BHP up on industrial rebound

These two commodities are both signs of industrial strength and BHP’s (BHP) biggest earners. They are also of major significance for fellow Australian mining giant Rio Tinto (RIO), but we feel BHP has the jump on its rival by simply not being the one who blew up a sacred Aboriginal site last month, as Rio did. What's more, BHP has managed to keep up its iron ore production better than the other major iron ore producers. Bernstein estimates BHP’s March quarter iron ore sales were 68.4m tonnes, a 1.5 per cent drop year on year, while Rio’s were 72.9mt, a 16 per cent drop.

BHP's chief executive, Mike Henry, said the group had hit an iron ore production record in the nine months to 31 March, so iron ore breaking the $100 a tonne mark indicates a strong year for the division. The steel ingredient provided 70 per cent of the group's cash profits for the first half, giving new boss Mr Henry enough ammunition to up the half-year dividend by 18 per cent to 65¢. 

Only the demand side, BMO says a rapid drop in steel and cement inventory reflects infrastructure approvals. Supply has also been a factor, and will continue to be after a Brazilian judge ordered Vale (Bra:VALE3) to close three mines (12 per cent of its output) after a Covid-19 outbreak. 

Copper’s break has been less dramatic than iron ore’s, but could ramp up further if traders dive in. In the view of Saxo Bank’s head of commodity strategy, Ole Hansen: “Hedge funds according to my weekly [Commitment of Traders] update have only just returned to a neutral position and they are likely to start rebuilding a long position on a break above [$2.50/lb].” In recent months monitored Chinese stockpiles have fallen 62 per cent, although Mr Hansen said this could be just because traders were betting on a recovery and shifting stockpiles to non-monitored warehouses. 

While the red metal is less influential on BHP’s earnings than iron ore, a break could provide a nice fillip for 2020. In the first nine months of the year, the average price was $2.43 a lb, falling to a dismal $2.08 a lb in the March quarter. The group said this was close to “cost support”, meaning the division will need a hefty pick-up to contribute to profits in the second half. 

The key copper mines are Escondida in Chile and Olympic Dam in South Australia. Mr Henry said in May BHP was stretching out rosters to try and stop workers going in and out of communities and spreading the virus, but also recognised how tough this could be for the miners.