By Jesse Riseborough and Diana Kinch
Nov. 22 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, and Cia. Vale do Rio Doce will cut output of iron-ore pellets from their Samarco venture in Brazil by 65 percent on weakening demand for the steelmaking material.
The companies will temporarily close the older two of the three plants operated by their Samarco Mineracao SA venture from the end of this month until mid-January, when they will reassess market conditions, Melbourne-based BHP said today in an e-mailed statement. Total pellet capacity will decline to 7.6 million metric tons from 21.6 million tons, it said.
A deepening global financial crisis has reduced demand for steel, prompting makers in Asia, Europe and North America to slash output, curbing their need for iron ore and pellets. Samarco is the world’s second-largest exporter of pellets, and BHP reported $279 million profit from its 50 percent share of the operation last fiscal year.
“It’s clearly a confirmation that market conditions are slowing and it has been well flagged with steel production cutbacks,” Mark Pervan, a senior commodity strategist at Australia and New Zealand Banking Group Ltd. in Melbourne, said today by phone. “These major producers are cutting higher-cost capacity first and trying to reduce costs. This will be the first step in pellet closures.”
BHP rose 3.8 percent to A$21.90 yesterday on the Australian stock exchange. Vale declined 7.8 percent to 20.75 reais in Sao Paulo trading yesterday.
‘Substantial Uncertainty’
BHP, the world’s third-biggest exporter of iron ore, has so for resisted cutting ore output. Vale and Rio Tinto Group, the two-biggest exporters, announced cuts this month. BHP, which is seeking to buy Rio in a $55 billion hostile takeover, said on Nov. 14 some customers had requested deferral of ore shipments equal to 5 percent of its budget for 2008.
“There is no doubt that these are very challenging times across the whole industry, and there is substantial uncertainty around the short-term outlook,” said Marcus Randolph, chief executive officer of BHP’s ferrous and coal units. “We will continue to monitor the situation and Samarco is also working closely with its customers through this period.”
Samarco, located in southeast Brazil’s Espirito Santo state, completed construction of its third pellet plant, the only one to remain operating from next month, for $1.5 billion in April. It won an 87 percent price increase in annual contract prices to about $150 a ton from Asian customers in March.
58% Price Slump
The company was seeking to boost output to 19.7 million tons this year, Chief Operating Officer Ricardo Vescovi said in April. About 100 million tons of iron-ore pellets are traded annually on seaborne markets. Pellets trade at a premium to ore in the form of lumps or fines, as they’re processed to better suit some steel mills.
Cash prices for iron ore delivered to China, the world’s biggest buyer, slumped 58 percent this half, prompting producers to curb output. The decline has led analysts to slash forecasts for 2009 contracts, and ANZ’s Pervan this week predicted prices will halve from this year’s record.
“This is very much now a consumer-led market so the consumers are going to be in no rush, they can potentially see conditions getting weaker,” Pervan said today. “January will be the earliest and you will probably find it will be protracted,” before Samarco reopens the two closed plants, he said.
Samarco started an 18-month study into building a fourth pellet plant in April. Customers in the Middle East and Africa take 23 percent of Samarco’s production. Sales to China total 21 percent, the rest of Asia gets 22 percent, Europe 20 percent and the Americas 14 percent.
Vale plans to cut 140 jobs at its port, rail and pellet operations at Tubarao, Espirito Santo, a trade union said yesterday.
To contact the reporters on this story: Diana Kinch in Rio de Janeiro at dkinch1@bloomberg.net; Jesse Riseborough in Melbourne at jriseborough@bloomberg.net.
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