Fortescue Metals Group shares fall on 88 per cent profit dive

Iron ore sank last month to the lowest in at least six years as Rio Tinto and BHP Billiton Ltd.in Australia and Brazil’s Vale SA boosted cheap supply, betting higher volumes would offset lower prices.

Weaker domestic consumption prompted China steel mills to seek overseas buyers, sending exports 27 per cent higher to 62.13 million tons in the first seven months.

BHP is due to report interim results on Tuesday afternoon AEST. It closed down 4.8 percent at 1,934 yuan.

This requires quite a strong acceleration in the sectors that consume the bulk of steel, namely housing construction, infrastructure and manufacturing. Could you say with more than 50% accuracy that they will?

BHP and Rio have defended their strategy of expanding output into an oversupplied market.

The miner has driven down its production costs to $16.20 a tonne this year, $2 lower than a year ago, enabling it to cope with falling prices of the steelmaking raw material, Ren Binyan said at a press briefing.

This should make the cost including freight and royalties around $25 a tonne, well below the current Asian spot price of $53.30.

Ren said Rio Tinto was keeping a close eye on the impact of China’s currency devaluation on iron ore demand, but said the rise in the U.S. dollar was positive for the company.

Fortescue reported that net income plummeted 88 percent to $317 million in the year ended June 30, missing the $417 million average of 12 analysts’ estimates compiled by Bloomberg.

Same too for investors who took a stake in Santos Ltd (ASX: STO) or Senex Energy Ltd (ASX: SXY) in recent days after those producers reported an 82% fall and an 87% fall in profits after tax respectively.

The company shipped 165.4 million tonnes of iron ore during the period, up 33 per cent on the previous year.

But whether rising dividends, cost-cutting and curtailing capital expenditure will be enough remains questionable. A limited range of fluctuations should be expected, says China Metals.

The chances are that the first step of downgrading China’s peak steel output won’t be enough and BHP will have to do more to adapt to the reality of sustained low commodity prices. “Mining companies are usually the most optimistic about demand conditions”.