Rio Tinto Group and BHP Billiton Ltd. will report record profits this year as Australia ships more iron ore than ever and still fails to meet Chinese demand that has increased sevenfold in a decade.
The biggest ore-exporting nation will send 425 million metric tons overseas, 5.5 percent more than in 2010, according to the Australian Bureau of Agricultural and Resource Economics and Sciences, the government’s commodities forecaster. Global seaborne supply of the raw material for steel will fall about 15 million tons short of demand, compared with an 11 million-ton surplus last year, according to Macquarie Group Ltd.
The Sydney-based bank is forecasting a 12 percent jump in prices this year, on top of 2010’s 84 percent advance, showing why analysts estimate that Rio and BHP will report gains in profit of as much as 74 percent. Demand will also strengthen as Japan, the world’s second-biggest ore importer, rebuilds after its worst-ever earthquake. That still won’t be enough to make shipping rates in the spot market profitable.
“Chinese appetite for iron ore isn’t showing any signs of abating,” said Chris Hall, who helps manage $4 billion of assets at Argo Investments Ltd. in Adelaide, including shares of BHP. “Add to that all the steel Japan will need to help rebuild after the earthquake and it’s looking like Australia’s iron-ore exporters are in for a good year.”
Record profit for mining companies won’t necessarily mean profitable rates for the shipping firms hauling the material. Rates for capesizes, carriers three times the size of the Statue of Liberty, slumped 62 percent this year because of a glut of vessels, according to the London-based Baltic Exchange, which publishes daily rates for more than 50 maritime routes.
Forward freight agreements, traded by brokers and used to hedge or bet on future transport costs, are pricing in a fourth-quarter rate of $14,586 a day. While that’s 92 percent more than now, it’s still less than the $25,000 a day owners of capesizes valued at $60 million need to cover expenses such as crew and financing, according to HSBC Shipping Services Ltd. in London.
Rates are volatile, rising or falling 10 percent or more in all except two of the last 30 months. The capesize fleet of 1,082 vessels will expand 17 percent this year, compared with a 7 percent gain in demand to ship iron ore, the biggest cargo, according to Clarkson Plc, the world’s largest shipbroker. About 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations.
“With the amount of new ships on order, it will not really be enough to make a massive difference,” said Peter Norfolk, an analyst at Freight Investor Services Ltd., a broker of shipping derivatives in London. “It will help, but I wouldn’t expect it to lead to a significant increase in rates later in the year.”
Investors are already concerned that demand for commodities may weaken as China seeks to restrain growth. The People’s Bank of China raised interest rates for a fourth time in six months on April 5, before a report forecast to show consumer prices climbed 5.2 percent last month from a year before, the fastest pace since 2008.
China’s growth of 9.5 percent this year, compared with 10.3 percent in 2010, will still be three times bigger than the U.S. and five times that of the euro zone, according to the median estimates in Bloomberg surveys of as many as 89 economists.
The anticipated surge in iron-ore exports to Japan may be delayed because the country first has to repair the ports and roads damaged by the magnitude-9 earthquake and 23-foot tsunami on March 11.
While the Brussels-based World Steel Association said March 25 that most of the country’s steel plants are back to pre-disaster level, Japan Iron and Steel Federation Chairman Eiji Hayashida told reporters March 29 that scheduled blackouts to cope with power shortages will affect smelters.
Analysts aren’t anticipating any slowdown in demand. Seaborne supply will expand 4.9 percent to a record 1.1 billion tons this year and prices in the spot market will average $164 a ton, compared with $147 last year, according to Macquarie.
“It’s an extremely tight market and it looks like it will stay that way for a while,” said Jim Lennon, a senior analyst with Macquarie in London. “We see prices trading in a $150 and $200 range for the next two years.”
Rio, based in London, will report net income of $19.07 billion this year, or $9.79 per share, a gain of 33 percent on 2010, according to the mean of 17 analysts’ estimates compiled by Bloomberg. Iron ore accounted for 39 percent of revenue last year and 68 percent of its net income, according to data compiled by Bloomberg. Rio is the world’s second-largest iron-ore exporter, behind Rio de Janeiro-based Vale SA.
Shares of Rio in London have declined 1.5 percent since the end of December, trading at a multiple of 7.3 times anticipated profit. Of 32 analysts covering the company, two rate it a “sell,” according to data compiled by Bloomberg.
BHP, based in Melbourne and the world’s largest mining company, will have net income of $22.13 billion, or $4.11 a share, in its fiscal year ending in June, an increase of 74 percent from a year earlier, based on the mean of as many as 14 estimates. Its Sydney-listed shares increased 8 percent since the end of December, trading on a price-to-estimated earnings ratio of 12.4 from about 14 last fiscal year. Of 19 analysts with recommendations tracked by Bloomberg, none rate it a “sell.” Iron ore accounted for 21 percent of revenue in its last 12-month reporting period.
Fortescue Metals Group Ltd., Australia’s third-biggest iron ore miner, will more than double profit to $1.44 billion in the year to June, or 42.8 cents a share, the mean of as many as 11 estimates shows. Its shares are unchanged this year, compared with the 4.8 percent gain in the MSCI World Index of equities.
Mining companies are contending with ores that yield less metal and development costs for new mines that have doubled in five years, according to Macquarie. In Australia, higher production also means spending billions of dollars on new railroads and bigger ports able to handle more ships.
BHP is paying $9.5 billion to increase iron ore and coal production in Australia, including new rail links and extra loading facilities at Port Hedland in Western Australia, already the world’s largest bulk export terminal. Perth-based Fortescue is planning expenditure of $8.4 billion on expansions, including the construction of 340 miles of railroad.
Rio opened it operations center in Perth in June, with more than 400 people managing its network of mines, ports, rail and power lines across the Pilbara about 750 miles north of the city.
The companies also face constraints from weather. Australian iron-ore exports slumped 13 percent in January, the most in two years, because rainfall flooded mines in Pilbara.
Crush and Ship
Almost all the iron ore from Pilbara is high-grade hematite, containing more than 60 percent iron, which is crushed before being loaded onto trains and ships. It can be fed directly into blast furnaces without processing.
World trade in iron ore will rise 4.6 percent to 1.09 billion tons this year, according to Canberra-based Abares. Growth will quicken to 6.8 percent next year, it said. China imported 641 million tons of iron ore and concentrate in the year ended March 31, seven times more than the 92 million tons shipped in 2001, according to customs data compiled by Bloomberg.
“Iron-ore prices are still holding up,” said Peter Chilton, who helps manage the equivalent of $790 million at Constellation Capital Management Ltd., including BHP shares. “We’re not expecting China to slow down for several years at least. BHP and Rio have performed better than many people said was possible a couple of years ago. They’re benefitting from the out-performance from commodities. While there’s demand for their products, those companies will do well.”