NEWS - Resources & Energy
Published 8:54 AM, 22 Jul 2009
Last update 1:15 AM, 23 Jul 2009
BHP paints mixed picture for global demand as iron ore prodn drops 10%
By James Regan of Reuters
SYDNEY - Restocking of commodities in China may have ended, coinciding with fresh inventory building in other markets and painting a mixed picture for global demand, said BHP Billiton Ltd, the world's largest miner.
Analysts have long warned that an upturn in demand for copper, iron ore and other industrial staples could have had more to do with buyers in China lapping up imported tonnages at cheaper prices as a $585 billion ($A718.9 billion) domestic stimulus package took shape ahead of any recovery in overseas industrial activity.
"Investment levels for most commodities have been relatively low, making it difficult to gauge what is restocking and what is real demand," FW Holst & Co analyst Rob Craigie said.
Since last September, as the financial malaise gripped commodities, China almost alone has kept world commodities markets above water, in some months reporting record imports.
In the short term, underlying demand trends for metals and minerals were still being masked by de-stock and stocking activities, despite evidence of activity in North America, Japan and Europe, BHP said in its fourth quarter production report.
"The 2009 financial year proved to be very challenging, with significant demand contraction exacerbated by dramatic movements in inventory levels," it said.
Analyst Jim Lennon at Macquarie in London was bullish that Chinese metals consumption would remain strong in the second half due to underlying demand.
"From a stocking perspective China is not going to be as big a factor but actually from a real consumption perspective ... it's going to be a lot stronger. We don't see an easing up in Chinese demand."
BHP's London shares, which have underperformed the UK mining index by 20 per cent this year, fell 2.8 per cent to 1487.5 pence by 0957 GMT (1957 AEST), lagging a weaker mining index.
Investec Securities downgraded BHP to "hold" from "buy" due to recent performance of the shares, which gained 17 per cent over the 10 days to Wednesday.
Iron ore output falls
In its fourth quarter production report for the three months to end June, the firm reported a 10 per cent fall in iron ore output to 27.048 million tonnes after its operations were hit by mining fatalities and flooding in Australia.
Full year output rose two per cent to 114.415 million tonnes, short of a targeted 130 million tonnes.
By comparison, Australian rival Rio Tinto Ltd last week posted record quarterly production of 53 million tonnes from its Australian mines.
"Given its safety issues, BHP was always going to come in with a lower number, so this was not entirely unexpected," DJ Carmichael & Co mining analyst James Wilson said.
"But iron ore is less important to BHP, which has its butter spread thinner than Rio and can make it up in other commodities, where Rio cannot," Mr Wilson said.
Iron ore is expected to account for about 40 per cent of BHP's annual operating profit versus up to 80 per cent for Rio, analysts have said.
BHP Billiton's output of metallurgical coal, used in steel-making, rose four per cent, while copper output fell 21 per cent due to lower grade ore mining and reduced output from milling operations at its 57.5 per cent-owned Escondida copper mine in Chile.
Output of petroleum products gained six per cent.
In fiscal 2009, 68 per cent of iron ore sales from its Western Australian operations were based on annual pricing.
This compares with more than half of spot sales by Rio Tinto so far in calendar 2009. Neither BHP or Rio have announced any contract sales agreements for the current shipping year with customers in China, a main market for ore shipments.
BHP Billiton has said it would like to scrap annual contract sales in favour of more market-based pricing, such as indexing.
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