, Fortescue (ASX:FMG)<\/a>, Mineral Resources (ASX:MIN)<\/a> and Hancock are looking to do similar, while a massive new source of supply is expected to hit the market in the latter stages of the 2020s in the Simandou mine out of Guinea, West Africa.<\/p>\n At the same time China\u2019s steel production levels have plateaued, recording slightly over 1Bt for the fifth year running, with expectations its demand will moderate as the years go by, scrap steel builds up, emissions restrictions become stricter and the Middle Kingdom revitalises domestic production to wean off imports.<\/p>\n But the latter hit a record high last year with the failure of Chinese authorities to impose environmental or commercial restrictions on steel mills losing an average of US$7 for every tonne produced emerging as a \u201cGodot never came\u201d moment for iron ore prices, McKay said.<\/p>\n \u201cContestable\u201d iron ore demand was some 187Mt higher than it was five years ago, and while majors disappointed by 30Mt over the past five years, high cost producers have lifted output by 188Mt \u201cessentially enough to constitute a new \u201cmajor\u201d,\u201d McKay noted.<\/p>\n Even in the past two years contestable demand has risen 45Mt while majors have supplied only an extra 12Mt between them.<\/p>\n \u201cIt is useful to remember that just five years ago, in the midst of the US\u2013China trade war, expectations for the iron ore industry were subdued,\u201d McKay said.<\/p>\n \u201cHalf a decade ago, the consensus outlook for iron ore was that demand would be modest, low\u2013cost seaborne supply from the major basins would increase, higher\u2013cost supply would be progressively squeezed out, the cost curve would flatten, and prices would soften. In reality the opposite has happened on every score.\u201d<\/p>\n \u00a0<\/p>\n The feeling around China is that without stimulus hopes converting to reality, iron ore prices will eventually soften.<\/p>\n Initial indications are the sort of \u201cBazooka\u201d stimulus that took iron ore prices to US$230\/t and above in May 2021 is not on the cards yet.<\/p>\n \u201cThe extent that policymakers support the Chinese economy looms as a major uncertainty for commodity markets. It\u2019s easy to see why a large stimulus package, often referred to as \u2018bazooka\u2019 style stimulus, is increasingly being considered by the market given the speculated and enacted policy measures over the last six months,\u201d Commbank\u2019s Vivek Dhar said in a note yesterday. <\/p>\n \u201cHowever, just in January, Chinese Premier Li Qiang noted at the World Economic Forum that China did \u201cnot seek short term growth while accumulating long term risk\u201d last year. These comments suggest targeted and incremental policy support measures were prized in 2023. <\/p>\n \u201cIf these principles were enacted again this year, it would mean a broad\u2011based stimulus package that typically supports heavy infrastructure investment (25\u201130% of China\u2019s steel demand) will be unlikely.\u201d<\/p>\n But China\u2019s iron ore demand and steel production has been surprisingly robust without that lever. Realised prices rose 21% for BHP to more than US$103\/wmt in the first half of FY24 \u2014 the US$9.7 billion EBITDA pull from BHP\u2019s flagship iron ore assets offsetting a virtual collapse of its nickel business and hard times in its coal assets to support an unchanged US$6.6b underlying profit in yesterday\u2019s half year accounts.