MS Morgan Stanley

SYDNEY—BHP Billiton Ltd. will tip more iron ore into the global market in the year ahead, as miners show few signs of holding back output of the commodity despite a worsening glut.

Iron-ore prices have been dragged to a decade low as large exporters churn out rising volumes of the raw material intended to feed growth in China that is now slowing down. It is leading to mushrooming stockpiles of the raw material, the main ingredient in steel needed for everything from cars to skyscrapers, that could take years to clear.

On Wednesday, BHP forecast its vast network of iron-ore mines in remote northwest Australia, the source of much of the global trade in the commodity, could produce up to 7% more in the year ahead versus the prior 12 months.

The miner, the world's biggest by market value, said it produced a record 257 million metric tons of iron ore from its Australian pits in the year through June, aided by the ramp up of its newest operation, Jimblebar. BHP projected output of between 265 million and 275 million tons in its current fiscal year.

Analysts have speculated whether the world's big iron-ore producers would start to tap the brakes after watching their earnings shrink on tumbling prices.

Iron-ore prices have fallen to around US$50 a ton from more than US$190 a ton as recently as 2011, as supplies from new and expanded mines planned when prices were booming began to outpace demand. BHP reported an average price of US$43 a ton for the last financial year, down 30% on the 12 months prior.

In February, Rio Tinto and BHP, the world's No. 2 and No. 3 exporters of iron ore, both of which rely heavily on iron ore for earnings, abandoned respective pledges to keep dividends steady or rising as each reported large losses.

Global iron-ore miners have repeatedly defended iron-ore production increases, despite the rapid downturn in prices.

Their strategy is to produce as much ore as possible for the lowest cost, rather than extract less in the hopes of bolstering prices. Thanks to economies of scale, they still generate a healthy margin on each ton they ship, even with prices falling.

BHP did produce slightly less iron ore than anticipated over the past year—even after downgrading its output estimates earlier in 2016—because its Australian operations were disrupted by bad weather and the start of a rail maintenance program. The suspension of operations run by its Brazilian joint venture with Vale after a catastrophic dam burst in November also weighed on global sales.

Earlier this year, Rio Tinto too trimmed a projection for output for 2017, although only after delays to an autonomous railway system it is trying to roll out across its train network in Australia's iron-rich Pilbara mining region.

Rio Tinto, which on Tuesday reported a 7% on-quarter jump in Australian iron-ore shipments, still says output from its mines here should increase both this year and next.

Vale SA, the world's top supplier of the commodity, has also been increasing its production of the commodity and is racing to complete a US$14.3 billion iron-ore mine in the Brazilian Amazon. Meantime, Australian billionaire Gina Rinehart's new 55-million-ton-a-year Roy Hill mine in the Pilbara is ramping up, as is Anglo American PLC's Brazilian Minas Rio project.

Morgan Stanley forecasts an oversupply in the seaborne iron-ore market to increase to 89 million tons in 2017 from roughly 60 million this year. It projects the market, which was in balance as recently as last year, will remain oversupplied for at least the rest of this decade.

BHP said it would increase its own production of the commodity by working its operations harder. "Over the next 12 months, we expect volumes and costs across our minerals businesses to benefit from our continued drive to safely improve productivity," Chief Executive Andrew Mackenzie said in a statement.

BHP said its Australian iron-ore mines were already running at an annualized rate of 275 million tons in June. Steps to improve productivity and further ramp up Jimblebar should increase capacity to 290 million tons in its 2019 fiscal year, the company said.

The miner didn't provide forecasts for the Brazilian joint venture, Samarco, which is unlikely to restart operations in 2016. BHP also said it couldn't yet estimate the final financial cost of the dam failure, which killed 19 people and polluted hundreds of miles of rivers in Brazil.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

(END) Dow Jones Newswires

July 19, 2016 23:05 ET (03:05 GMT)

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