BHP, Rio to Reap Profit as Costs Hurt ArcelorMittal

BHP Billiton Ltd., Vale SA and Rio Tinto Group, the world’s three largest mining companies, are set for record profit totaling $52 billion as they accelerate earnings growth at the expense of their biggest customers.

The companies, also the largest iron-ore exporters, may post an average 66 percent jump in the annual earnings they report this year compared with 2007, according to analyst estimates compiled by Bloomberg. In contrast, ArcelorMittal, Baoshan Iron & Steel Co., Posco and Nippon Steel Corp., the largest publicly traded steelmakers, may see an average 31 percent slump in profit over the same duration.

The contrasting fortunes will probably widen further this half should steelmakers fail to pass on rising iron-ore and coal costs, which are forecast to peak in the second quarter, according to Bank of America Merrill Lynch. The steel producers have struggled to adapt to changes in raw-material pricing introduced last year as mining companies ended a decades-old system of annual contract talks in favor of quarterly accords.

“It was a dramatic impact,” said Charles Kernot, director of metals and mining at Evolution Securities Ltd. in London. Mining companies are going to see “very significant earnings growth,” he said.

Rio advanced 2.9 percent in London to 4,625 pence as of 4:30 p.m. local time, the highest close since July 2008. BHP climbed 0.8 percent to 2,541.5 pence. ArcelorMittal gained 2.3 percent to 27.25 euros in Amsterdam trading. Vale fell 0.1 percent to 50.32 reais in Sao Paulo at 6:07 p.m. local time.

Quarterly Pricing

BHP led the change to price iron-ore and coking-coal sales each quarter, saying it better reflected shifts in the market. Steelmakers opposed the move, arguing it hampered efforts to predict costs and pass them onto consumers.

“The pricing power remains firmly in favor of the miners,” Richard Knights, an analyst at Liberum Capital Ltd., said by phone from London. “The change to quarterly pricing has been significant because if we had settled iron-ore and coking- coal prices in March last year, the average achieved price over the course of the year would have been significantly lower.”

In January of last year, analysts estimated the iron-ore annual benchmark may increase 30 percent to 50 percent in 2010 from 2009’s $61 a metric ton. Instead, the first quarterly contract for BHP’s ore was set starting April 1 at $120, double the previous annual price, according to UBS AG.

It rose for two of the three subsequent quarters and was set at $143 for the current quarter, UBS said.

Iron Ore, Coal

Vale and London-based Rio also ship coking coal, and BHP is a partner in the world’s biggest exporter, the BHP Billiton- Mitsubishi Alliance. Steel producers use about 1.6 tons of iron ore and half a ton of coking coal to make 1 ton of the alloy.

The combined cost of the raw materials may peak next quarter, Merrill said in a Jan. 25 report. The contract coking- coal price may leap 78 percent to a record $400 a ton during the quarter, the bank said. Credit Suisse Group AG said last month that the spot price of iron ore could jump to $250 a ton.

“2011 will see record amounts of cash generated by the industry,” said Andrew Keen, an analyst at HSBC Holdings Plc in London. “You are seeing high coking coal, very high iron-ore prices and that’s all accreting to the miners.”

BHP Earnings

BHP, the world’s biggest mining company, may report record profit of $21 billion for the year ending June 30, 2011, according to the average estimate of 17 analysts surveyed by Bloomberg. The company’s iron-ore unit delivered 26 percent of BHP’s earnings in the previous fiscal year and may contribute about a third of earnings before interest and tax for the first half, Liberum said. BHP reports first-half results on Feb. 16.

Rio will post record annual profit of $14.2 billion this week, according to the average estimate of 16 analysts. Iron ore may comprise 62 percent of earnings before interest, tax, depreciation and amortization for 2010, according to Liberum. Vale is estimated to report net income of $17.2 billion.

“The iron-ore miners risk killing the goose that laid the golden egg,” said Gordon Moffat, director-general of Eurofer, representing European steelmakers including ArcelorMittal. “The reason they have huge profitability is because of behavior that is not aligned to market conditions. It’s not sustainable.”

ArcelorMittal said in October that fourth-quarter earnings, due Feb. 8, would drop as much as a third from the prior three months after steel prices declined and costs rose. The shift to quarterly pricing is increasing “volatility in steelmaking margins,” HSBC’s Keen said.

ArcelorMittal Profit

ArcelorMittal may post net income for 2010 of $3.6 billion, according to the average estimate of 21 analysts. That compares with record profit of $10.4 billion in 2007, the first complete earnings year following the creation of the company through the $38 billion acquisition of Arcelor SA by Mittal Steel Co., the steel industry’s biggest takeover. ArcelorMittal spokesman Giles Read didn’t return a call seeking comment.

“The issue is for the steel producers, and therefore the auto-manufacturers: every quarter they’ve had to think about re- pricing the steel that they produce and therefore the cars that are produced from that steel,” Evolution’s Kernot said. That “makes the whole market much, much more complicated.”

Nippon Steel, based in Tokyo, cut its full-year profit forecast on Jan. 28 after prices fell and floods in Australia pushed up the cost of steelmaking ingredients. South Korea’s Posco reported a bigger-than-expected decline in quarterly earnings after raw-material costs expanded and demand waned.

Customers Suffer

“We have annual contracts with some of our main customer groups and, unlike the iron-ore industry, we’re not prepared to see our customers suffer disproportionally,” Moffat said. “We negotiate with our customers, we don’t impose price increases.”

Nippon Steel and Sumitomo Metal Industries Ltd., Japan’s largest and third-biggest steelmakers, last week agreed to combine to cut costs. The merger plan, to be completed by 2012, would produce the world’s second-largest steelmaker in a deal valued at about 2 trillion yen ($24 billion), according to data compiled by Bloomberg.

Nippon Steel last week said annual profit may be $1.15 billion, 63 percent less than in 2007. Posco reported 2010 profit of $3.6 billion last month. Baoshan Iron & Steel, China’s biggest publicly traded steelmaker, posted a $1.89 billion profit in 2010, compared with $1.67 billion in 2007. The company was the world’s second-largest steelmaker in 2009, climbing from fifth place in 2007, according to the World Steel Association.

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net.

To contact the editor responsible for this story: Amanda Jordan at ajordan11@bloomberg.net.

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