BHP chief warns of continuing downward pressure on iron ore prices

The head of the world's largest mining company BHP Billiton said on Tuesday that the price of its main commodity, iron ore, was likely to fall in the near term under pressure from increasing global supply.

BHP Billiton and peers Rio Tinto and Vale are pushing additional ore into a market where there is a lack of corresponding demand growth. Iron ore, which accounts for almost half of BHP’s earnings, has lost more than half of its value in the past two years.

"Although we see some loss of production, particularly from expensive Chinese iron ore [producers], we still see a growing surplus of low-cost supply and therefore, if anything, the pressure on the price is [still] downward," said BHP chief executive Andrew Mackenzie in a call with analysts after the company posted a 31 per cent drop in half-year profit.

The medium-term outlook for iron ore was also cloudy, BHP's chief financial officer Peter Beaven said, pointing to growing volumes of scrap.

“As the finance guy I am really happy that we don’t have a whole heap of capital going into big projects in iron ore,” he said.

Mr Mackenzie has defended BHP’s strategy of high-volume iron ore production as the best way to increase market share and profit in a gloomy market, though the price outlook leaves smaller producers struggling close to break-even point.

“We are done investing [in iron ore], we have only a small amount of investment that we continue to consider ...Then we are finished,” Mr Mackenzie said.

BHP Billiton rose 4.9 per cent in London yesterday to become the top gainer on the benchmark index after it flagged further belt-tightening to withstand tough conditions.

“The ability of the company to produce a strong set of numbers during a testing time for the commodities industry is why the market has so much confidence in BHP Billiton,” said David Madden, market analyst at IG.