BHP Billiton and Rio Tinto produce results next week that will once again confirm that they are riding the China boom for all they can get.
Even though the profits will be lower than the respective previous corresponding periods (BHP interim, Rio full year), they will still be very solid and much better than anyone thought a year ago.
But the real story will be the coming year to 18 months.
Many analysts see the two companies earning more than they ever have in 2010 (in the case of Rio) and 210-011 (BHP).
Both groups will show some damage in their reports next week, but the thing to look for will be the commentary and outlook.
Both should be more confident than for the past couple of reporting periods.
Why? Well spot iron ore prices almost doubled in the final quarter of last year: both companies took advantage of that, selling between 40% and 50% of sales into the spot market.
Copper prices rose sharply, especially in the second half, while aluminium prices jumped 50%.
Both companies have significant interests in that metal, from bauxite through to metal production.
And even though there’s been a bit of a sell-off in late January and this week, prices are still firm.
There is a lot riding on these results.
Most notably there’s the fate of their prospective iron ore joint venture in the Pilbara. If iron ore profits are too good, opposition to the JV will grow.
The European Commission started its examination of the $US116 billion proposal last week, but perhaps a much bigger obstacle will be China, which is looking for some sort of face saving victory against the two companies after completely stuffing up its 2009 attempts to take control of iron ore pricing.
The two companies either release half year figures in the case of BHP on February 10, or full year figures on February 11 for Rio.
And, two other important results are out next week.
Brazil’s Vale, the world’s biggest iron ore exporter, reports its 2009 figures also on February 10, as does Arcelor Mittal, the world’s biggest steelmaker which is based in London.
In many respects the results will be all about iron ore and China.
China’s iron ore imports rose an astonishing 42% last year, to 630 million tonnes, while the rest of the world collapsed. It accounted for as much as 70% of global seaborne trade, especially in the second half.
Australian miners, principally BHP and Rio, grabbed the lion’s share of those extra shipments.
Australia’s global iron ore exports rose 17% to 383 million tonnes, even as they fell to other major destinations including Japan, South Korea and Taiwan.
Exports to China rose by 46%, to 282 million tonnes – nearly three-quarters of Australia’s total.
As this week’s trade figures show (see story below), Australia’s trade with China in the six months to December last grew 16.5% as iron ore shipments surged.
It is that increase which will be the driver in the results from both companies next week.
Brokers here and offshore have boosted their estimates of Rio’s 2010 earnings and BHP’s interim by hundreds of millions of dollars in the past few weeks.
According to these estimates the higher earnings could boost Rio’s shares by 14% or more this year and BHP by 10%.
According to Bloomberg estimates, Rio may have net profits of $US9.3 billion this year
That would beat its record in 2006 of $US7.4 billion.
BHP may report profit of $US16 billion in fiscal 2011, according to 13 analyst estimates, beating 2008’s record $US15.4 billion, according to Bloomberg.
Chinese steel and copper production (two commodities both miners have major stakes in) both hit records last year.
Both are expected to rise again this year with forecasts for Chinese economic growth at 9% to 10%, notwithstanding the attempts to slow bank lending and property.
The global steel market will grow by 9.2% this year, thanks to rising demand from the US, Japan and Europe, according to the World Steel group.
Macquarie sees it a bit faster, perhaps as high as 10%.
Market profit consensus (covering the estimates of 20 analysts) is that BHP’s December half profit (attributable profit on a pre-exceptional basis) will be a $US5.1 billion, down 16% or so on the $US6.12 billion reported for the December 2008 half-year.
Analysts generally said that the rebound in commodity prices that strengthened in the back half of 2009 production increases in key commodities will be offset by currency moves.
Oil prices will be the biggest swing factor for the company. Earnings from petroleum will be down.
BHP’s underlying earnings before interest and tax is forecast to be $US7.9 billion, down from $US11.89 billion in the previous corresponding period.
Macquarie said in a note to clients recently that BHP is already ramping up its expenditure and has identified close to $US25 billion in commitments for the 2010 financial year.
That’s made up of $US10 billion in capital expenditure, $US5 billion in dividends and $US6 billion to the proposed iron ore joint venture with Rio Tinto (but the latter could be delayed for the rest of this year).
Last week, BHP announced another $US3 billion in commitments to the expansion of its Pilbara iron ore business and the acquisition of a potash group in Canada.
Rio’s 2009 iron ore output for all of 2009 exceeded 217 million tonnes, just its second forecast for last year of 210-215 million tonnes.
For Rio, market consensus seems to be a ‘core’, or underlying profit for 2009 of $US5.8 billion.<
