BHP Billiton Ltd. (BHP) iron ore chief executive Ian Ashby said
Wednesday the iron ore industry had "every reason" to be optimistic
but retained a cautious stance on the outlook for fundamental,
underlying demand in China for the near future.
"We are cautious on China after going through an enormous trough
in 2008 when stocks were drawn down. We think restocking has come
to an end but we still don't know what the fundamental demand is.
We think we'll find out in the second half of the year," Ashby told
reporters at the Diggers and Dealers forum.
China, the world's largest iron ore consumer, has increased its
share of seaborne imports after many domestic, smaller mines shut
down due to a slump in prices and plummeting freight rates as well
as tighter safety standards that have made imports more
competitive.
During the first half of 2009, seaborne imports accounted for
69% of China's iron ore supply, compared with 50% last year. As a
result, imports have swelled to record levels this year, with China
importing 279.2 million metric tons of ore in the six months to
June 30, up 29% on the same period a year earlier, according to
preliminary data from China's General Administration of
Customs.
Asked if BHP's business relations with China had changed in
light of the arrest of four Rio Tinto PLC (RTP) iron ore executives
on suspicion of stealing state secrets, Ashby said: "It is business
as usual for us in China. Nothing has changed. There are no changes
to our shipping schedule."
Rio iron ore executive Stern Hu, an Australian citizen, and
three other Chinese Rio Tinto employees have been held in Shanghai
without charges since early July on suspicion of stealing state
secrets while negotiating iron ore deals.
Beyond China, long-term fundamentals for the market were solid,
based on "one-third of the global population modernizing," said
Ashby.
"The world is short iron ore units, and supply hasn't been able
to respond as quickly as we would like," he added.
While the short-term market was still impacted by restocking and
destocking cycles, BHP's iron ore operations are producing at
capacity and sales are steady, he added.
Outside of China, shipping volumes to developed economies are
expected to rise in the second half of the year, abut will stay
"significantly below" 2008 levels, Ashby said.
"Mills in Japan, Taiwan and elsewhere are restarting, so that
goes beyond the restocking process in China," he told
delegates.
BHP's proposed multibillion iron ore joint venture with Rio
Tinto in Australia's Pilbara region was making good progress, and
the deal was in the process of moving from a non-binding agreement
to a binding contract.
"The JV is a significant exercise, and we are working through
the legalities," said Ashby, adding that "dozens" of BHP staff were
involved in the process. The deal, which BHP believes will reap
US$10 billion in synergies, is on track to conclude in
mid-2010.
However, clearance by the European Commission competition agency
remains a potential stumbling block. Commission concerns over the
proposed BHP takeover of Rio Tinto were material in contributing to
the breakdown of the merger proposal last year.
"We have engaged the European Commission. We don't know if it
(the iron ore JV) will be subject to merger clearance. We're not
sure at this stage," said Ashby.
BHP's iron ore growth plans are to boost output from a current
129 million tons annual capacity to an eventual 350 million tons
are "well underway," but "we haven't discussed changes (to growth
plans) with Rio, because we're not allowed to," Ashby said.
Operationally BHP's iron ore unit is focusing on its "abysmal"
safety record in the Pilbara, after five people died during the
2008-09 financial year ending June 30. The poor safety record in
Western Australia affected iron ore production volumes for the
financial year, as pressure mounted for the company to take urgent
steps to address the causes behind workplace fatalities.
Aside from the industry-changing planned JV, BHP has been
instrumental in weakening the long-standing annual benchmark
pricing system, and has long made clear it wants a transparent and
more flexible approach that allows for price fluctuations during
the year. Prices for delivered Australian iron ore were now 25%
above the agreed annual benchmark price, Ashby said.
In July, BHP announced it had sold about 30% of product on a mix
of spot, quarterly and index-linked basis, adding weight to
analysts' predictions that benchmark pricing may soon be
redundant.
"All new contracts will be under the new pricing system," Ashby
said, which will feature quarterly negotiations while using a price
index as guidance. But Ashby added that BHP's existing agreements
would continue to use the benchmark system.
This year, the dominant three iron ore miners Rio, BHP and
Brazil's Vale S.A. still haven't clinched a deal with Chinese mills
for the current iron ore pricing year that began April 1.
Other mills in Asia have fallen in line with Rio's benchmark
deal that cut iron ore prices by 33%-44%, and many mills still
favor the stability of the annual benchmark system.
-By Elisabeth Behrmann, Dow Jones Newswires;
612-8272-4689, elisabeth.behrmann@dowjones.com