<\/p>\n \u00a0<\/p>\n McKay indicated the glum outlook for iron ore considered by BHP and others last year \u2014 based on very real concerns about the health of China\u2019s property sector \u2014 overlooked important tailwinds in other economic data.<\/p>\n \u201cWhat careful observers of the economy and the steelmaking value chain saw in calendar 2023 were (a) strength in a broad range of non\u2013housing activities that are collectively very important for steel demand,\u201d he said.<\/p>\n \u201c(b) The fact that over the course of this multi-year downturn commercial housing had shrunk appreciably in terms of its total share of steel end\u2013use, and therefore even with profound weakness in property, it was becoming a less influential swing factor in the overall balance.<\/p>\n \u201c(c) A near\u2013record overall run\u2013rate for crude steel (measured in various ways) was sustained for most of the year, and BF mills gained share within that, allowing for extremely high utilisation rates (d). <\/p>\n \u201cThese high utilisation rates led to consistently strong port outflows of iron ore, (e) these outflows, and limited incremental supply from low\u2013cost seaborne exporters, contributed to a steady trend decline in iron ore port stocks from 142 Mt in late February 2023 down to a new record low of 108 Mt after the Golden Week mill restocking in early October.<\/p>\n \u201cAfter the usual seasonal lift in the final few months, the overall change in port stocks for the full calendar year was \u201312 Mt YoY, despite a record year for imports and +10 Mt YoY from Chinese domestic production, (f) the record year for imports was made possible by a +57 Mt increase in higher\u2013cost and swing supply, which thickens the cost support membrane even further.\u201d<\/p>\n But BHP has learnt to be realistic too. Indonesia\u2019s battery nickel supply rush is a case in point, where BHP is now considering shutting down its long-running Nickel West operations because it does not see deficits returning until the 2030s.<\/p>\n They still think the cost curve will determine the long run price, with China turning to West Africa and domestic sources to reduce their reliance on Australia and Brazil.<\/p>\n Yet India could be BHP\u2019s friend in both iron ore and coking coal.<\/p>\n \u00a0<\/p>\n In fact India is now BHP\u2019s largest customer in metallurgical coal.<\/p>\n It produced around 141Mt of crude steel in 2023, up 12% YoY, and is the only major source of growth in the global market. India plans to produce some 300Mt by 2030.<\/p>\n \u201cI was there a number of number of months back now, but I came away so energised by the feeling on the ground, they\u2019re both by way of the numbers that we\u2019re seeing, as well as the mood amongst everyday Indian policymakers I met with and so on, it\u2019s a country that\u2019s on the move,\u201d Henry said on a media call yesterday.<\/p>\n \u201cAnd you certainly see that coming through in the demand for coking coal for example, with India being being our largest market, now for metallurgical coal, and they\u2019re looking to double steel production by the end of this decade.<\/p>\n \u201cAnd at the rate they\u2019re going in the past few years they certainly seem to be moving in the right direction.\u201d<\/p>\n But BHP is not banking on India to anchor the price of iron ore if China\u2019s demand dissipates, with Henry noting it has its own sources of high quality domestic iron ore reserves.