BHP Billiton says prices of the nation’s two biggest exports — iron ore and coking coal — are expected to remain strong until at least the end of the year, in one of the more upbeat assessments of global commodities demand from a big miner in years.
In its economic outlook, released in the wake of last month’s full-year profit report, BHP chief commercial officer Arnoud Balhuizen says 2017 has so far been a better year than expected, with conditions that have buoyed iron ore and coking coal prices set to continue.
Ongoing reforms in China, particularly restructuring of the steel industry, mean BHP is now more optimistic about the short-term prospects for its (and also the nation’s) two biggest commodities earners.
“Based on our view that the steel market in China will remain tight, thus supporting mill margins, we expect (iron) ores at the higher end of the grade spectrum to perform well for at least the remainder of the calendar year,” Mr Balhuizen said on the miner’s website.
Coking coal, used to make steel, could be set for a longer run.
“With the potential for voluntary supply restraint by major Chinese metallurgical coal producers, ongoing supply issues, Chinese port inventories remaining low, high land-borne logistics costs in China, and the potential for an accelerated rate of capacity closures in calendar year 2018, it is possible that metallurgical coal prices can sustain above long-run marginal costs for some time,” Mr Balhuizen said.
Strong iron ore and coal prices were reflected in BHP’s second-half underlying net profit of $US3.5 billion (up 315 per cent) and that of rival Rio Tinto, whose interim profit of $US3.9bn was up 152 per cent.
Benchmark 62 per cent iron ore prices were trading at $US76.50 a tonne late last week, up from $US55 in June, while premium quality coking coal was at $US209 a tonne, up from $US150 in June and double where it sat for much of 2014 to 2016.
For Fortescue Metals, the outlook will to some extent be determined by whether China’s demand continues to favour the higher-grade iron ores of BHP and Rio, as it focuses on productivity and environmental issues.
The price difference between 58 per cent iron ore, like that sold by Fortescue, is now above than $US20 a tonne, and more than double traditional discount levels.
Confidence in the broader outlook was reflected in profit season indications by BHP, Rio and Fortescue that future cash returns to shareholders are on the way.
“Six months ago, in advance of our half-yearly results for the 2017 financial year, there was a great deal of uncertainty about how the year would unfold,” Mr Balhuizen said.
Anti-free-trade policies, geopolitical risks and unpredictable policymaking in major economies were the concerns six months earlier.
“While many policy and geopolitical challenges remain, happily the global economy has been resilient to this backdrop, and has performed well,” he said.
“The result has been a solid price performance by our key commodities.”
And it’s also led to more optimism. “While uncertainties remain, and prices are expected to remain volatile, we are feeling more confident in our expectation that we have left the cycle trough behind us,” Mr Balhuizen said.
In the medium-term BHP says more supply will need to be brought on in copper, iron ore, coal and petroleum.
“In many cases, this could lead to higher-cost supply entering the cost curve (which) could reward disciplined operators with high quality assets,” he said.
The reward would be higher prices and big margins for lower-cost operators.
In China, BHP’s view that growth will cool from this financial year is unchanged. But it now believes steel market tightness could continue for some time, as China’s anti-pollution drive closes inefficient and illegal steel mills and those remaining need to run harder.
Mr Balhuizen says this year’s price recovery in commodities has seen stabilisation in large parts of the emerging world and resource-rich parts of the developed world.
There has also been an encouraging lift in international trade, which has helped manufacturing spur growth in Europe and North Asia.
BHP says short-term upside and downside risks for copper and oil are considered to be roughly equal, with a balanced copper market until the early 2020s and OPEC’s strategy to drive oil prices.