Iron ore majors, for long accused of pumping up volumes into an already oversupplied market, may finally be easing the pressure.
In the first concrete signs of a move away from the volume game, top global miners BHP Billiton, Rio Tinto and Vale this week trimmed production targets – a move that could help sustain the current rebound in iron ore prices.
Rio surprised the market by cutting its 2017 production guidance after delays in the driverless train program it is testing at its main mining operations in Western Australia.
Larger rival BHP followed a day later, pulling back its 2015/16 output target for the second time in three months and blaming bad weather.
Brazil’s Vale, the world’s biggest iron ore producer, joined in, easing its full-year iron ore production target to the lower end of the guidance range.
Analysts estimate the cutbacks from the top three miners could knock off around 50 million tonnes of expected production.
“The market will need to rethink the volumes that were expected to come in,” UBS analyst Glyn Lawcock said.
In addition, Gina Rinehart’s Roy Hill project, which was expected to add 55 million tonnes to the market, is running far behind schedule and has so far produced only a fraction of that volume.
That could create a demand-supply imbalance, at least in the short term, which would support the recent recovery in prices. Iron ore prices have surged nearly 50 per cent from record lows set in late 2015 on restocking by Chinese mills and currently hover around $US64 a tonne.
The easing of volumes is seen as evidence that big miners’ strategy of flooding the market to push out marginal players has worked and could allow them to turn attention to the longer term.
BHP indicated this on Wednesday while flagging a 24-month rail maintenance program that will help deliver an increase in capacity to 290 million tonnes per annum.
Mr Lawcock said the timing of BHP’s Western Australian rail maintenance program is significant.
“A two year track maintenance program will severely limit their ability to increase production in the near term,” he said.
In other words, BHP’s WA operations will not hit the 290 MT capacity target for at least two more years. Rio has also pushed back the time frame for hitting full capacity at its Pilbara operations.
Some market watchers believe the infrastructure issues are convenient supply disruptions that have provided the big miners an easy way of pulling back production in a weak market.
Others think the miners are simply preparing for further volatility ahead.
“If you read between the lines, you can see they are thinking of softer demand ahead,” Fat Prophets analyst David Lennox said.
“You generally accelerate maintenance work during periods where you think your network will not be used at full capacity.”
Mike Henry, BHP’s head of mining operations in Australia, underlined the uncertainty, telling a mining conference this week that iron ore prices could retreat in a few months, with a likely slowdown in growth for steel demand and steel production in China.