<\/p>\n \u201cMedium to long term we see tonnes coming out of West Africa, more tonnes coming out of the Pilbara and so on. And we\u2019ll see how that plays out over over time,\u201d Henry said.<\/p>\n \u201cThe safest thing for us to do is ensure that we are at the very low end of the cost curve with the most cost competitive iron ore business in the world. And that\u2019s we\u2019ve managed to achieve in recent years.\u201d<\/p>\n Iron ore prices in Singapore fell hard by 4.5% yesterday to a touch over US$121\/t despite news of a surprise rate cut from the People\u2019s Bank.<\/p>\n \u00a0<\/p>\n Scroll or swipe to reveal table. Click headings to sort.<\/em><\/p>\n CODE COMPANY PRICE WEEK RETURN % MONTH RETURN % 6 MONTH RETURN % YEAR RETURN % MARKET CAP ACS Accent Resources NL 0.01 0% 25% 25% -60% $ 4,731,272.83 ADY Admiralty Resources. 0.007 0% 17% 0% -36% $ 9,125,054.07 AKO Akora Resources 0.135 0% -4% -16% -23% $ 12,822,679.89 BCK Brockman Mining Ltd 0.027 4% 8% -10% 8% $ 250,566,267.54 BHP BHP Group Limited 45.54 -1% 0% 4% -5% $ 233,364,779,793.48 CIA Champion Iron Ltd 8.13 1% 5% 48% 9% $ 4,293,566,963.54 CZR CZR Resources Ltd 0.31 11% -7% 94% 51% $ 64,827,027.65 DRE Dreadnought Resources Ltd 0.019 0% -30% -59% -79% $ 69,631,459.20 EFE Eastern Resources 0.008 0% 0% -27% -53% $ 9,935,571.69 CUF Cufe Ltd 0.015 -6% -6% -6% -17% $ 19,483,910.21 FEX Fenix Resources Ltd 0.26 4% -2% -12% 0% $ 177,127,569.60 FMG Fortescue Ltd 28.21 -1% 2% 39% 27% $ 87,442,603,671.20 RHK Red Hawk Mining Ltd 0.65 -7% 7% -1% 44% $ 116,759,391.89 GEN Genmin 0.160002 0% 0% 3% 0% $ 79,339,701.97 GRR Grange Resources. 0.445 0% 5% -12% -58% $ 509,229,027.12 GWR GWR Group Ltd 0.096 4% 13% 12% 66% $ 30,194,365.57 HAV Havilah Resources 0.145 -3% -9% -46% -59% $ 47,495,881.50 HAW Hawthorn Resources 0.083 0% -15% -28% -17% $ 27,806,295.88 HIO Hawsons Iron Ltd 0.038 6% -16% 3% -51% $ 34,005,629.18 IRD Iron Road Ltd 0.056 -7% -14% -40% -47% $ 47,700,545.25 JNO Juno 0.076 -5% -28% -4% -22% $ 14,191,730.28 LCY Legacy Iron Ore 0.015 -6% 0% -17% 0% $ 102,509,219.18 MAG Magmatic Resrce Ltd 0.028 -7% -33% -58% -71% $ 9,170,783.94 MDX Mindax Limited 0.04 0% -22% -23% -32% $ 81,822,351.20 MGT Magnetite Mines 0.26 0% -4% -34% -66% $ 26,085,149.13 MGU Magnum Mining & Exp 0.023 35% -12% -39% 5% $ 17,805,950.87 MGX Mount Gibson Iron 0.51 2% -6% 28% -11% $ 625,665,122.50 MIN Mineral Resources. 59.41 5% 2% -6% -30% $ 11,730,704,322.80 MIO Macarthur Minerals 0.14 4% 0% -26% -10% $ 24,938,023.20 PFE Panteraminerals 0.053 -2% -4% -37% -54% $ 8,222,598.04 PLG Pearlgullironlimited 0.029 12% -6% 16% -33% $ 5,522,628.33 RHI Red Hill Minerals 5.08 -1% 0% 18% 4% $ 332,297,524.00 RIO Rio Tinto Limited 128.04 -1% 0% 21% 3% $ 48,614,475,385.44 RLC Reedy Lagoon Corp. 0.005 0% 0% -29% -43% $ 3,097,703.66 CTN Catalina Resources 0.004 0% 33% 0% -56% $ 4,953,947.57 SRK Strike Resources 0.035 0% -24% -31% -57% $ 9,931,250.00 SRN Surefire Rescs NL 0.011 -8% 10% -31% -21% $ 21,594,735.94 TI1 Tombador Iron 0.014 0% 0% -33% -44% $ 30,218,753.22 TLM Talisman Mining 0.205 17% -13% 41% 28% $ 39,547,273.29 VMS Venture Minerals 0.015 25% 67% 7% -40% $ 37,570,221.60 EQN Equinoxresources 0.245 -2% -18% 44% 29% $ 24,282,000.72 AMD Arrow Minerals 0.005 -17% 0% 100% -17% $ 17,368,825.48 <\/p>\n WordPress Table Plugin<\/a><\/p>\n \u00a0<\/p>\n BHP is not the only big player looking to India as a source of future demand.<\/p>\nHow long can this continue?<\/h2>\n
Market factors overlooked<\/h2>\n
Henry sees Indian demand on the rise<\/h2>\n
ASX iron ore stocks<\/h2>\n
Coronado also looks to India<\/h2>\n