COLUMN-Time for big miners to go contrarian on commodity supply?: Clyde Russell

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, July 18 (Reuters) - It may be time for big, diversified miners such as BHP Billiton and Rio Tinto to engage in some contrarian thinking about their businesses.

Both BHP and Rio released production reports this week that on the surface were fairly positive, yet the market reaction was underwhelming, heightening a trend whereby the share prices of resource producers lag the prices of the commodities they sell.

BHP, the world's largest miner, boosted iron ore output 15 percent in the June quarter and said it expects to lift its production by 5 percent in the 2013 financial year that started this month.

Rio, the world's second-largest iron ore miner, did have flat quarterly output, but it also said it would make its bullish 2012 target of 250 million tonnes of the steel-making ingredient.

There were no real nasty surprises in either report, with BHP acknowledging that its margins in coking coal had been hurt by industrial action at its mines in Australia's Queensland state, but even so the company managed to increase output 2 percent when some analysts had expected a decline.

Rio trimmed its guidance for mined copper by 3 percent to 580,000 tonnes for 2012 even though it boosted production of the industrial metal 5 percent in the June quarter.

Both companies also remained committed to large capital spending on projects to boost output despite slowing growth in major consumer China, renewed recession in Europe and a less than stellar expansion in the United States.

Tom Albanese, Rio's chief executive, said the projects still add up even amid concern about global growth.

"Our investment programme remains resilient to this market volatility, as our tier one projects are robust under any probable macroeconomic scenario," he said in a statement after Tuesday's report.

The problem for Albanese and his BHP counterpart Marius Kloppers, is that the market doesn't seem to believe them, and appears not to be have much faith in the outlook for big commodity producers for some time.

BHP's shares have dropped 12 percent so far this year in Sydney, while the S&P GSCI index of commodities is down only 1.9 percent as of Tuesday's close. While the S&P GSCI is weighted toward oil products, it's worth noting that BHP's petroleum division accounts for about a third of revenue.

Since the start of 2009, when both shares and commodities started to recover after the 2008 financial crisis, BHP is down 0.3 percent while the S&P GSCI is up almost 98 percent.

To put this in perspective, BHP has underperformed Barclays Plc, which has gained 3.7 percent since the start of 2009, despite the recent Libor scandal and being subject to the financial sector's suffering at the hands of the European sovereign debt crisis for much of the past three years.

Rio fares a little better, if the basis for comparison is switched to iron ore, which is the miner's main profit earner.

Since January, Rio is down 12 percent while Asian spot iron ore has dropped 5.4 percent, while since the start of 2009 Rio has gained 77 percent to iron ore's 73 percent increase.

Even allowing for the slowing Chinese economy, there seems little logic to resource companies like BHP underperforming a bank like Barclays, which is in a sector at the heart of the global economic problems.

I used Barclays as an example of a company that has some serious issues but is still outperforming BHP.

To look at a bank that would compete for investors' attention in BHP's home market of Australia, one could single out Commonwealth Bank, which is up 12 percent year-to-date and 91 percent since the start of 2009.

It seems investors don't like what they see when they look at the likes of BHP and Rio, and worries over China can only be part of the story.

There is also concern that the two may over-invest and then not be able to make sufficient returns on the capital spending, and the relative lack of dividends can limit the appeal to shareholders.

If the aim of the CEOs is to boost the share price, clearly the strategy being followed isn't working as well as it should.

It would be interesting to see what would happen if BHP and Rio, and other firms in the same boat such as Anglo American, decided to cut back on capital spending while simultaneously returning more of the cash they are generating to shareholders.

This could have the double benefit of boosting the shares while at the same time switching the market's focus to the possibility of an under-supply in commodities in a few years rather than the current fears of too much product chasing slowing demand.

This would only work where Rio and BHP didn't face numerous competitors, making iron ore the top candidate for slowing growth in output.

Brazil's Vale, the world's top producer of iron ore, has ambitious expansion plans similar to those of BHP and Rio, but it may also be tempted to ease back on the growth accelerator on the prospect of higher prices for existing production.

Australia's number three producer behind Rio and BHP, Fortescue Metals Group, plans to double its annual output to 155 million tonnes by mid-2013, but it is also facing higher costs and may see some slippage in its timetable.

Sea-borne coking coal and copper are other commodities that would be likely to jump if there was a suggestion that project expansions may be curtailed or delayed.

However, it's very unlikely that companies like BHP and Rio will row back substantially from their expansion plans.

More likely is that their CEOs will talk up the prospects of ongoing demand growth from China and other developing nations, while perhaps easing up slightly on the capital spending, but probably not enough to assuage market concerns.