Wednesday 21 October 2015

BHP Billiton reports record iron ore production as prices fall

The world's biggest miner, BHP Billiton reported increased production output in iron ore this morning up 7% from a year ago beating analysts forecasts. However with the price of iron ore 70% below there peak of 2011, one wonders why the company is pacing itself to bring more ore to market when there is an existing glut in place.
Quite simply the three largest players in the iron ore market namely, BHP Billiton, Rio Tinto and Vale mining are doing what market leaders in their industry would do, manipulate the price by adjusting the quantities going to market. All three miners have now reported increased production in iron ore operations effectively flooding the market with cheap ore.

These companies have the ability to do this because their cost of production falls on the lower end of the cost curve meaning that although they take a knock on profitability the are still able to produce at a profit whereas other producers who's cost lie on the top end of the cost curve are reeling from a leakage of cash flow from the balance sheet as they try to plug the holes.

If these distressed miners are forced to halt production it would allow the surplus quantities to be depleted at a faster rate thus raising the price significantly. If that were to happen the bigger players would see a huge improvement in the rate of profitability and investors confidence would hurry back.

We've seen much of the buoyancy in mining stocks dissipate as the Chinese economy suede too far to the downside that it has created a sitatuaion where miners are left with excess production capabilities from newly built capital expansion project but no demand to satisfy supply. The problem comes in where investors wish to seek proper return for large investments made, something that has been missing for a while causing a  drop in investor sentiment.  
Here's just one of the examples of how the leading iron ore producers are cutting costs and paving the way for higher profitabilty. These driverless trucks operated by Rio Tinto are controlled from the companies headquarters 1200 km away!!! They transport up to 20 million tonnes of iron ore every month. The trucks are able to operate 24/7 365 days a year without argument.

The company said that it has rolled out the entire projects adding that the efficiacies are already starting to show with less risk to workers safety plus downtime incurred from shift changes and breaks. Unfortunately humans are being mechanised out of a job which will prove problematic in decades to come as a wave of new innovations aimed at eliminating the human element are brought on board.

The world's largest producer Vale mimicked its competitors actions by increasing output as I said above. The iron ore mining space is really starting to heat up and we are yet to see the end of this, it'll be interesting to see how the smaller players respond to these ramped up productions measures with the little to no chance of fighting back against the big boys. I'd expect to see smaller players to cut or even halt production altogether in an effort to well up quantities before we start to see any kind of bounce
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