INVESTORS are hoping that BHP Billiton can today follow the strong lead from Fortescue Metals Group into reporting season, and avoid the production downgrades dumped on the market by 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 than the guidance it offered 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 the company was yesterday spruiking its highest first-half production of iron ore.
But many investors were disappointed by the iron ore division's performance in the three months to June 30.
Rio's global iron ore network including joint-venture partners produced 62 million tonnes in the quarter, below the 64 million tonnes 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 for the June, September and December quarters of 2011.
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 the year to June 2012.
The impact on Rio's share price was instant: the stock slipped 90?, or more than 1.6 per cent, in an hour. After touching $55.15, it closed at $54.44, 5? below Monday's close.
Rio chief Tom Albanese said market conditions had deteriorated in recent months, but he was confident Rio's businesses were resilient.
"Global economic conditions and sentiment dropped markedly in the second quarter," he said. "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."
The big resources stocks have suffered steep share-price declines amid fears that demand for commodities will fade as China grows at a slower pace than before.
But the world's biggest investor in resource stocks, BlackRock, said the sector might soon enjoy some relief 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," said BlackRock's chief strategist, Ewen Cameron Watt. "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…
What production changes did Rio Tinto announce and which commodities were downgraded?
Rio Tinto announced downgrades to its full-year production guidance for copper, hard coking coal and thermal coal. Its iron ore full-year guidance remained unchanged at 250 million tonnes, though the company reported mixed quarter results for iron ore.
How did Rio Tinto’s recent quarterly iron ore numbers compare with analyst expectations?
Rio’s global iron ore network produced 62 million tonnes in the quarter, which was below the roughly 64 million tonnes predicted by several analysts (including Deutsche Bank). Rio’s own share of that production was 48.6 million tonnes, partly hit by a scheduled equipment shutdown at the Cape Lambert port.
How did the market react to Rio Tinto’s quarterly update and production downgrades?
The market reaction was immediate: Rio’s shares slipped sharply in trading, touching $55.15 intraday and closing at $54.44 (around 5 cents below the prior close). The stock fell quickly, declining more than about 1.6% in an hour after the announcement.
How did Rio’s iron ore performance stack up against Fortescue Metals Group?
Fortescue reported better-than-expected iron ore production for the June quarter and said it had exported more than 55 million tonnes in the year to June 2012. By contrast, investors viewed Rio’s June-quarter iron ore performance as disappointing relative to Fortescue’s stronger result.
What reasons did Rio Tinto’s CEO give for the weaker results and what macro risks were highlighted?
CEO Tom Albanese pointed to deteriorating global economic conditions and sentiment in the second quarter, noting concern about the pace of the US recovery, the eurozone crisis, and how Chinese stimulus efforts affect markets Rio serves.
What did big investors say about the outlook for commodity demand and resources stocks?
BlackRock suggested the sector might see some relief as investors realise China is experiencing a relatively mild slowdown (described as a “softest hard-landing”). The comment implies attitudes toward commodities could level off, and that majors with financing power may weather the downturn as marginal projects fall away.
Why did Rio’s Cape Lambert shutdown matter and how does operational disruption affect production numbers?
A scheduled equipment shutdown at the Cape Lambert port partially reduced Rio’s share of iron ore output in the quarter. Operational disruptions like port shutdowns or weather events can cut quarter-on-quarter production and make quarterly results more volatile.
As an everyday investor, what should I watch next after Rio Tinto’s update?
Watch upcoming reporting-season updates from peers (especially BHP Billiton and Fortescue), any further guidance changes for copper, coking coal, thermal coal and iron ore, macro signals about China demand, US recovery and the eurozone, and how markets respond to the majors’ ability to finance projects. These are the themes highlighted by the article that could drive commodity stocks and share prices.
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