By Nick Toscano
BHP told Asian customers that some Pilbara iron ore shipments were lower quality than expected after suspected issues with its fleet of autonomous trucks forced it to mine in lower-grade areas of key Western Australia deposits.
The revelation, conveyed by industry sources, comes just days before BHP's annual result and will add to concerns the big miners are facing challenges maintaining high grades for the key steelmaking commodity.
A reclaimer at the ore stockpile at the BHP Jimblebar mine.Credit: Tony McDonoug
The issues have led to BHP price discounts and come amid a softening outlook for the nation's biggest export, which will be a critical factor in the Morrison government's hopes of delivering a budget surplus nex year.
BHP's concession follows a move made by rival miner Rio Tinto in June.
The big Australian last month signalled to its customers, which include the world's biggest steelmakers, that an iron ore product from its large Jimblebar mine in WA's Pilbara, which ordinarily has iron content of 61 per cent, would drop down to 59.5 per cent for the 2020 financial year.
News of the issues came just weeks after rival Rio Tinto revealed that operational challenges at its Greater Brockman hub mine in WA had affected the quality of its iron ore, prompting the miner to cut its shipments forecast in order to maintain the grade of its flagship "Pilbara Blend".
BHP's grade issues affect the company's "Jimbeblar Fines" iron ore product that accounts for about 15 per cent of BHP's overall sales of WA iron ore, the bulk of which is shipped to China.
Mining industry insiders with knowledge of BHP's discussions with customers said the Jimbeblar quality issues had been partly attributed to problems arising from its autonomous trucks fleet and other maintenance and technical challenges. This had forced BHP to mine in closer pits containing the lower-grade material.
However, sources close to the miner disputed this narrative, saying the company was "currently mining in an area with lower grade ore."
The impact of the grade reduction has resulted in a discount of between $5-6 a tonne, a source said.
Miners have been investing heavily in automation to control costs. BHP last month signalled it could look to deploy as many as 500 driverless trucks at its open cut mines in WA.
Unlike Rio Tinto, BHP opted to maintain its current volumes of iron ore rather than produce less at a higher grade due to contractual volume commitments to customers. The miner said it would work to lift the grade of the iron ore over coming months.
"BHP remains committed to meeting all of our contractual obligations with our customers," a spokesman said.
"We will look to improve the average Jimblebar Fines product grade over the course of this financial year. There is no expected impact to our production volume commitments for Jimblebar Fines."
The issues would have a "negligible" impact on overall WA iron ore quality, the company said, affecting less than 1 per cent of product.
The discounted prices are not expected to weigh on BHP's full-year results to be released on Tuesday as they occurred following the end of the 2019 financial year.
Analysts at investment bank JP Morgan have forecast BHP to post underlying earnings of $9.2 billion later this week. They pointed out that iron ore prices over the past two years have been affected by "lower grades at Jimblebar"
"BHP's achieved iron ore price of $77.7 per wet tonne was 7 per cent below the average price in the period, and below Rio's," said analyst Lyndon Fagan. "We are uncertain how long this will be an issue for and will be looking for management to comment on this."
The soaring price of iron ore this year, which hit a five-year high in June, has provided a major boost to the Australian economy and the Federal government's finances. But the price of the key steelmaking input has begun to decline, dropping into 'bear market' territory this month to sit well below $100 a tonne.
Mining analysts linked the slump to China's decision to let its currency depreciate in response to US President Donald Trump's imposition of a wave of new tariffs on Chinese goods, the latest escalation of the long-running dispute between the world's two largest economies. A resumption of supply in Brazil, where major producer Vale had suffered from production issues, has also contributed.
"We have been signalling for a while that August would be a tough month for iron ore, particularly as steel mill margins in China would likely struggle to hold up," said Vivek Dhar, a mining and energy commodities analyst with the Commonwealth Bank. "And those concerns appear to be playing out."