Sagging prices of iron ore as stockpiles of the commodity build up at ports is threatening plans by BHP Billiton Ltd. /quotes/zigman/270355/quotes/nls/bhp BHP -0.30% to spend billions of dollars to expand its mining operations in the Pilbara region of Western Australia state.

 

Jimmy Wilson, the recently appointed president of the Anglo-Australian mining giant's iron ore division, said in an memo to staff that rising costs and falling prices had prompted a review of "the sequence and pace" of future growth projects.

 

Although not mentioned, key among these projects is the expansion of Port Hedland--already the world's second largest iron-ore port after the terminals at Sao Luis in Brazil--that analysts estimate could cost close to US$20 billion to complete.

 

Pressures are being felt by companies across the mining industry and for commodities such as copper and thermal coal. However, iron ore was widely viewed as more resilient until recently, supporting plans by BHP and others to continue ramping up capacity of what is a major driver of earnings.

 

Mr. Wilson's note, while outlining the challenges the market is facing, reaffirmed the company's belief in the long-term attractiveness of iron ore and its commitment to projects already underway. A spokeswoman at the company's headquarters in Melbourne said there was no mention of possibly delaying approval for an outer harbor to boost export capacity at Port Hedland, and no decision on that project has been made.

 

The harbor project is one of three likely to cost at least US$10 billion that BHP's board had been due to decide on at the end of the year. But speculation has risen that at least one mega project will be deferred after executives began backing away from ambitious spending plans and the company increased its focus on cutting costs.

 

The benchmark spot price for iron ore has fallen by a third in the last year to a nearly two-and-a-half-year low of US$115.20 a metric ton, although that remains strong historically and still offers a healthy margin for the world's biggest miners, including BHP and Rio Tinto PLC (RIO), which are among the lowest-cost producers.

 

However, analysts say lower longer-term price assumptions and higher operating costs mean the return offered on investments in new capacity has fallen to levels where companies may need to reconsider some projects.

 

Marius Kloppers, the South African-born chief executive of BHP, has said there is a window of opportunity for major mining companies to expand in iron ore to capture strong prices before demand from primary consumer China peaks in about 2025 and increased amounts of scrap material enter the market.

 

BHP's mines produced a record almost 159.5 million tons of iron ore in the year through June and has ambitions to lift that to 220 million by 2014 and 350 million by 2020. It received government environmental approval in May for the construction of an outer harbor at Port Hedland that in the first phase of development would see the construction of a four kilometer jetty, four-berth wharf and a 32-kilometer dredged channel out into the Indian Ocean to add an initial 50 million tons a year capacity.

 

Analysts at Macquarie in a report to clients this week said BHP may shift its focus to first maximizing export capacity in the existing inner harbor at Port Hedland.

 

To be sure, BHP isn't alone. Rio Tinto has said it is looking to squeeze as much capacity out of "debottlenecking" its operations in the Pilbara and some analysts believe it could pause its expansion plans. Fortescue Metals Group Ltd. (FMG.AU), the third-biggest iron ore producer in Western Australia, in late May said it will pause its own expansion when annual output capacity hits 155 million tons next year to focus on paying down debt. (Source: MarketWatch)