Ore Prices Put Iron in Earnings

BHP Billiton's Profit Jumps; ArcelorMittal, Rio Tinto Should Post Increases on Commodity Higher raw materials and metals prices are expected to lift earnings this year at the world's biggest steel and mining companies.

On Wednesday, BHP Billiton reported earnings for the six months ended Dec. 31 more than doubled. Results due out this week for the fourth quarter and full-year from ArcelorMittal, the world's largest steel maker, and Rio Tinto PLC, the world's third largest miner are expected to show the benefit of higher steel and iron ore prices.

Price increases are lifting profits for miners and steel makers. Above, a Rio Tinto mine in Western Australia.

Of course, the prices are prompting big steel consumers such as auto and appliance makers to forecast rising materials costs this year. Those higher costs could trickle down to consumers. Ford Motor Co. and Whirlpool Corp. said their raw material costs will be higher.

Over the last few months, demand for minerals and metals has risen because of the continued strength in China's economy and slow recoveries in the U.S. and, to a lesser extent, Europe.

As a result, steel prices have risen between 10% and 30% in the fourth quarter and through the end of January, depending on the metal and location.

The prices of steel are expected to continue to rise because so much production capacity was taken out in 2009, resulting in a weak supply-to-demand ratio.

The price of ingredients to make steel—iron ore and coal—are rising sharply. Spot prices for iron ore and coking coal are expected to rise between 30% and 40% in 2010, which is boosting the fortunes of Rio Tinto and BHP. Prices for annual contracts between miners and steelmakers are currently being negotiated but are expected to rise as much as 40%. A contract is expected by April.

BHP Billiton said profit for the six months ended Dec. 31 was $6.14 billion, up from $2.62 billion a year ago. Revenue fell 17.5% to $24.58 billion, from $29.78 billion a year ago. Still, BHP said it was cautious about the speed and strength of the global recovery.


Last month BHP gave its most positive outlook for commodities since the economic downturn, with iron ore a major component of its improved outlook. "During the December quarter, we saw strong price recovery driven by demand in China and restocking in the developed world," the company told investors in its latest report in January.


As a result, its costs will fall relative to other steelmakers that have to buy more iron ore and coal, but it will sell its steel at about the same price, resulting in higher profit margins. "The future is looking more positive for ArcelorMittal. It will earn extra margin," said Thorsten Zimmermann, metals analyst for HSBC Bank PLC.

ArcelorMittal is expected to report Wednesday that it swung to a profit in the fourth quarter of 2009, with analysts' earnings estimates averaging about 40 cents a share. A year ago, the company lost $2.63 billion in the fourth quarter 2008.