Has this mistake hurt BHP Billiton Limited’s iron ore prospects?

The miner is targeting 270 million tonnes over the coming years, even though the commodity’s price is tumbling…

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

BHP Billiton Limited (ASX: BHP) is on track to produce a record 217 million tonnes of iron ore this financial year and has its sights set on producing around 270 million tonnes in the coming years. With the commodity rapidly dropping in price however, the miner’s CEO Andrew Mackenzie has admitted that his company’s production could have been expanded too rapidly.

The iron ore market is currently facing a serious dilemma. The commodity’s price has dropped to just US$94 a tonne after trading for an average US$135 a tonne throughout 2013. Worse yet, it is expected to continue its plunge over the coming 12 months to around US$80 per tonne as the world’s largest producers, being BHP, Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Brazil’s Vale continue to elevate their production rates. Unfortunately, demand for the commodity isn’t growing anywhere near as quickly.

BHP’s 217 million tonnes this FY compares with its production of just 170 million tonnes in 2013. Of course, the greater the production rates, the lower the cost per tonne produced (it is estimated its breakeven price is currently around US$45 a tonne), but its margins are being squeezed by the plummeting price. The oversupply is also putting enormous pressure on higher cost producers like BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX).

The combined effects of a slowdown in China’s economic growth and increased supply has certainly left the market wary of a global oversupply and depressed prices over the long term. Although shares in each of the miners are trading at considerable discounts compared to the beginning of the year, the sector certainly hasn’t earned my vote of confidence.

3 better bets than the Big Australian

BHP’s shares have dropped 4.6% since the beginning of 2013 compared to the S&P/ASX 200 Index’s (Index: ^AXJO) (ASX: XJO) 2.1% rise. While I like the company’s future prospects, I still don’t think now is a good time to be pressing the “Buy” button.

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »