The Motley Fool

The Good Times Are Over For Rio Tinto plc and BHP Billiton plc

Both Rio Tinto (LSE: RIO) (NYSE: RIO.US) and BHP Billiton (LSE: BLT) (NYSE: BHP.US) entered 2014 with a spring in their step. The two mining behemoths had spent much of 2013 slashing costs and ramping up output, which, when combined with a high iron ore price, meant that both miners reported strong profits during the first few months of the year. 

The industry was optimistic, so optimistic in fact, that Rio surprised investors with a 15% dividend hike and there was talk of BHP instigating a multi-billion dollar share repurchase programme. 

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However, since the beginning of this year, the price of iron ore has crashed to a near two-year low, completely changing the outlook of these mega-miners.

Falling profits

Unfortunately, during the past few weeks, as worries about the state of China’s economy have grown, the price of iron ore has crashed below theBHP Billiton physiological $100 per ton level. And now, some analysts believe that the price of the commodity could fall as low as s $86 per ton, although on average most analysts believe that the price of ore will settle around $90 per ton for the rest of 2014.

A price of around $90 per ton for the rest of 2014 is a far cry from the price of $135 per ton reported at the end of 2013, a time when both BHP and Rio were reporting record levels of profit and output.  Actually with the price of iron ore down approximately 26% year to date, it’s reasonable to suggest that BHP’s and Rio’s profits will fall by a similar double-digit percentage. 

Hitting out

opencast.miningGlencore Xstrata’s (LSE:GLEN) CEO Ivan Glasenberg has hit out at both BHP and Rio, blaming them and their management teams personally for depressing the iron ore market, effectively shooting themselves in the foot.

Indeed, these two miners have spent billions expanding existing iron ore mines, swamping the market with new supply, at a time when consumption is falling as the Chinese construction sector slows. 

According to Mr Glasenberg:

“[Iron ore] prices are coming off because we are see massive expansions coming from our major competitors…They continue to expand these brownfields and put more supply into the market.”

This is not the first time Glencore’s CEO has attacked BHP and Rio. It’s well known that Glencore’s management team as a whole is against the mega-mining projects that Rio and BHP have embarked on during the past few years, many of which have since been postponed, or cancelled. 

Glencore touts itself as the only miner with real diversity. The miner owns a vast array of assets such as gain, oil, mining and the marketing side of the business. What’s more, Glencore’s only real exposure to iron ore is through the company’s trading arm and a $1bn iron-ore project just approved within Mauritania. In comparison, Rio derives 90% of its earnings from iron ore.

Foolish summary

Overall, throughout the rest of 2014 Rio and BHP are going to find it tough going after a buoyant start to the year.

Hopefully, the price of iron ore will find a bottom soon and declines will slow but even if this does happen, it’s likely that both BHP and Rio will have to adjust their near-term profit forecasts.

Risky business

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Rupert does not own any share mentioned within this article.