BHP Billiton Anticipates 'Decline Over Time' with Iron Ore Prices

The drop in iron ore prices is no surprise to mining giant BHP Billiton. The company’s president of marketing Mike Henry says the dramatic 31 percent fall in price this year wasn’t a shock and the company anticipates further declines in price for the key steel-making ingredient.

“The decline in iron ore prices wasn’t unexpected for us ... what we’re seeing today in the marketplace is within the range of expectations that we’ve had,” said Henry.

The price of iron ore has fluctuated continuously in the last 12 months. The final quarter of the financial year saw the commodity fall to a 21-month low at $89, with the bulk metal plunging by nearly a third this year.

"What we're seeing today in the marketplace is within the range of expectations that we've had," Henry said.

He added, “We’ve been saying for a long period of time now that growth rates in China will begin to slow, that you would see steel intensity slowing at an even greater rate than GDP declines, and at the same time you’d see a lot more low cost supply coming to market that would bring prices down.”

The only good news about sliding prices is analysts remain confident BHP, along with rival Rio Tinto, will still make healthy profits at the $90 level. BHP’s breakeven price for iron ore sits at $45 a ton.

And while Rio Tinto and BHP Billiton can accommodate declining earnings at $90 per ton, companies like Atlas Iron may face short-term pressure.

“Weaker earnings, together with high debt following the term loan B issuance in 2012, could significantly increase its leverage and pressure its credit metrics in the absence of remedial actions taken by the company,” said S&P analyst credit analyst May Zhong.

Last week BHP shipped its billionth ton of iron ore to Japan, marking a huge milestone for the company and for Port Hedland in Western Australia.

BHP, along with Vale and Rio Tinto, are chasing record iron ore volumes following heavy investment in bringing on new mines in recent years. Lower prices in iron ore are allowing the companies to capitalize as other companies continue to cut costs in an effort to improve their margins.