By Jesse Riseborough
Dec. 6 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, may need to cut iron ore production by about a quarter next year as a slump in global steel output curbs demand for the raw material, Merrill Lynch & Co. said.
BHP, the world’s third-biggest iron ore producer, may curb output from mines in Western Australia by 30 million metric tons amid a slump in prices, Merrill Lynch analysts led by Sydney- based Vicky Binns said in a report dated yesterday. Output this year may be cut by 4 million tons, the report said.
The global financial crisis has reduced demand for steel, forcing mills in Asia, Europe and North America to slash output, curbing the need for ore. Cia. Vale do Rio Doce and Rio Tinto Group, the world’s two biggest producers of the ore, have already cut output, while BHP has yet to announce a reduction.
“After four very tight years, the iron ore market is now in oversupply on our forecasts, driven there primarily by a collapse in steel production,” Merrill said. Global iron ore demand will fall 1.1 percent next year, according to Merrill Lynch, down from an earlier forecast for a 6.3 percent gain.
Boost Capacity
BHP produced 122 million tons of iron ore last fiscal year and has flagged plans to boost capacity in Western Australia to 300 million tons by 2015. The Melbourne-based company last month approved a $4.8 billion expansion of its operations in the state, increasing capacity to 205 million tons by the second half of the 2011 calendar year.
BHP may cut output of iron ore from its mines in Western Australia by 17 percent this year, Macquarie Group Ltd. analysts said in a Nov. 18 report. The company said last month that customers had requested a deferral of iron ore shipments equal to 5 percent of its budget for 2008.
Contract prices for iron ore may decline 20 percent, to about $73 a ton for benchmark Australian ore, in the year starting April 1, Merrill Lynch said. That’s down from its earlier forecast for prices to remain unchanged at a record $92 a ton.
Commodity prices plunged to their lowest in more than six years yesterday on concern the deepening global recession will cut demand. The Reuters/Jefferies CRB Index of 19 raw materials, including oil, copper and corn, is headed for the biggest annual drop since its debut in 1956 after plunging 56 percent from a July record.
Mining Index
The slump has led to a 69 percent decline in the Bloomberg World Mining Index of 162 global stocks this year. BHP’s shares in Australia have dropped 35 percent this year, closing yesterday at A$26.15 after losing 4.9 percent.
“The problem for commodities at the moment is the complete lack of visibility on current quarter and 2009 actual demand and real consumption,” Macquarie analysts led by Jim Lennon said in a report e-mailed today. “The collapse in demand in the current quarter has been easily the largest anyone in all the industries we cover can recall, and we speak to some old people.”
Merrill Lynch slashed its forecasts for metals and bulk commodities, iron ore and coal. Copper may average $1.80 a pounce next year, down 20 percent from an earlier forecast, aluminum 88 cents a pound, down 20 percent, zinc 58 cents a pound, down 13 percent, and gold $897 an ounce, a 12 percent decline.
The medium- to longer-term outlook for the mining sector was positive as demand for commodities from China continued, Merrill said. “If investors can handle the volatility and are prepared to look more long term, then the next three-to-six months will offer great opportunity,” the report said.
To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net
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