INVESTORS are hoping BHP Billiton can follow today the strong lead from Fortescue Metals Group into reporting season, and avoid the sort of production downgrades dumped on the market by rival Rio Tinto.
Rio shares slipped rapidly yesterday as investors reacted to an underwhelming quarterly result from the company's flagship iron ore division and downgrades to full-year production guidance in three other important commodities.
Rio is now forecasting weaker full-year production of copper, hard coking coal and thermal coal compared with the guidance it was offering just three months ago.
Full-year guidance for iron ore production, which delivers the bulk of Rio's profits, remains unchanged at 250 million tonnes, and yesterday the company was spruiking its highest first-half production of iron ore.
But many investors were left disappointed by the iron ore division's performance during the three months to June 30.
Rio's global iron ore network - including joint venture partners - produced 62 million tonnes during the quarter, below the 64 million tonnes that were predicted by several analysts, including Deutsche Bank.
Rio's share of that production was 48.6 million tonnes a result that was partially hampered by a scheduled equipment shutdown at the Cape Lambert port.
While that result was better than the cyclone-affected March quarter, it was poorer than the June, September and December quarters of the previous year.
It looked even worse when compared with the June quarter results published earlier in the day by Fortescue, which revealed better-than-expected iron ore production, and successful achievement of its goal to export more than 55 million tonnes in 2011-12.
The impact on Rio's share price was instant: the stock slipped by 90?, or more than 1.6 per cent, in the space of an hour.
After touching $55.15, it closed at $54.44, 5? lower than Monday's close.
The Rio chief executive, Tom Albanese, said market conditions had deteriorated in recent months, but he stressed he was confident Rio's businesses were resilient to the volatility.
"Global economic conditions and sentiment dropped markedly in the second quarter. We are keeping a close eye on the pace of the US recovery, the continuing eurozone crisis and the impact of efforts to stimulate the Chinese economy on the markets that we serve," he said.
The big resources stocks have suffered steep share price declines over recent months, amid fears demand for commodities will fade as China's pace of growth slows.
But the world's biggest investor in resource stocks, BlackRock, said the sector could enjoy some relief soon as investors realised China was undergoing "the softest hard-landing in history".
"We feel there will be some levelling-off of attitudes towards commodities, particularly as-and-when people become more convinced that China, the main engine, is not about to collapse in a heap," the BlackRock chief investment strategist, Ewen Cameron Watt, said.
"The bear market in resources stocks has certainly helped the majors in the sense that they're the people that can get the finance and a lot of marginal projects will fall by the wayside."
Frequently Asked Questions about this Article…
Why are investors turning their focus to BHP Billiton after Rio Tinto's share tumble?
Investors are hoping BHP Billiton can deliver a stronger reporting season and avoid the kind of production downgrades that knocked Rio Tinto's share price. The article says market attention shifted to BHP after Fortescue's strong results set a high bar and Rio's downgrades jolted the sector.
What triggered the recent fall in Rio Tinto shares?
Rio's share price slipped after an underwhelming quarterly result from its flagship iron ore division and downgrades to full-year production guidance for copper, hard coking coal and thermal coal. The company’s quarterly iron ore output was below some analyst predictions, and the stock fell by more than 1.6% during the trading hour before closing lower at $54.44.
What changes did Rio Tinto make to its production guidance?
Rio Tinto downgraded full-year production expectations for copper, hard coking coal and thermal coal compared with the guidance it gave three months earlier. Its full-year iron ore guidance remained unchanged at 250 million tonnes, although the recent quarterly iron ore result was weaker than some analysts had forecast.
How did Fortescue Metals Group’s results compare with Rio Tinto’s performance?
Fortescue reported a better-than-expected June-quarter iron ore production and achieved its goal of exporting more than 55 million tonnes in 2011–12. That stronger result made Rio’s weaker quarterly iron ore performance look worse by comparison, contributing to negative market reaction to Rio’s update.
Did operational issues affect Rio Tinto’s iron ore output?
Yes. Rio partly attributed its lower share of quarterly iron ore production to a scheduled equipment shutdown at the Cape Lambert port, which reduced output during the period.
How are macroeconomic factors like China and the eurozone affecting resources stocks?
Rio’s CEO noted deteriorating market conditions driven by concerns about the pace of the US recovery, the eurozone crisis and how Chinese stimulus affects demand. The article says big resource stocks have fallen amid fears that slowing Chinese growth will reduce commodity demand, though BlackRock suggests this may be a temporary reassessment as China’s slowdown may be milder than feared.
What is BlackRock’s outlook on the commodities and resources sector?
BlackRock’s chief investment strategist said investors may start to ‘level off’ negative attitudes toward commodities as confidence grows that China isn't about to collapse. He also noted the bear market has helped major resource companies by squeezing out marginal projects and concentrating financing with the majors.
As an everyday investor, how should I interpret production downgrades and sudden share price moves in resource stocks?
The article illustrates that production downgrades and weaker quarterly results can trigger swift share price falls, as happened with Rio. Everyday investors should pay attention to company reporting season, track production guidance and operational issues (like port shutdowns), and consider how broader economic signals—especially demand from China—are influencing market sentiment.
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