It’s a funny old mining boom. The greatest resources super-cycle in history has seen global capital flood the economy and propel the currency to post-float records. But it has left investors sorely disappointed.
Mining stocks have been a drag on the stock market for the past two years as industry chieftains have reinvested the colossal amounts of cash being thrown off their projects into ever more grandiose expansions.
Couple that with new entrants such as Fortescue and it will be years before the global supply of iron ore peaks.
The big question remains: Will there be sufficient demand to absorb all that extra supply?
If not, and there are many who believe that is the case, prices will ease, putting the squeeze on high-cost producers. That could leave a large portion of that spanking new infrastructure to rust back into the red earth of the Pilbara.
Many analysts have pencilled in iron ore prices for $US120 a tonne this year, falling to $US90 next year and beyond.
From an investor’s viewpoint, energy rather than mining is where it is at. While miners have been flat for the past 24 months, oil and gas stocks have risen 27%. It is the longest period of mining underperformance in decades.
BHP, as a major energy producer and with far less reliance on iron ore than its peers, has become the favoured target for many analysts.
The miner's production numbers, released early this morning, have revealed solid lifts in production of most divisions in the fourth quarter.
Iron ore production was up 17.7% year on year, thermal coal output jumped 6% while metallurgical coal production jumped 34% as petroleum output lifted 5%.
Along with Rio, BHP is also adding production capability in its Western Australian operations, with output expected to rise to 207 million tonnes this year.
The miner rallied around 1.4% overnight in London despite Wall Street ending lower as anticipation builds around its production report.
Rio Tinto’s quarterly production figures yesterday reflected a seriously improved management that has confronted the many issues facing the company and is well on the path to overcoming them (see Tim Treadgold's Re-examining Rio).
Iron ore production rose 7% in the three months to June to 51.829 million tonnes, from 48.6 million tonnes, boosting first half iron ore output to a new record.
This year, the company is expected to produce 265 million tonnes. But it is in the process of ramping that up to 290 million tonnes a year.
Adding to the supply pressure, Brazilian giant Vale has vowed to lift production and target high cost producers. It will be aided in that quest by a massive depreciation in the Brazilian real.
On the other side of the equation, China’s economic growth is slowing. Real GDP rose only 1.7% in the second quarter. Imports are down. So are exports. And the new leadership has renewed its push to shift the economy’s focus from infrastructure and investment to consumption.