With retailers having endured some horrible results from this past festive season, the mining industry has provided an unexpected boost to the market.
Citigroup has changed its 12-month view on the sector to bullish for the first time in three years. Since then, BHP Billiton (LSE: BLT) (NYSE: BBL.US) appears on track to grow profits in 2014 and put an end to three years of disappointment.
Things are similarly good for Rio Tinto (LSE: RIO) (NYSE: RIO.US), which recently announced record production for iron ore, bauxite and thermal coal. This could be the first of many broken records to come.
Sensible management
Firstly, the pair of Rio Tinto and BHP Billiton have placed great focus on reducing operating costs, and the increases to productivity have helped combat falling commodity prices. These two things combined are essential because the mining companies are ‘price takers’, meaning on a basic level, the main influence on commodity prices is supply/demand in the market. You’ll end up stuck in a mess when you can’t influence the price of your product and that price is below the cost of production.
Booming iron production
Present estimates are that Rio Tinto will produce approximately 330 tonnes of iron ore from the Pilbara by the end of 2014. That would represent a 20% increase in output. Rio Tinto expects to reduce both its operating costs and capital expenditure by significant sums.
It’s a similar story for BHP Billiton, which has just announced heavy production increases. Iron ore production is up by 20% and petroleum by 9%. This should boost revenues and profits beyond the end of 2014.
China is crucial to both investment cases; there’s no other country in the world which imports more iron ore. According to the World Bank, China’s GDP growth is forecast to be 7.7% during 2014, stabilising at 7.5% for the next two years. In this case, neither company is veering towards a cliff.
