BHP blinks as iron ore prices fall, delays output boost

* BHP defers iron ore output increase to 290 million tonnes

* Move seen as bet on longer-term iron ore recovery

* Ups FY2015 total iron ore production guidance (Adds analyst comments, context on small miner shutdowns)

By James Regan

SYDNEY, April 22 (Reuters) - BHP Billiton (NYSE: BBL - news) is slowing down its expansion plans in iron ore, the first big miner to pull back as a global supply glut sends ore prices tumbling.

The world no. 3 producer said it would delay an Australian port project that would have boosted output by 20 million tonnes and buoyed annual output to 290 million tonnes by mid-2017.

While BHP's pullback is small compared with overall seaborne iron ore trade of around 1.3 billion tonnes, it is viewed as significant given BHP's position as an efficient producer.

"It is probably more a symbolic posturing position by BHP, but it also likely signals the bottom of the iron ore market, given this action is being taken by one of the lowest cost producers," said Mark Pervan, head of commodities for ANZ Bank.

Some analysts said the move suggests BHP expects ore prices to rise later in the decade, when it hopes to control a greater share of the global seaborne trade than it does now.

"BHP is simply saying, why spend the money now to produce more when the ore may well be worth more at a later date when supply from other sources backs off," said David Lennox, a mining analyst with Fat Prophets.

Two small iron ore firms have recently shut mines in Australia because of low prices and Goldman Sachs (NYSE: GS-PB - news) says half the world's so-called "tier two" miners are at risk of closure.

Spot iron ore prices have fallen 60 percent in the past year on surging output blamed on overestimates of China's appetite for imported ore by mega miners BHP, Vale and Rio Tinto (Xetra: 855018 - news) .

Analysts, however, do not expect the big-tonnage miners like Rio, who have ignored calls to curtail expansions to revive prices, to follow BHP's lead.

Small supply adjustments are also unlikely to have much impact on prices of the steelmaking ingredient that have plunged to near $50 a tonne from almost $200 four years ago, they said.

"The sort of tonnes we're talking about are drops in the ocean. If you're going to see a sustained stabilisation in the iron ore price, you're going to need a demand pick-up," said Joel Crane, a commodities analyst at Morgan Stanley (Xetra: 885836 - news) .

The World Steel Association expects China's steel production to contract by 1 to 2 percent this year.

COST SAVINGS

BHP, which saw its iron ore output rise 20 percent on the year to 58.9 million tonnes in the March quarter, said on Wednesday it had deferred a project to reduce congestion at its Australian Port Hedland export terminal.

"While (the deferral) will lead to a slower path to system capacity of 290 million tonnes per annum, it will come at a lower capital cost," the miner said.

The project was expected to cost about $600 million, RBC Capital (Other OTC: CGHC - news) said.

BHP did not set a new date for the work.

The miner raised its 2015 full-year total production outlook by 2 percent to 250 million tonnes, and said it was on track for 270 million tonnes a year by 2017 without further investment.

"In iron ore, our focus remains on producing at the lowest possible cost with Western Australia iron ore unit costs now below $20 per tonne as we continue to improve productivity," Chief Executive Andrew Mackenzie said in a statement.

BHP and Rio have been able to cut costs more than smaller rivals, leaving them better able to weather low prices.

Rio reported a 12 percent rise in quarterly output on Tuesday to 74.7 million tonnes and said it still planned to ship 350 million tonnes of ore in 2015.

"I don't believe Rio will go down the same path, given they are much more reliant on iron ore for revenue than BHP. Rio has made it clear it is committed to its next expansion to 350 million tonnes," said Lennox.

Rio's chief executive last month called a proposal from fellow Australian producer Fortescue Metals Group for miners to wind back production to support prices "harebrained".

(Editing by Richard Pullin and Himani Sarkar)