BHP chief plays down China’s plea for lower prices

BHP Billiton’s (ASX: BHP) chief executive Andrew Mackenzie has played  down requests from China’s new leadership group for the mining heavyweight to lower commodity prices, whereby he regarded the comments made to have simply been a ‘friendly quip’, according to The Australian.

Following a decade of dominance, miners have recently come under the spotlight as commodity and resource prices have plunged on the back of growing supply levels and slowed growth in China.

During a private meeting between China’s new leadership group and chief executives from select companies (companies that China’s continued growth prospects will heavily rely upon), Chinese Premier Li Keqiang reportedly said to Mr. Mackenzie “Lower prices, lower prices.” Whilst it is not certain that Mr. Li was specifically referring to iron ore prices, it is assumed to be the case as iron ore is the primary commodity that China imports from Australia.

However, Mackenzie reminded Mr. Li that commodity prices were now at far more sustainable levels, and were already “quite low.” Iron ore is currently valued at US$131.40 per tonne, which compares to levels of around US$180 per tonne recorded in April 2011. Today’s price also compares to US$87 per tonne in September last year.

At today’s price, the production of iron ore still proves to be very profitable for companies, however, analysts from Macquarie believe that the commodity will fluctuate between US$125-US$130 per tonne as the Chinese steel industry makes production cuts. It is also believed that the surge in value for iron ore in July can be attributed to Chinese firms restocking their inventory levels.

Whilst playing down Li’s plea for lower prices, Mackenzie acknowledged the importance of resources trading between Australia and Asia, which is a relationship that “secures economic prosperity for both and provides new opportunities from agriculture to education to tourism.” He later stated that China and other developing nations can continue to “count on BHP and Australia to work to deliver the sustainable, low-cost and secure supply of basic raw materials”.

Foolish takeaway

Even with the slowing pace of China’s economy, the nation still expects to deliver a 7% rate of economic growth, which it will rely heavily on BHP and its main competitor, Rio Tinto (ASX: RIO), to achieve.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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