This BHP slide will bring tears to iron ore price bulls eyes

BHP Billiton, number three producer of the commodity, announced a halving in profits in the second half of last year, but the iron ore division fared better than expected despite the price crash.

Thanks to increased output of 15% to a record 124 million tonnes, BHP’s iron ore revenues came in at $8.4 billion compared to nearly $11 billion in the corresponding period in 2013 despite average realized price of $70 a tonne last year versus $112 the year before.

The company slashed unit cash costs by 29% at its Western Australia iron ore unit which is now approaching $20 a tonne. That means some of the fattest margins in the business.

That also helps to explain why BHP and its peers Rio Tinto and Vale which enjoy equally fat profits from ore, continue to ramp up volumes and push out mid-tier and small scale producers.

Melbourne-based BHP sees an improving outlook for metallurgical coal and copper, but its prognosis for iron ore couldn’t be more dire.

Short term the low-cost supply surge (notwithstanding Chinese domestic miners dropping out) will continue to put pressure on the price. In the medium term a flattening costs curve will keep prices stable.

Long term; well, even the next generation shouldn’t expect much of a pick up in the price thinks the world’s most valuable mining company.  Speaking after the financial results release CEO Andre Mackenzie summed it up in two words – Chinese scrap:

“Longer term, the increased availability of scrap steel in China will impact peak iron demand and therefore for iron ore. These developments are consistent with the outlook that we have held and talked about for a number of years and it led us to step away from investing in major iron ore growth projects, such as the outer harbor development, and it’s shifted our focus to maximizing returns from our installed infrastructure and resources.”

Read the slide and weep:

Source: BHP Billiton Interim Results Presentation 24 February 2015

Image of roadside dump truck wreck between Mount Augustus and Tom Price by Robyn Jay