In what could prove to be a turning point for the iron ore industry, BHP Billiton Limited (ASX: BHP) announced that it would apply the brakes on its expansion plans in response to the commodity's crumbling price.
Since January 2014, iron ore has more than halved in value and hit a new decade low at US$46.70 a tonne earlier this month, according to the Metal Bulletin. BHP Billiton and fellow miner Rio Tinto Limited (ASX: RIO) have been heavily criticised for the role they played in the crash, given that they have been aggressively increasing output at a time where demand was falling.
While both have stuck to the assumption that China's annual steel production would peak at around 1 billion tonnes towards the middle of next decade, other experts in the field have questioned their forecasts. In fact, the World Steel Association believes that the peak may have already come, saying "we are at the beginning of a very long and flat peak", as quoted by Bloomberg, putting serious doubt over the legitimacy of the big miners' expectations.
BHP Billiton's decision to shelve its Port Hedland upgrade is an indication that it too could be having its doubts. Although it increased its forecast production rate to 230 million tonnes (Mt) for the 2015 financial year (up from prior guidance of 225Mt), it said that the deferral of its Inner Harbour Debottlenecking project would "lead to a slower path to system capacity of 290 Mtpa (million tonnes per annum)."
While there were only two sentences regarding the deferred project in its quarterly report, those sentences have already had a major impact on iron ore prices, and could be a sign of things to come. The commodity enjoyed its biggest single-day rise in over two years on Wednesday night, surging 5.9% higher before rising a further 1.4% on Thursday and 5% on Friday.
It's now trading closer to US$55 a tonne, according to the Metal Bulletin, and investors are becoming increasingly confident that such a rebound can be sustained. That would explain the enormous rallies enjoyed by companies such as Fortescue Metals Group Limited (ASX: FMG), BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX), which climbed 18%, 62% and 14% over the week, respectively.
Before investors get too comfortable however, the outlook remains just as unclear as it did last week, or the week before that. Although BHP Billiton will slow its expansion rate, the big miners are still due to add another 100 million or so tonnes to the market while Gina Rinehart's new Roy Hill mine will add even more over the coming years.
Meanwhile, a number of Australia's junior miners are likely struggling to operate at a profit at these price levels and there is no certainty the recent rebound will be sustained. The first sign of a reversal could have investors rushing for the exits, leaving those investors left holding the shares exposed to the downfall.
