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Rio and BHP hoping for a soft landing in China

The two mining giants will be hoping that demand recovery in developed and other emerging economies will offset China weakness
Rio and BHP hoping for a soft landing in China

 

  • Iron ore futures under pressure
  • Chinese steel production falters

The FTSE’s two largest mining companies have provided operational updates at a time when iron ore’s most heavily-traded May contract on China’s Dalian Commodity Exchange was exhibiting further weakness despite China’s central bank unexpectedly cutting the borrowing costs of its medium-term loans.

Spot prices fell by 57 per cent in the five months through to mid-November but have retraced slightly into 2022. Both Rio Tinto (RIO) and BHP (BHP) will be monitoring events in China’s steel mills as the country’s real estate crisis drags on, though the suspicion lingers that further monetary stimulus measures may only serve to delay the reckoning for a vastly overindebted sector.

China's annual crude steel production fell for the first time in six years in 2021, albeit from record levels in the prior year, but downstream demand from the construction sector could falter if property prices continue to contract. Fitch Ratings has forecast a 3-5 per cent annual fall in property prices on the Chinese mainland in both 2022 and 2023, so the portents are far from encouraging.

Nor was the latest quarterly update from Rio Tinto, at least in terms of shipping guidance. The group shipped 321.6m tonnes of Pilbara iron ore last year, a year-on-year fall and towards the lower end of downwardly revised guidance. The good news, of course, was the 45 per cent rise in average realised prices. Unfortunately, we can’t rule out an inverse effect through this year, and the group has set a relatively modest shipment target of 320-335m tonnes from its Pilbara sites in Western Australia. But even that figure may need to be revised if the ramp-up of new iron ore projects is delayed, or if new cultural heritage laws impinge on production.

The group’s destruction of the Juukan gorge sacred sites casts a long shadow, but there are other strings to Rio Tinto’s bow and management also anticipates a 14-44 per cent range hike in refined copper production, following on from increased throughput (with higher grades and recovery) feeding its Kennecott smelter & refinery. The seemingly interminable disruptions to its majority-owned Oyu Tolgoi underground mine in Mongolia were in evidence yet again, this time courtesy of a declaration of force majeure on copper concentrate shipments to Chinese buyers following suspension of border crossings from Mongolia due to further Covid-19 outbreaks.

China looms large in any deliberation over prospects for iron ore miners in 2022, and Rio’s management did point to “demand recovery in developed and other emerging economies”, further noting that “global crude steel production grew by an estimated 6 per cent year-on-year – by one of its largest absolute annual increments in history”. 

The insiders at BHP were also at pains to point to broader resilience in the mining giant’s key markets, even though you imagine board members have had their hands full advancing the group’s delisting proposal, along with exiting its space in the fossil fuel industry via the merger of its oil and gas assets with Woodside Petroleum (ASX:WPL).

Short of pulling out of the market altogether, there is little BHP can do to underpin iron ore prices. But the group revealed accelerated production through its second quarter, helped along by a positive outcome at the Jimblebar mine, while production ramped-up at South Flank in Western Australia.

However, there could be some pandemic-induced disruption in the offing. Western Australia plans to reopen its hitherto tightly controlled borders in the first week of February. No one can be sure whether the clinical situation in the mines will suddenly deteriorate. Conversely, it could transpire that any disruption will mitigated by an enhanced ability to get skilled workers across the state border. But it remains a risk factor, nonetheless.

Beyond its iron ore prospects, the “Big Australian” has been forced to downwardly revise its coking coal guidance and has warned of impairments amounting to nearly $500m (£368m) in its half-year results due in February. It is also on the hook for a further $700m in financial support for the Renova Foundation, a body established to oversee reparations linked to the 2015 Samarco dam disaster in Brazil.

All of this is really run of the mill. Of more interest is the gathering speculation that BHP might be thinking of making a tilt for commodities giant Glencore (GLEN). Any such deal would change the centre of gravity within the mining industry, though pitching a realistic price for Glencore - now without the guiding hand of Ivan Glasenberg - may prove challenging, as metals markets continue in a state of flux due to trade imbalances brought about by the pandemic.