A savage sell off in BHP Billion and Rio Tinto shares here yesterday after global oil and copper prices fell after Monday’s spate of gloomy economic news, and the admission that the US economy had been in recession for the past year.
Rio shares in fact hit a new 52 week low of $38.45 yesterday before a small, late bounce. Rio shares ended off 8.6% at $39.37, down $3.70.
The fall when it hit the low was more than $4, or 9.9%, which is almost a ‘correction’ in the share price in a day.
The company’s shares didn’t hit that sort of low in the wake of BHP’s withdrawal of its offer a week ago.
BHP shares fell $2.87, or 9.6% (almost a day’s correction as well) as they fell to $27.03.
That’s a long way from the 52 week low of $20 reached in November’s big mid- month sell off.
The sharp falls in both companies helped send the market down 4% or more than 150 points overall.
Oil prices fell under $US50 a barrel, and then fell further in Asian trading during the day to be down $US1.68 at under $US48 a barrel.It fell sharply to just under $US47 a barrel at one stage
That won’t help BHP today.
Copper again eased, down more than 4 US cent to $US1.58 a pound as global stockpiles hit a four year high. Nickel, lead and zinc were also weak as investors fretted about the global slump next year.
Both companies shares will rebound today after major markets enjoyed a recovery of sorts from Monday’s brutal selldown.
Rio made it clear it’s pulling in its horns again yesterday with another small scale, but highly symbolic decision.
Rio dropped a plan for a 300-room mining village for its Yarwun alumina expansion in Queensland.
On Monday it cancelled a contract to build housing for a railroad expansion at its Pilbara iron ore operations.
Not helping were some bearish comments from Goldman Sachs JBWere yesterday which again looked at iron ore prices.
"Following the removal of the bid by BHP, the market focus for RIO has centred on refinancing RIO’s debt and its ability to fund its capex program, which is under review.
"The concerns around the demand for iron ore in particular have been acute and we have been asked to run many scenarios based on lower iron ore volumes and much lower iron ore prices – stress testing RIO’s position.
"The debate on iron ore demand centres on whether the current iron ore demand reflects the underlying iron ore demand (where Indian iron ore sales fell dramatically and RIO announced sales in the last 3 months of the year would effectively be at ~65% of capacity) and whether iron ore prices could return to levels seen in CY03 of around US$20/t compared to our forecasts of down 30% at ~US$64/t.
"We believe it is likely that, while the demand for steel is weak, the current very weak level of demand for iron ore is heavily influenced by the destocking process.
"We provide a crude theoretical example where a 10% fall in demand for steel could lead to a 50% fall in demand for iron ore (and even worse for the seaborne market) but that this size of fall in iron ore demand is temporary provided steel demand doesn’t continue to fall (demand only needs to level out for the destocking process to cease, theoretically).
"In terms of prices, we believe they are unlikely to return to levels seen in 2003 unless the demand for iron ore (in absolute volume) also falls back significantly – new entrants in recent years (India), we believe, are higher cost than the traditional major suppliers (Vale, BHP, RIO) and would not survive at previous volumes at these price levels (we believe a portion of the new entrants are low capital cost, high operating cost, eg. long trucking distances, and would exit).
"RIO is a financially leveraged company with a struggling Aluminium business in the midst of a credit crisis. The company is trading at a significant discount to our valuation, however we believe this discount is justified given the loss of financial flexibility the company now has.
"On our forecasts and volume expectations, we believe RIO will be able to repair its balance sheet but this will take several years and cause it to either delay or look at other financing arrangements for its growth opportunities.
"We continue to prefer BHP which is in a strong financial position and can pursue its organic growth options and allow the company to opt to buy rather build as opportunities arise.’
Credit Suisse told clients that Rio may delay $US32 billion of new projects and expansions next year.
“Although management has not yet confirmed any of their building plans, it’s almost certain that their $US26 billion spending program is likely to be pushed out,” Credit Suisse
“The $US6 billion Simandou iron ore mine in Guinea, a $US7 billion expansion of Rio’s Pilbara mines, and the $US1.8 billion Yarwun expansion may be among the delayed projects, according to the Credit Suisse report.
It also hinted the Rio could be forced to make a big cut in the value of Alcan, perhaps as much as $US11 billion.
