COLUMN-Upbeat miners at odds with gloomy commodity investors: Clyde Russell

Thu Apr 18, 2013 2:09am EDT

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

By Clyde Russell

LAUNCESTON, Australia, April 18 (Reuters) - There is an increasing disconnect between the gloom in commodity markets and the upbeat assessments in the latest production reports from the world's biggest miners, BHP Billiton and Rio Tinto.

Commodity markets continued to drop on Thursday, with Shanghai copper falling by the daily limit of 4 percent to an 18-month low, Brent crude hitting the lowest since July and another 1.5 percent decline added to gold's rout, which is now 15 percent since the start of the month.

It seems that bullish views on commodities have capitulated as investors become increasingly pessimistic following China's weaker-than-expected gross domestic product growth and some disappointing economic numbers in the United States.

However, reading the quarterly reports from BHP and Rio Tinto gives an entirely different perspective on the market, with the miners boosting output of most commodities and re-affirming commitments to further increases.

The obvious difference between the negative sentiment in the market right now and the views of the world's two biggest mining companies is that the miners will focus more on the medium- to long-term, and that they have an interest in talking up the prospects of the commodities they produce.

Nonetheless, there was no hint in either quarterly report that BHP and Rio see a market on the verge of a major correction, or that they see demand for natural resources evaporating.

Rather, it was quite the opposite, with BHP talking about a "robust" performance while Rio said it was a "solid" quarter and it was making "good progress" in cutting costs and delivering new projects.

Rio, the second-biggest iron ore producer after Brazil's Vale, boosted output of the steel-making ingredient by 7 percent in the first quarter of 2013 from a year earlier.

It also remains on track to increase capacity to 290 million tonnes a year from 237 million currently at its Western Australia operations by the third quarter of this year.

BHP boosted its iron ore output by 3 percent in the March quarter from the same period a year earlier, and said it was on target to increase annual output to 220 million tonnes by March 2014 from 183 million now.

For BHP, copper output gained 9 percent, coking coal 22 percent and aluminium 10 percent in the March quarter from a year earlier.

Rio also boosted output of copper by 26 percent, that of semi-soft and thermal coal by 28 percent and aluminium by 6 percent.

The logical question to ask is why are these companies increasing output of key commodities at a time when the market thinks less of them are going to be consumed, or at least the supply will be more than the demand?

Given their commitment to cutting costs, exercising capital discipline and exiting non-performing businesses, why would BHP and Rio continue to increase output of iron ore, copper and coal, among others, as well as plan even more production?

In taking a longer-term view the companies look through short-term market volatility and what they are probably seeing is ongoing and growing demand for their products.

If they can manage to be the lowest-cost producers around, BHP and Rio are probably betting demand will hold up well enough for them to sell increased output at what will still be handsome profits.

Perhaps they have some reason to be optimistic, as a look at iron ore shows.

While China, which takes about two-thirds of the global seaborne iron ore trade, has seen imports remain flat in the first quarter, it would appear that BHP and Rio have been able to boost their share.

Detailed figures are only available up to February, but they show China's imports of iron ore from Australia gained 6.4 percent in the first two months of the year over the same period in 2012.

Second-ranked supplier Brazil saw imports drop 8.7 percent, while India, which used to be the world's number 3 iron ore exporter, saw an 87.6 percent plunge in shipments to China.

Given that BHP and Rio dominate Australian output, the Chinese data shows they have managed to increase their share of imports so far this year, and this on top of a 18.5 percent jump in imports from Australia in 2012 over 2011.

The same dynamic may be at work in copper, with BHP and Rio owning the giant Escondida mine in Chile, where BHP reported an increase in grade that boosted in-concentrate production by 61 percent in the nine months to end-March.

Even though copper prices in London are now down almost 17 percent from their 2013 peak in early February, BHP and Rio are likely benefiting from being low-cost producers even though the market is moving to a structural surplus.

It's harder to rationalise the increasing aluminium and coal output, given Rio's planned asset sales in both these sectors, and it will be interesting to see the profitability of these divisions when the earnings statements are released.

But overall, the impression gained is that the big miners are much more comfortable about the outlook for commodities than investors are.

Whether they are right, and the market is currently wrong, will depend on whether economic data from China and the developed world shows some sign of improving.

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