The low point will be BHP Billiton’s annual profit statement, scheduled for release tomorrow and likely to show a 27% fall on last year.
BHP Billiton’s profits should start rising after tomorrow thanks to its diverse spread of assets, with higher prices for copper and oil likely to offset falling profits from iron ore.
The start of the high point is likely to be the annual profit of Fortescue Metals Group, scheduled for release on Thursday and likely to show that last financial year and the current financial year are the high-water marks for the one-commodity company.
Profit in the year just ended is likely to be down by about 16% because it will include the effects of last year’s big slide in the iron ore price, which has since been washed away by higher prices.
The current year’s profit should be up again, by about 80%, as higher rates of production and the current high iron ore price flow into FMG’s accounts.
But after this year it will become much harder for FMG to post higher profits as the triple pressures of high debt levels, a lower iron ore price, and total reliance on a single commodity bear down on the company, which is furiously expanding to achieve greater rates of productivity – an economist’s way for describing squeezing more toothpaste out of the tube or, in FMG’s case, more iron ore out of existing facilities and workers.
After the current year’s peak, FMG could see a 30% profit fall next year, bringing to a close the great iron ore boom of the first half of the 21st century thanks to supply and demand moving closer to a state of equilibrium.
That comment, which is based on Blower’ observations of China’s slowing growth rate and the iron ore industry continuing to expand, is probably getting too far ahead, though it is a thought for everyone in mining to consider.
Best growth in the next phase for our industry is more likely to come from other commodities, especially the neglected base metals sector, where copper and nickel are starting to exhibit a pleasing upward price trend.
Diversified miners such as BHP Billiton, Rio Tinto, Vale and Anglo American are the companies that will sail smoothly into the next phase of global economic growth. One-trick ponies, such as FMG, will either buy a new pony or fade from the headlines.
As you digest that suggestion, here’s snapshot of what to expect in the BHP Billiton and FMG profit statements, and what to watch for.
BHP Billiton will ride out the forecast slide in net earnings from $US17.2 billion to $12.5 billion because it is widely expected, and because management is likely to silence any critics with a strong final dividend that will take the full year’s payout from $1.12 to $1.17.
Apart from the profit and dividend, there will be close attention paid to any announcements on additional cost-cutting, and possible project delays, such as the long-term deferral of the Jansen potash development in Canada.
FMG’s profit, which is tipped by analysts to come in at about $A1.2 billion, should be accompanied by a dividend of about 8c a share, and a forecast of a higher profit in the current year as the existing iron ore price of $US140 a tonne delivers strong income flows.
But what investors will be watching closely for are signs that this year (or next) may be the peak in the iron ore cycle and that FMG is serious about reducing its sky-high $17 billion in total liabilities by doing more deals, such as that on a magnetite development with Formosa Plastics or by selling assets such as its rail and port facilities while prices are high.
The market will also be looking for proof that FMG can keep its costs down in the long term and that recent cost reductions and the Formosa deal were not just window dressing to please its bankers.
Sliced and diced in any way you like, the next few days may eventually be seen as a watershed period for mining, with the boom years of iron ore giving way to recovery in other metals – which is why diversified miners, over time, always deliver better returns than one-trick ponies.
