BHP to slash copper output
By William MacNamara and Peter Smith
Published: April 22 2009 04:16 | Last updated: April 22 2009 18:12
ft.com
BHP Billiton has warned that copper production at its majority-owned Escondida mine in Chile will fall by 30 per cent in the year ending June due to declining ore grades and electrical faults at the processing mill.
Escondida is 57.5 per cent owned by BHP, whose forecasts of “uncertain” commodity market conditions in the next few years was underlined by lacklustre quarterly production.
However, the fall could yet support copper prices for BHP and Rio Tinto – owner of a 30 per cent stake in the mine – as copper demand remains uncertain.
Spot copper prices have gained more than 40 per cent this year, but market watchers attribute much of this jump to the shutdown of the scrap market, as prices remain too low to justify recycling used copper.
Uncertainty also surrounds the buying patterns of China’s state reserve bureau, which reportedly has bought large volumes of copper for domestic consumption this year but moderates purchases when prices rise too much.
A 30 per cent production cut at Escondida would amount to about 360,000 tonnes of copper taken off the market in the year to June 2009, based on a calculation of last year’s production. The International Copper Study Group forecasts a surplus of at least 345,000 tonnes of copper in 2009.
Escondida is 57.5 per cent owned by BHP. Rio aims to sell half of its 30 per cent stake in the mine to Chinalco as part of the Chinese group’s proposed $19.5bn capital injection into the mining group. BHP has pre-emption rights to buy that stake from Rio but has remained tight-lipped about its intentions.
BHP signalled in its third- quarter production report released on Wednesday that it would cut operations as necessary.
“We will continue to take appropriate actions in any business that is cash negative and set to remain so, or where there is lack of demand,” BHP said.
This year BHP cut 6,000 full-time employees and contractors and shelved some nickel operations as demand slumped for the industrial raw materials.
BHP shares rose 36p to £13.80 in London, but fell 7 cents to A$31.49 in Sydney, as third-quarter production declines were largely anticipated by the market.
In its report, BHP implied that 28 per cent of its iron ore production was sold on the spot markets in the nine months to March, compared with historical levels of 10 to 20 per cent per year. The figure supports observations by analysts that traditional annual pricing contracts between iron ore miners and steelmakers are breaking down.
BHP surprised some analysts by acknowledging that steelmakers’ requests to defer iron ore deliveries based on agreed prices had risen to the point that only 72 per cent of iron ore shipments were based on these annual prices – agreed at high levels in April 2008 – in the first nine months.
Steelmakers are clamouring for lower benchmark prices while also buying iron ore at lower spot prices.
BHP has entered a weak period for commodities with one of the strongest balance sheets in the sector. Gearing is less than 10 per cent. In March, BHP raised $6.3bn via separate euro and dollar bonds. |
