Ore struggles reach the big end of town

BHP (ASX:BHP) has joined its major iron ore rival Rio Tinto in warning investors about the uncertain outlook for the company and its commodities.

Rio (ASX:RIO) issued its warning in its 2022 half year production and sales report last Friday and Tuesday saw BHP use its June quarter and full year production and sales report to join Rio in warning about an outlook that is becoming increasingly voltile.

BHP saw June quarter iron ore output and sales affected by Covid cases in the Pilbara but despite that it still managed to meet guidance for the year to June of 282.4 million tonnes – guidance was for a range of 278 million to 288 million tonnes

BHP said iron ore production fell 2% to 71.7 million tonnes in the three months to June 30 down from analysts’ forecasts for 76 million tonnes because of the rise in Covid cases meant shortages of labour in the Pilbara mines and other facilities.

Despite meeting its record guidance for the full-year, BHP chief executive Mike Henry warned of significant looming challenges for the company amid “broader market volatility”. “We expect the lag effect of inflationary pressures to continue through the 2023 financial year, along with labour market tightness and supply chain constraints,” Henry said.

“Over the year ahead, China is expected to contribute positively to growth as stimulus policies take effect, however, the continuing conflict in the Ukraine, the unfolding energy crisis in Europe and policy tightening globally is expected to result in an overall slowing of global growth.”

Benchmark prices, which averaged between $US110 and $US143 a tonne during the past financial year, have fallen to as low as $US96 a tonne last Friday as COVID-19 restrictions and weak demand in China, the world’s largest iron ore consumer.

BHP on Tuesday told investors it was targeting between 278 million tonnes and 290 million tonnes of iron ore in the coming financial year. That’s little changed from 2021-22’s guidance and further confirmation that we have passed peak iron demand.The forecast was lower than many analysts had been expecting. UBS had optimistically forecast BHP to ship between 285 million and 295 million tonnes.

The record performance in the Pilbara was due to South Flank’s ramp up to full production capacity (80 million tonnes a year) tracks ahead of schedule.An average production rate of 67 million tonnes a year was achieved at South Flank in the June 2022 quarter contributing to record production from the Mining Area C (MAC) hub and record lump sales.BHP produced 253 million tonnes of iron ore in 2021-22, with the Western Australia Iron Ore (WAIO) operations making up 249 million of that and Samarco (The Brazil pellet business half-owned with Vale) the remaining 4.1 million tonnes. This was in line with BHP’s iron ore production from the 2020–21 financial year.

BHP’s copper production eased 4% year-on-year to 1.5 million tonnes. Despite this, the company achieved its revised full-year guidance.BHP’s Pampa Norte copper operations in Chile increased its output by 29% to approximately 281,000 tonnes reflecting the ramp up of the Spence Growth Option (SGO) expansion.Olympic Dam production fell 33% 33 to around 138,000 tonnes after being affected by a major smelter maintenance campaign.BHP said the South Australian operation delivered near-record production in the June quarter following the successful ramp up of the smelter to full output in April.

Copper prices hit record levels in March of just over $US10,700 a tonne or more than $US5 a pound in the wake of the Russian invasion, but have fallen sharply in the past month and are around $US3.30 a pound on Comex on Monday.

BHP also achieved full-year guidance for metallurgical coal while full-year nickel production was lower than revised guidance due to a smelter outage in the June quarter.

Nickel prices also peaked in March above $US100,000 a tonne (and the London Metal Exchange squeeze debacle) but have fallen sharply to just under $US20,000 a tonne this week.

Thermal (Energy coal) is now back on the books with the decision to keep the huge Mount Arthur mine in the Hunter Valley area of NSW and then close it by 2030.

Keeping the mine means BHP will see a massive boost in revenue and earnings from soaring thermal coal prices – up 271% in the year. Metallurgical coal prices were up 225%.

That will be a one-off because the prices for met coal have fallen sharply – by 30% in some cases in July and the price of thermal coal is down well under $US300 a tonne after touching $US400 a tonne and more in the wake of the Russian invasion of Ukraine in March, May and again in early July.

BHP shares eased 0.9% on Tuesday to $36.61.