BHP raises full-year iron ore guidance

BHP Billiton lifted its full-year guidance for iron ore output in a timely announcement that coincided with another day of worrying Chinese economic news, and gave rise to optimism that new infrastructure spending in the country would consume some of the mining giant's excess ore supply.

Weaker quarterly growth figures in China, which showed growth in industrial production at a five-year low, strengthened the belief that the country would bring forward its infrastructure spending stimulus package.

Premier Li Keqiang already pledged on 3 April to speed up construction of railways in the central and western parts of the country and ordered the state lending arm China Development Bank to set up a department focused on financing affordable housing, to reassure international investors that Beijing will not tolerate a slow down.

BHP lifted quarterly production by 23% to 57.6 million tonnes (mt), and sales by 21% to 57mt, but the shares perversely fell on the announcement, and then rallied, along with iron ore miners Rio Tinto and Fortescue Metals, on the release of China's data. By noon, they had settled back to their opening price at 1,895p.

Renewed infrastructure spending in China will boost iron ore demand and should reverse the supply glut many have been forecasting, which had prompted analysts at Citigroup to suggest that iron ore would fall to $80 a tonne in 2015.

China imports more than a half-billion tonnes of iron ore every year to supplement domestic production of mostly lower-grade ore and to feed its crude steel production of some 2mt a day.

BHP raised its 2013/14 guidance for iron ore output in Western Australia's Pilbara by 5mt to 217mt, helped by favourable weather unlike Rio Tinto, which on Tuesday blamed wet weather and tropical cyclone Christine for missing its quarterly targets. Expansion at the company's new Jimblebar mine will contribute to production growth of 16% over the two years to the end of the 2015 financial year.

However the miner reduced guidance for its second-biggest earner, petroleum, from 250 million to 245 million barrels of oil equivalent.

Since its low in the summer of 2012, BHP shares have climbed around one quarter, but they have lagged equities in other sectors, creating pressure to deliver more shareholder value.

The likelihood is that underperforming assets will be sold off soon, as they contribute little to overall group business. This would reduce the firm's diversification base, leaving it with four main businesses - iron ore, coking coal, copper and crude oil – all facing particular political challenges.

But of the smaller businesses in nickel, manganese and aluminium, only nickel has a following wind, in the form of the ban on ore exports from Indonesia, which has pushed up London prices by one quarter this year and for which BHP might command a decent price.