BHP Billiton spent much of the commentary at the start of its third quarter production report talking about its ‘prudence’ and not much about the performance of the giant’s worldwide mining operations.
Gone was the optimism and talk about long term fundamentals from previous quarterly statements.
We did learn of solid production in petroleum and falls in production after previously announced cuts, but it wasn’t until we got to the comments deep in the report on its iron ore business that we learned that some buyers of its Western Australian iron ore have asked to defer long term purchase agreements.
Quite a few in fact; enough to cover 28% of output from the company’s WA iron ore operations at Mount Newman.
That’s believed to be more than double the 10% or so of iron ore output the company normally sells into the spot market.
But that was more than 22 million tonnes over the nine months to March; output which was pushed into the lower priced spot market to prevent stocks from building.
BHP said in the production statement to the ASX that long term contracts accounted for 72% of its WA iron ore sales in the nine months ended March 31.
"For the nine months ended March 2009, 72 per cent of Western Australia Iron Ore shipments on a wet metric tonne basis were based on annually agreed pricing," BHP said.
That means 28% of those shipments were at lower than contract prices: at times up to 60% lower than the contract prices BHP (and Rio, Vale and other producers) were selling at under long term contracts with buyers.
The news confirmed reports circulating in the industry and among analysts that BHP has been pushing more ore into the spot market.
Originally it was thought BHP wanted to do this to promote more pricing flexibility and to force the iron ore (and coking and thermal coal industries as well) into a more flexible market structure, like oil and metals.
Looked at another way, in the 9 months to March 31, BHP produced 80.8 million tonnes from its WA mines. So around 22.6 million tonnes were sold at market prices, which will force analysts to lower estimates for the profitability of the iron ore business.
(Overall production worldwide was a record 87.36 million tonnes in the nine months to March.)
It also shows how determined BHP is to power through this recession without a build up in stocks, even if the dumping of unwanted iron ore on world markets at sharply lower prices has put added downward pressure on contract prices for the April 1 shipping year to China, Japan and other major markets.
This is the first time BHP has broken out that figure.
It can also be viewed one more way: the 72% of production sold under contract indicates the level of performance by buyers under those contracts. A 28% deferment rate is substantial.
BHP said production of iron ore was little changed at 28.19 million tonnes in the three months ended March 31 (and around 26.4 million tonnes from WA).
So the amount of deferred ore sold into the spot market was only around 4.2 million tonnes less than the March quarterly output, which is a substantial amount.
The production figures were issued before the market opened yesterday. The shares opened higher around $32.06-$32.09, then fell in morning trading, before dropping again to $31.49 at the close.
Investors had taken time to think about the comments on iron ore and the news of the big move to spot sales to clean up unwanted tonnages, and the implications for earnings that flowed from that.
In its general commentary, BHP said:
"Against a backdrop of weak demand, BHP Billiton achieved sound operational results, albeit with lower production compared to the December 2008 quarter.
"This quarter’s production reflects management’s proactive and decisive actions in response to the challenging market conditions.
"These actions include previously announced production curtailments in Samarco, Samancor Manganese and across our metallurgical coal operations.
"In the medium term, we expect that market conditions will remain uncertain. Consistent with the way we have managed our business to date; all our operations will remain under review.
"We will continue to take appropriate actions in any business that is cash negative and set to remain so, or where there is lack of demand.
"Our track record in taking difficult but prudent decisions has ensured that we have an exceptional portfolio of low cost and long life assets. This means that our margins are among the best in the sector.
"With our low financial and operational leverage and a strong balance sheet we are in a unique position to continue to invest in future growth and deliver long term value to our shareholders.
"We are also well placed to take advantage of opportunities in the market, but with our usual disciplined approach," the company said
Aluminium output fell 4% but nickel production rose 10% in the third quarter.
The quarter’s iron ore production slowed as the company suspended operations in Western Australia after a worker was killed in March, the fifth fatality this financial year.
Petroleum production declined 3% to 31.67 million barrels of oil equivalent (boe) from a year earlier, slowed by damage caused to pipelines and infrastructure and slowing seasonal demand for natural gas.
For the nine months to March, petroleum production was a record at 99.63 million boe.
Rio Tinto last week said its iron ore production was 31.6 million tonnes in the three months to March 31, down from 37.4 million tonnes in the first quarter of 2008.
Rio reported record quarterly output of 42.4 millio
