Record Production Can’t Save BHP Billiton plc And Rio Tinto plc On Its Own


Rio Tinto (LSE: RIO) (NYSE: RIO.US) produced another positive set of production figures in its third quarter results, released today, cheering markets and driving the share price up nearly 2.5% in early trading.

There was plenty to celebrate, with record iron ore shipments, and record production and rail volumes.

Copper output only rose 1% to 151,800 tonnes, but Rio still expects to produce 615,000 tonnes of copper this year, up from its previous guidance of 585,000.

Way to go, Rio.

China Surprise

All the miners, including Rio’s fellow FTSE 100 giant BHP Billiton plc (LSE: BLT) (NYSE: BBL.US), have benefited from surprisingly positive Chinese data this week, which showed exports and imports up 15.3% and 7% respectively in the year to September.

Investors have dumped mining stocks in recent months over fears of a Chinese hard landing, but this trade data has persuaded bargain hunters to sharpen their elbows.

The cyclical mining sector has been hit hard by the recent slide in market sentiment, as investors worry over the global recovery, and the impact of US Federal Reserve tightening on emerging markets.

I sold my stake in BHP Billiton early this year, for exactly that reason. With the stock down nearly 15% since then, I have no regrets.

But is now the time to leap back into this sector?

Heavy Metals

The answer depends on how you view BHP and Rio’s current production strategy. Ramping up supply as demand begins to fall can only mean one thing for metals prices, but there is a method to their apparent madness.

Both companies have the scale to cope with falling commodity prices, by investing billions in impressive cost-cutting measures, of which the most eye-catching are the new 3km robo-trains snaking through North Western Australia, part of a drive to fully automate their cargo systems. 

Automation has helped BHP cut its iron ore production costs from $100 to $30 per tonne. Smaller miners can’t compete at this level, and falling metals prices could drive many rivals to the wall.

Saudi Arabia appears to be following a similar short-term low pricing strategy, in a bid to out-gun tar sand and oil shale producers.

Dig Deep For The Miners

Ramping up production may drive metals prices even lower but, combined with efficiency savings, it could make sense.

Investors in BHP Billiton and Rio Tinto should brace themselves for more short-term pain, but the ultimate reward could be long-term market dominance.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.