BHP expects iron ore prices to drop as more supply swamps China

BHP Billiton, the world’s biggest mining company, expects iron ore to come back down to earth in the short-to-medium term because of rising global production, snapping a rally that’s seen prices surge to a 10-month high.“We’re going to continue to see low-cost, new production come to market, either through productivity or through new investments,” Mike Henry, president operations, minerals Australia, said on Thursday in an interview with Bloomberg Television. “As that happens, once the mills are through the restocking cycle, we do expect that we’ll see prices come back down again.”Prices have staged a surprise rally in 2016 as steelmakers in China revived output to a record last month, policy makers said they’d support growth and the property sector improved. The commodity’s gains will probably be reversed in the second half as gains in production hurt prices, rival Rio Tinto Group and Citigroup said this month.“If you look at the increase that we’ve seen recently in prices for some commodities, we’re not expecting that’s going to hold for an extended period of time,” Henry said. “But the long- term outlook for commodities remains quite positive.”Ore with 62% content delivered to Qingdao climbed 3.1% to $64.77 a dry metric ton on Wednesday, according to Metal Bulletin data. The price, which is set daily, has rebounded 69% since bottoming in December, surprising many banks that had forecast further losses in 2016.Iron ore futures in Dalian rose to the highest since March 2015 on Thursday as the country’s inventories of the alloy are depleting, pushing up domestic prices and boosting mills’ incentive to ramp up supply. Over time, steel output in China will be raised to a level that tips the market back into oversupply, according to Xu Xiangchun, chief analyst at Mysteel Research.BHP on Wednesday cut its iron ore production forecast for its Australian mines by 4% because of bad weather and rail network maintenance, adding to bullish signals for the global market. Rio Tinto Group lowered its iron ore production forecasts Tuesday, citing delays in implementing a driverless train system in the nation’s Pilbara region.China’s economy gathered pace in March as a surge in new credit helped the property sector to rebound, with housing values in first-tier cities soaring. The trend has drawn concern from investors including billionaire George Soros, who said on Wednesday the credit-growth figures should be viewed as a warning.“China has the reserves that will allow them to deal with any short-term issues in terms of debt, so it’s not something that changes our view around the long-term fundamentals of China and the attractiveness of China as a commodities market,” said Henry, who previously served as head of the company’s coal division and as chief marketing officer.BHP expects oil to recover more quickly than other commodities, said Henry. The copper market, meanwhile, may see a deficit by the end of the decade that pushes prices higher, he said.After five straight annual declines, commodities markets are carving out a bottom, according to Goldman Sachs Group. Materials including nickel, zinc and metallurgical coal have already passed through the worst of the price downturn, while the outlook for the entire ferrous sector has improved, Credit Suisse Group AG analysts led by Matthew Hope wrote in an April 8 note.BHP is examining opportunities to acquire tier-one assets as the price routs pressures competitors to sell operations and deals are a priority over internal projects, the producer said in February. A decision to cut the dividend for the first time in 15 years and other spending cuts may add an estimated $10bn in extra cash for possible acquisitions.