Leighton overlooked

For engineering and construction companies it seems no amount of good news can bolster their stocks.

For engineering and construction companies it seems no amount of good news can bolster their stocks. They are hostage to global trends. Suspicions over the fundamental health of the global economy, especially China’s, trumps any good news a company may declare.

How else can we explain today’s reaction to Leighton Holdings shares? Leighton said today it has won an additional $1.3 billion worth of work from Fortescue. Leighton’s shares fell as much as 1.8% and at 1138 AEST the stock was down 15 cents, or 1%, to $14.97. Leighton’s contract with Fortescue, now worth $2.8 billion, is the single biggest in its contractor unit history.

Shares in Leighton’s mining services rivals have suffered even more.

Transfield shares fell as much as 6.8% today and at 1039 AEST the stock was down 2.5 cents, or 3.4%, to 71.5 cents. Boart Longyear’s shares dipped up to 5.4% lower and had slipped 2.5 cents, or 3.4%, to 71.5 cents. Ausdrill shares declined as much as 5.3% and were down 2 cents, or 1.9%, to $1.02. The benchmark S&P/ASX200 Index had slid 59.90, or 1.3%, to 4678.90.

Leighton's rivals may not be able to pick up any crumbs left over from Fortescue’s contract decision. Leighton plans to give $100 million worth of work to aboriginal groups at Fortescue’s Solomon site in the Pilbara region of Western Australia. About 60 million tonnes of iron ore will be mined every year from the area, according to Leighton. Fortescue is using Leighton to operate and maintain an open cut mine mining fleet as well as take responsibility for ore quality control and processing facilities.

Leighton’s contracting unit now has more than $13 billion worth of work in hand. That clearly means little to investors who are focused on worrying sounds coming from China whose economy is slowing as the health of its financial institutions is coming under increasing scrutiny.

The spot price for iron ore imported through the northeast Chinese city of Tianjin fell $US2, or 1.7%, to $US118.60 a tonne on Friday, according to Bloomberg data. The Tianjin iron ore spot price is down 25% from a 52-week high of $US158.90 a tonne on February 20.

Mining contracts are notoriously fickle. Miners such as Fortescue often have the ability to change the contract terms or cancel contracts when the economics of a project don’t make it profitable. Leighton shareholders and others invested in such stocks are quite right to be nervous.

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