Demand for iron ore is subdued in China, Australia’s biggest customer, after weakness in the property market led to falling demand for steel.
And globally the price of iron ore has fallen by around half in the last 12 months.
Lower prices for commodities across the board reduced BHP’s underlying earnings before interest and tax by $US6.6 billion, according to December half year results announced today.
Iron ore was the major contributor and reduced earnings by $US4.6 billion.
BHP saw this weakness coming about three years ago and has been working on the problem.
In the latest six month results, BHP saw a 38% decline in the average realised price of iron ore to $US70 per wet metric tonne. Compare that to the $US112 per tonne in the same period the year before.
To meet a falling return, BHP has been aggressively cutting costs associated with digging out each tonne of ore.
And then it has been digging more of the ore, increasing production to try to make up for the lost income.
Iron ore production increased by 16% in the six months to December to a record 113 million tonnes. BHP expects a total 225 million tonnes by the end of June.
In Western Australia, BHP cut its per tonne costs for iron ore by 29% to $US20.35 per tonne as the operation benefited from economies of scale, a reduction in overheads, contractor, labour and maintenance costs and a stronger US dollar.
The target is to get these costs under $US20 a tonne. Even at $US50 a tonne, there are healthy margins to be made at that level.
Here’s how the costs have been coming down: