BHP Billiton, the world's biggest miner, has approved $1.93 billion ($2.16 billion) in capital expenses to expedite an expansion of its Australian iron ore business to keep pace with growing demand for the commodity from Chinese steelmakers.
Analysts forecast contract iron ore prices under negotiation with steel mills could rise by 40 per cent or more this year as steelmakers crank up mills idled during the financial crisis.
BHP sells about half its iron ore to China where steel output is running at record highs. After a 13.5 per cent rise in 2009 steel output, China now accounts for 46.5 per cent of the global production and is set to be the engine of growth once again in 2010.
"This investment is the continuation of our long-term strategy of adding capacity in our high quality iron ore business to support our confidence in the longer-term demand for iron ore globally," Ian Ashby, president of BHP's iron ore division said in a statement this morning.
BHP's share of the Western Australia iron ore business stands at $US1.73 billion and the funding will help boost installed capacity to 240 million tonnes a year in 2013, the company said.
The remaining $US200 million will come from Itochu Minerals & Energy, Mitsui-Itochu Iron and Mitsui Iron Ore, which hold minority stakes in BHP's iron ore mines.
The funds will be spent to upgrade rail lines used to haul ore from outback mines in far west Australia and to expand port facilities on the Indian Ocean.
Approval for the balance - yet to be disclosed by BHP - will be considered during the second half of the 2010, BHP said.
Analysts put the total cost at around $US4 billion.
BHP, which is the world's third largest iron ore producer after Brazil's Vale and fellow Australian Rio Tinto, is already in the final stage of a separate 50 million tonnes-per-year expansion project in Australia that will take its capacity level to 205 million tonnes by mid-2011.
BHP has signalled a willingness to deploy surplus cash into development projects and acquisitions. On Thursday, it greed to buy Canadian potash explorer Athabasca Potash for $C341 million ($360 million) in cash.
Last week, the company gave its most upbeat outlook for commodities since the global downturn and reported an 11 per cent rise in the December quarter iron ore output from a year ago.
BHP's continued investment in iron ore comes at a time when it is pursuing a $US116 billion iron-ore joint venture with Rio to combine their Western Australian iron ore businesses.
In Australia and Canada, Rio aims to boost production 6 per cent to 230 million tonnes in 2010 and is strongly considering a leap to 330 million tonnes within five years.
In Brazil, Vale is heading toward record iron ore exports this year as it runs its mines near their 310 million tonnes-per-year maximum capacity.
Also, by the end of 2010, Fortescue aims to lift its annual operating rate by 37 per cent to to 55 million tonnes per year of iron ore.
Reuters
