BHP Digging Deeper for More Ore to Feed China Steel Mills

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BHP Billiton, the world's biggest mining company, boosted its iron ore output by 3 percent in the December quarter, as it races to supply more of the raw material to Chinese steelmakers despite signs of a softening market.

The increase was slightly below analysts' forecasts, but the shortfall is unlikely to dent the ever-rising tonnages of Australian iron ore bound for the world's top buyer China, where demand growth is expected to slow this year.

The risk, say analysts, is that miners may flood the notoriously fickle market for seaborne-traded iron ore, where prices can rise or fall by as much as 50 percent in a matter of months.

(Read More: Iron Ore Rally May Hamper, Not Help, Deals in Australia's Pilbara)

China's iron ore imports are expected to grow only by 25-50 million tons this year, according to the China Metallurgical Mining Enterprises Association, a slower pace than previous years.

Moreover, China's own mines already supply about half the mills' needs, with some 200 million tons of additional capacity capable of being reactivated on short notice.

"There's enough demand in China as long as the Chinese don't restart too many of their own mines, which they will do if they believe (iron ore) prices need to come down," said David Lennox, a mining analyst for Fat Prophets in Sydney.

BHP's iron ore production rose to 42.2 million tons in the three months ended Dec. 31 from 41.1 million in the same period a year ago, it said, highlighting record tonnages from its Australian mines.

BHP plans to boost output an overall 5 percent, or 9 million ton to 183 million tons in the year to June 2013. At the same time Rio Tinto and Fortescue Metals Group will add nearly 40 million tons each this year.

Iron Ore Tumbles

Iron ore prices have tumbled 8 percent since a short-lived restocking drive by Chinese steel mills lifted iron ore to $158.50 a ton on Jan. 8. Iron ore sold for as little as $80 a ton as recently as September.

Fortesecue Metals Group is due to release a production report on Thursday which should show Fortescue's iron ore shipments up 26 percent from a year ago at 18.6 million tons.

(Read More: Australia Trade Deficite Widens; Iron Ore to the Rescue )

At this rate Fortescue is on track to reach its next annual target rate of 115 million tons this quarter as it strives to take annual production to 155 million tons by December 2013.

BHP's quarterly performance swept its half-year output to 81.96 million tons of iron ore at its Western Australian operations, up 2 percent on the same period the previous year.

Despite worries about slowing expansion that at one point last year sent iron ore prices below $100 a ton, imports by China surged by 8.4 percent last year to a record 743.6 million tons, encouraging suppliers to lift output.

China's economic outlook has improved markedly since the government announced a slew of approvals for railway investments, highway projects and other infrastructure projects in September worth an estimated $160 billion.

(Read More: Rio Tinto Iron Ore Output Tops 2012 Guidance at Record 253 Million Tons)

Still, the increase in global supply is expected to outpace a recovery in demand from China and elsewhere, meaning prices this year may struggle to regain their January peaks, a Reuters poll this week showed.

"High levels of iron ore investment globally, and in Australia specifically, will drive oversupply as demand from steel manufacturers is unable to keep pace," Barclays warned in a note to clients this month.