BHP Billiton (BHP) has curbed the pace of its expansion programme with the announcement that its project to reduce bottlenecks at Australia's Port Hedland – the world's biggest export terminal – will be deferred
The project was a critical component of the long-term expansion of iron ore system capacity from 270 million tonnes per year (Mtpy) to 290Mtpy, but it now appears that the company is seeking more gradual growth at lower capital cost.
The move has made no material impact on our supply forecast and we remain comfortable with our view that a 290Mtpy run rate will be reached in five years.
However, we suspect that many analysts anticipated the full expansion to 290Mtpy from mid-2017 – some three years earlier than our view. Consequently, the announcement could reduce consensus forecasts for iron ore exports by 20Mtpy from 2017.
Whilst this figure may not be considerable in a 1.4 billion tons per year seabourne market, this is the first official deferral of an expansion project by a major low cost iron ore producer and the short-term response could be more significant than its impact on the long-term supply/demand balance.
The iron ore price increased in response to the deferral announcement but we doubt this marks the start of a coordinated production response to an oversupplied market. The underlying problem of weak Chinese demand remains paramount, with the country's requirement falling by over 5% year- on-year during Q1 2015.
We forecast Chinese steel production will grow by just 1% this year and we still see downside risk to our annual average price forecast of $62/t CFR.
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