Posted on 05 Feb 2009
IF there was a bright spot in a dour outlook from the world's biggest miner yesterday, it was its view of the iron ore market and prospects for Chinese demand.
BHP Billiton chief executive Marius Kloppers said the medium-term outlook for the miner's products was weak, but he suggested his iron ore unit would not suffer the big slides already experienced by, or in store for, his other businesses.
While not saying contracted prices would hold at their record, he indicated that predictions of a 20-40 per cent fall in current contract negotiations were probably overstated.
After a period of Chinese steelmakers running down stockpiles and not wanting more iron ore, a better idea of demand was forming.
"People are coming back to the market and buying, and you're starting to see the underlying demand of the Chinese economy," Mr Kloppers said.
He said spot prices were trading within 15 per cent of last year's contract settlement, which was a good indicator of where the supply and demand equation was set.
BHP is currently involved in iron ore and coking coal contract talks with Asian steel mills and would be keen to paint as strong as possible a picture of demand.
However, Mr Kloppers gave no such positive picture of coking coal markets, where BHP is by far the world's biggest producer.
Analysts are expecting falls of 50 per cent or more in coking coal contracts from the record $US300 a tonne price set last year.
Coking coal is expected to be the nation's biggest export earner this year, followed by iron ore.
"Marius Kloppers indicated he thinks the iron market is all right and that it seems to have turned around, but that's all -- there's no visibility on anything else," ABN AMRO analyst Warren Edney said.
The current round of contract talks are for the year starting in April and will have a strong impact on BHP's profit this half and in the next financial year.
BHP said yesterday a $US1 a tonne fall in coking coal prices over a year would reduce full-year earnings by $US25 million ($39 billion). If prices fall by $US150 a tonne, that translates to a $US3.75 billion fall in net profit after tax over a full year.
A $US1-a-tonne fall in iron ore prices equates to an $US80 million loss.
With contracted prices at around $US100 a tonne, a 15 per cent price fall would wipe $US1.2 billion from the bottom line over a year.
Mr Kloppers said he expected the benchmark contract system to further evolve into something more closely aligned with spot markets, in keeping with his comments during last year's price negotiations when prices were booming.
"The way I see that market developing is that the strong distinction between the benchmark price and the market-clearing (or spot) price will blur," he told analysts yesterday.
