BHP and Rio Tinto's solid output masks shaky demand

Sun Oct 14, 2012 4:03pm EDT
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By Sonali Paul

MELBOURNE (Reuters) - BHP Billiton (BHP.AX: Quote) and Rio Tinto (RIO.AX: Quote) are set to report this week solid iron output for the September quarter, but prices and cost will be the top concern for the miners as even their most profitable division is hurt by slower Chinese demand.

The production reports by BHP, the world's biggest miner, and Rio Tinto, the No.3 miner, will be closely watched for signs of how weaker consumption of steel in China is playing out on demand for commodities such as iron ore and coal.

Weaker demand for resources is fueling worries that a decade-long mining boom in Australia is faltering. BHP and Rio have in recent months been cutting jobs, closing coal mines, shelving expansions, selling assets and scaling back spending.

The main concern of investors is how the companies manage profit margins for iron ore, given that they are among the lowest cost producers and will continue digging as much as they can, shareholders and analysts said.

"The biggest challenge is managing costs. It's not a question around volumes," said Ric Ronge, a portfolio manager at Pengana Capital, which owns shares in Rio Tinto and BHP.

Rio Tinto, the world's no.2 iron ore miner behind Brazil's Vale (VALE5.SA: Quote), and world no.4 iron ore miner Fortescue Metals Group (FMG.AX: Quote) are both due to report September quarter production on Tuesday, with BHP reporting the next day.

Despite a 34 percent rebound in iron ore prices from a low of $87 a metric ton (1.1023 tons) in September, prices remain more than 20 percent below this year's high.

"Given the volatility over the past quarter, investors will be looking for the companies' comments on current market conditions, particularly for steel making raw materials," said Rob Craigie, an analyst at broker FW Holst.   Continued...