BHP to cut production of three key raw materials

AS commodity prices tumbled this week to a 13-year low, the world’s biggest mining house said yesterday that it would cut the production of three of its four most important raw materials.

Petroleum, copper and coal output would fall in financial 2016, while iron ore was the only one of its so-called four pillars forecast to post an increase, BHP Billiton said yesterday. The average prices for all its key commodities slid in the first half of the year, it said.

Raw material prices have declined about 9 percent in the past two months, driving the Bloomberg commodities index down as economic growth slows in China, the largest buyer of metals and energy.

Oversupply in some metals markets was likely to persist, holding prices lower, BHP Billiton’s chief executive Andrew Mackenzie said last month.

“The four pillars are starting to look a bit crumbly,” said Evan Lucas, a Melbournebased markets strategist at IG.

“It’s external market conditions that have pushed this on to him, but what we see now is Andrew Mackenzie asking how has this happened, why is it happening and what can he do to fix it?”

Petroleum output in the year to June 30 will fall 7 percent to 237 million barrels of oil equivalent, with copper production declining 12 percent to 1.5 million tons. Coking coal output will slip 6 percent and thermal coal by 2 percent.

Iron ore output is forecast to expand by 6 percent.

Trimming earnings

Citigroup analysts said production guidance for 2016 was below the bank’s estimates and trimmed their financial 2016 underlying earnings forecast by 4 percent to $4.6 billion (R56.9bn). They also cut the financial 2015 estimate by 8 percent to $8.3bn.

US crude slumped on Monday below $50 a barrel for the first time in more than three months, while the London Metal Exchange index of six base metals hit a six-year low earlier this month.

The rout has extended to the currencies of economies tied to commodities such as Australia, Canada and Norway.

The weaker oil prices meant BHP Billiton would defer development of US onshore gas fields, seeking to hold off output until prices rose, the producer said. Declining copper grades and a coal mine closing will also crimp production.

The forecast production cuts by BHP Billiton showed the biggest producers were responding to tumbling prices, according to Mark Pervan, the head of commodity research at Australia & New Zealand Banking Group. – Bloomberg