UPDATE 2-BHP digging deeper for more ore to feed China steel mills

Tue Jan 22, 2013 10:51pm EST

* BHP December quarter iron ore output up 3 pct
    * Some analysts were expecting slightly bigger gain
    * Softer iron ore market looms
    * BHP sees FY 2013 output at 183 million tonnes


    By James Regan
    SYDNEY, Jan 23 (Reuters) - BHP Billiton ,
the world's biggest mining company, boosted its iron ore output
by 3 percent in the December quarter, as it races to supply more
of the raw material to Chinese steelmakers despite signs of a
softening market.
    The increase was slightly below analysts' forecasts, but the
shortfall is unlikely to dent the ever-rising tonnages of
Australian iron ore bound for the world's top buyer China, where
demand growth is expected to slow this year.
    The risk, say analysts, is that miners may flood the
notoriously fickle market for seaborne-traded iron ore, where
prices can rise or fall by as much as 50 percent in a matter of
months.
    China's iron ore imports are expected to grow only by 25-50
million tonnes this year, according to the China Metallurgical
Mining Enterprises Association, a slower pace than previous
years. 
    Moreover, China's own mines already supply about half the
mills' needs, with some 200 million tonnes of additional
capacity capable of being reactivated on short notice.   
    "There's enough demand in China as long as the Chinese don't
restart too many of their own mines, which they will do if they
believe (iron ore) prices need to come down," said David Lennox,
a mining analyst for Fat Prophets in Sydney.
    BHP's iron ore production rose to 42.2 million tonnes in the
three months ended Dec. 31 from 41.1 million in the same period
a year ago, it said, highlighting record tonnages from its
Australian mines.
    BHP plans to boost output an overall 5 percent, or 9 million
tonnes to 183 million tonnes in the year to June 2013. At the
same time Rio Tinto  and Fortescue Metals Group
 will add nearly 40 million tonnes each this year.
    
    
    IRON ORE TUMBLES
    Iron ore prices have tumbled 8 percent since a short-lived 
restocking drive by Chinese steel mills lifted iron ore to
$158.50 a tonne on Jan. 8. Iron ore sold for as little as $80 a
tonne as recently as September. 
    Fortesecue Metals Group is due to release a
production report on Thursday which should show Fortescue's iron
ore shipments up 26 percent from a year ago at 18.6 million
tonnes.
    At this rate Fortescue is on track to reach its next annual
target rate of 115 million tonnes this quarter as it strives to
take annual production to 155 million tonnes by December 2013. 
    BHP's quarterly performance swept its half-year output to
81.96 million tonnes of iron ore at its Western Australian
operations, up 2 percent on the same period the previous year.
    Despite worries about slowing expansion that at one point
last year sent iron ore prices below $100 a tonne, imports by
China surged by 8.4 percent last year to a record 743.6 million
tonnes, encouraging suppliers to lift output. 
    China's economic outlook has improved markedly since the
government announced a slew of approvals for railway
investments, highway projects and other infrastructure projects
in September worth an estimated $160 billion. 
    Still, the increase in global supply is expected to outpace
a recovery in demand from China and elsewhere, meaning prices
this year may struggle to regain their January peaks, a Reuters
poll this week showed.  
    "High levels of iron ore investment globally, and in
Australia specifically, will drive oversupply as demand from
steel manufacturers is unable to keep pace," Barclays warned in
a note to clients this month.
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