A deceleration in China’s economy has underpinned demand concerns for many key industrial commodities, including iron ore. China, the second largest economy in the world and a major consumer of metals, has steadily put downside pressure on industrial metals through economic reports like September’s Purchasing Managers' Index printing 49.8 on a 100-point scale, compared to 49.2 in August. Readings below 50 signal contraction.
Global miner BHP Billiton Ltd. (BHP), the biggest miner in the world by market cap, is feeling the impact of slumping demand and rising production costs. Late Monday, the company said that it will be shifting and/or cutting jobs in its iron ore arm. BHP, the world’s largest producer of iron ore behind Vale SA (VALE) and Rio Tinto PLC (RIO), said that it plans to reassign an unspecified number of employees from its iron ore division within the company, but does not rule-out job cuts until it makes a full assessment of how workers will be redeployed.
"For most people there will be little change other than position title and reporting line changes. For some people there will be greater impact," said Antonios Papaspiropoulos, a spokesman for BHP. Papaspiropoulos commented that there are about 900 open positions across its iron ore division.
BHP’s iron ore division accounted for more than 50 percent of corporate earnings in 2011.
Poor demand from China has also stung BHP’s coking coal operations, which closed two Australian mines recently and was left with about 800 workers to reassign to other mines or lay-off. More than $20 billion in proposed investments has been shelved and the Anglo-Australian mining giant said that it will not consider any new projects until at least the summer of 2013 in the face of a challenging economic climate.
In the past month, majors Rio Tinto and Xstrata (XSRAY) have announced slashing jobs at their Australian business as well.
Soft demand and lowered projections on China’s growth have crippled iron ore prices; sending them to a three-year low of $87 in September.
Also acting as an anchor on prices and demand is an increased amount of production utilizing recycled steel. China Metal Recycling Holdings Ltd., the largest recycler in the country, said that scrap may account for more than 20 percent of steel production in China by 2015; up from today’s 14 percent, but still a very low overall usage rate. In comparison, the United States uses about 60 percent recycled material in steel production.
If China, the largest producer of steel in the world, amplifies its recycling efforts, it could put an even greater amount of pressure on iron ore demand.
Shares of BHP had a nice run to start 2012, rising as high as $79.66 a share in February, but have lost their footing since. Shares closed Monday at $68.16 each.
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