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BHP, Rio iron ore output guidance cuts could boost prices

Some of the world's biggest iron ore miners are slashing ambitious production targets, a move likely to restore balance to the commodity's skewed fundamentals and fuel price gains ahead.

On Wednesday, BHP Billiton, the world's third-largest producer, lowered its 2016 output guidance by 10 million tonnes. The news comes a day after number two producer Rio Tinto cut its 2017 forecast by 20 million tonnes and left its 2016 global shipments estimate unchanged at 350 million tonnes.

Weather-related issues were broadly at fault after a cyclone hit Western Australia's iron ore mining belt, called the Pilbara, earlier this year. Stalled production at Samarco, a company joint-owned by BHP and Brazilian miner Vale, following a deadly dam collapse last year also weighed on BHP's results while Rio's performance was hampered by a delay in the deployment of its driverless train technology.

"This is quite positive for the spot price. As more major miners cut production, concerns about oversupply could finally be cooling down," Angus Nicholson, market strategist at IG, said.

The price of iron ore, a key steel-making ingredient, dropped nearly 40 percent in 2015 on the back of an enormous supply glut, but the mineral substance has since recovered most of those losses. Year-to-date, iron ore is more than 40 percent higher, having recently breached the psychologically important $60 level, on the back of improved demand from China, reflected by a 6.5 percent rise of iron ore imports in the first three months of the year.

A train loader fills train carriages with lump iron ore at Rio Tinto Group's West Angelas iron ore mine in Pilbara. The miner's plans to replace trains with driverless ones hit a delay in Q1.
Ian Waldie | Bloomberg | Getty Images
A train loader fills train carriages with lump iron ore at Rio Tinto Group's West Angelas iron ore mine in Pilbara. The miner's plans to replace trains with driverless ones hit a delay in Q1.

Beijing is channeling its massive monetary and fiscal resources to stimulate a nation experiencing its slowest pace of economic growth in over two decades—stimulus that has yielded a noticeable recovery in property investment, industrial production and fixed asset investment. Data last week showed all three indicators logging robust gains in the first quarter of the year.

Because these sectors consume massive amounts of industrial metals such steel, the commodity market benefits.

With the added support of lower production from major miners, iron ore should be able to stay above $60 a tonne in the near-term, Nicholson said. Prices jumped to a six-week peak of $62.85 a tonne on Tuesday, according to the Metal Bulletin's benchmark index.

"The price rise is sustainable. We probably will not see the lows of $30-$35 for a while and if we do see a correction, it would be a correction that I'd buy into," said Jonathan Barratt, chief investment officer of Ayers Alliance Securities.

From a global supply-and-demand perspective, lower output targets were positive for the market because it created a sense of better balance, explained Shaw and Partners' metals and mining analyst Peter O'Connor.

BHP and Rio's combined lowered output will prevent 30 million tons of new supply from hitting the market. While that number may seem like a tiny drop in iron ore's estimated 1.5 billion-tonne seaborne market, it could lead to a tighter market in 2017, O'Connor explained.

Another factor supporting the commodity's price recovery was delayed spending on new projects, Nicholson noted. Rio has yet to make a investment in its Silvergrass mine in the Pilbara, which further limits the amount of new supply.

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