The Distillery: Iron overflow

BHP Billiton shares finished yesterday’s session in positive territory on the back of the latest production report. Australia’s business commentators are well attuned to the formidable hold BHP and rival Rio Tinto – both of which have reported production this week – have over the iron ore market. And then there’s the eternal battle between their respective portfolios.

First, we start with BHP Billiton as a standalone. The Australian’s Barry Fitzgerald says new boss Andrew Mackenzie will have to, among other things, properly frame “just how transformational” the miner’s shale gas play will be.

“It is an issue well worth addressing, given it is also BHP’s point of difference from the rest of the mining pack. In these continuous disclosure days, it can be assumed that previous super-charged production growth forecasts by former chief Marius Kloppers – and former petroleum chief Mike Yeager – remain intact for the shale business, so far. Which is just as well, given it soaked up $US4.8 billion in capex in the year.”

Meanwhile over at Rio Tinto, The Herald Sun’s Terry McCrann explains the well-known heavier reliance on iron ore.

“In the calendar 2012 year, iron ore contributed $US9.2 billion, or essentially all of Rio Tinto’s $US9.3 billion group net profit. Rio Tinto has only one other major profit source – its copper division, which contributed $US1.1 billion with the lion’s share coming from the (fabulous) Escondida mine in Chile it shares with BHP Billiton. Everything else, including group costs, added to a negative. BHP in contrast got $US4.8 billion, or just half of its $US9.8 billion group earnings before interest and tax for the half from iron ore. It had two other significant profit centres: base metals – copper, Escondida – which contributed $US2 billion of EBIT; and petroleum, which contributed $US3.2 billion.”

The Australian Financial Review’s Chanticleer columnist Tony Boyd says BHP Billiton and Rio Tinto have effectively confirmed the iron ore market is set for a period of oversupply with their latest production reports.

“After delivering record iron ore production in the year to June 2013 of 187 million tonnes, BHP Billiton said it would deliver 2014 ­production of 207 million tonnes. Earlier in the week, Rio Tinto confirmed 2013 calendar year production guidance of 265 million tonnes. It is not wavering from a commitment to have a 360 million tonnes run-rate by the first half of 2015. The excess supply of seaborne iron ore will be about 155 million tonnes in 12 months’ time, according to analysts at UBS. The low cost structures at BHP Billiton and Rio Tinto mean they are happy to pursue similar strategies. They will deliver higher volumes of ore even if it means lower prices.”

Fairfax’s Malcolm Maiden also looks at the potential riches that BHP Billiton and Rio Tinto will reap almost regardless of the iron ore price.

“As the credit ratings group Fitch observes in a new report on the balance sheet pressure lower commodity prices are causing, many projects are being cut back, but there are a select group of projects that are still expanding, and they have some features in common. They include long mine life, low mining costs, expandability, and a stable political climate. Miners with low cost positions are under less pressure ‘to make capital expenditure and other adjustments in the current environment’, Fitch concludes. That’s a good description of the advantages BHP Billiton and Rio Tinto are exploiting as they push production higher in the Pilbara.”

In other company news, The Australian Financial Review’s Michael Smith looks at the day of drama that unfolded yesterday at Billabong International following revelations that a rival proposal from the company’s new debt owners Centerbridge Partners and Oaktree Capital Management had been turned away.

Meanwhile, Fairfax’s Elizabeth Knight reports on the diminished influence of Billabong founder Gordon Merchant, who will watch his stake in the company diluted to 9 per cent eventually be dwarfed by the stake of refinancing saviour Altamont Capital Partners.

Business Spectator’s Stephen Bartholomeusz concludes that the wash-up from the Billabong deal is, given the company’s circumstances, a reasonable outcome for shareholders.

Meanwhile, The Australian’s John Durie previews a hastily organised conference call from Woolworths set to take place this morning, which concerns the Masters home improvement division.

And finally, The Australian’s Asia-Pacific editor Rowan Callick gives a first-hand report of the inefficiencies in China’s aviation market.