Update BHP Billiton
On January 20 BHP Billiton (BHP) announced that second-quarter iron ore output rose 11% to a new record on heavy demand from China. The company also reported increased production of petroleum, zinc, diamonds, and nickel. Production of coking coal, uranium, and copper declined.
Continuing the shift in how prices are set on the global iron ore market, BHP Billiton said that 46% of its iron ore shipments from Western Australia were sold at market rates.
Update BHP Billiton (BHP)
When I added BHP Billiton (BHP) to my Jubak Picks 50 portfolio in my book The Jubak Picks I said that the company was a one-buy way to get exposure to a wide spectrum of commodities.
In the first half of 2009 that diversification paid off big, the company reported on August 12. The company’s iron ore business reported an operating profit of $6.2 billion; the base metals (copper, lead, zinc, and such) division reported $4.6 billion in operating profits; and the oil business reported $4 billion in operating profits.
That diversification didn’t prevent company’s revenue from falling (by 16% from the first half of 2008) or pre-tax profits from plunging by 67% from the first half of 2008.
But it did provide enough stability so that the company was able to maintain its dividend payout of 41 cents a year for the six month period. Competitors Xstrata (LSE: XTA.L) and Anglo American (OTC: AUKY.PK) have both suspended their dividends.
Trading halted in Fortescue Metals: more cash from China on the way?
Trading in Australian iron ore miner (and Jubak’s Pick) Fortescue Metal (FSUMF.PK) has been halted in anticipation of the release of news on Monday that the company has completed a ”commercial negotiation”.
Speculation in Australia is that the news will be that China’s sovereign wealth fund, China Investment Corp. (CIC), has decided to invest $1 billion into Fortescue. CIC, rumors go, will get convertible bonds in exchange for its cash.
The new money would go a long way toward funding Fortescue’s goal of expanding producton to an annual 95 million metric tons by sometime in 2012. Production is now running at a rate of about 35 million tons a year.
China plays hardball on iron ore but the iron ore miners are the winners so far
China has so far refused to sign a long term contract with the world’s big iron ore exporters, Vale (VALE), BHP Billiton (BHP), and Rio Tinto (RTP). The goal was to get a big price break on iron ore prices. But it now looks like China’s tough stance has backfired. Chinese companies are now either buying iron ore on the spot market at prices about 50% higher than those in the annual contracts signed by Korean and Japanese steelmakers back in April,or scrambling to sign side deals at the price set by Korean and Japanese buyers.
The result is that spot iron ore prices are booming. The big three iron ore exporters are getting higher prices for their ore than they forecast just a few months ago. And Chinese steelmakers are announcing huge price increases for their products just as China tries to revive its economy with a big shot of spending on iron and steel-intensive infrastructure.
The key to commodities investing now is idle capacity. And how quickly it gets back into production
In its regular report on June iron ore production, delivered on July 22, BHP Billiton (BHP) gave investors the key to investing in commodities over the next year. Ignore this at your portfolio’s peril. BHP just told us all what to buy, what to avoid, and when.
Ready for those words of wisdom: “Commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry.”
Let me translate into language useful to investors: Yes, commodity prices are climbing as consumers of raw materials rebuild their stock piles. And yes, we are seeing what is a real increase in demand and not just a result of inventory rebuilding. But don’t get carried away by short-term spikes in commodity prices. So many commodity producers have idled mines or wells or whatever that any big increase in price will be temporary as it will bring that idled capacity back into the market. And that will depress prices–for a while. Expect, then, a start-stop price chart where the trend is gradually higher, but where the trend is punctuated by spikes and plunges as demand and supply lurch toward equilibrium.
And from that I think investors should be able to figure out what commodity stocks to buy. I’ll lay out three general prices of commodity investing–in the current scenario–in this post. And I’ll give you a stock to buy later today.
