BHP, Rio Tinto Hold Off Iron Ore’s Squeeze

Back in August 2012 when I came back from Australia, I blogged how Aussie was going to head for a slump due to China cooling and individuals in the Mining industry telling me they saw a halt in the demand. Well, the slump is well and truly here; however, some of the miners stayed out of trouble by not paying crazy prices for the mining pits. Furthermore, they sold off assets like railway lines. I fondly recall sitting with a hedge fund guy in Naples that told me he was buying the debt for Aussie mining railways. He was very happy that the demand was there into the future backed by Chinese contracts. I shared with him where I thought demand was going and the issue with enforcement of Chinese contracts, he told me I was full of S---! I wonder how much money he has lost? I do thank him though as he was one of the reasons that spurred me into creating and maintaining a blog looking into the future using my previous experiences. Aivars Lode

By Rhiannon Hoyle

SYDNEY—The world’s largest iron-ore mining companies have much in common with Big Oil right now: Each sector is grappling with slumping commodity prices cutting deeply into their financial results.

What some of the mining companies don’t share with the oil majors, though, are big write-offs on their assets.

While several oil companies took billions of dollars of impairment charges in their 2014 earnings, mining companies such as BHP Billiton and Rio Tinto have escaped writing down the value of iron-ore pits in Australia.

Vale SA, the world’s largest iron-ore producer, on Thursday posted a fourth-quarter net loss of $1.85 billion and wrote off $635 million on an iron-ore project in Guinea. Brazil-based Vale attributed the charge not to iron-ore prices, but to “uncertainties” regarding potential compensation for its investments in the concession, which the Guinean government revoked last year.

 By contrast, British oil company BG PLC wrote off US$8.9 billion against its assets, including a liquefied-natural-gas plant in Australia. BP PLC, also based in the U.K., wrote off $3.6 billion, primarily on its upstream, oil-producing assets, while Total SA of France took a $6.5 billion charge against some of its shale and oil-sands ventures.

Both iron ore and crude oil halved in value last year amid emerging supply gluts. 

But the mining companies’ profits haven’t taken such a large hit, partly thanks to timing, and partly because their low-cost mines remain handily profitable despite iron ore’s slump. 

By contrast, many sizable oil companies have made large investments in recent years in projects that need oil prices far higher than their current level to break even. 

The mining companies “haven’t paid for the sort of growth oil majors have, in an environment where prices were as high as they have been in the past couple of years,” said Mike Elliott, global mining and metals leader at professional services group EY.

“For a lot of these oil majors, though, they acquired properties when the oil price was above $40 or $50 a barrel. That means when you come back to $50 a barrel you are exposed,” he said.

The divergence in fortunes has its roots in iron ore’s rapid rise from an unloved commodity to an important profit engine for BHP and Rio Tinto, largely because of the rapid urbanization in China, where iron ore is used to make steel for things as diverse as cars and apartment buildings. 

BHP and Rio staked out vast tracts of the Australian Outback more than a decade ago when iron-ore prices were a fraction of current levels. As a result, mining companies’ balance sheets weren’t saddled with assets bought when prices were high. 

In 2000, when Rio Tinto acquired North Ltd. for $3.5 billion to become the world’s No. 2 iron-ore producer, the commodity was trading at roughly $20 a ton. The ore’s price eventually rose as high as $190 a ton in 2011. Despite its recent slide, it still trades at $65 a ton. 

Also, BHP and Rio Tinto had existing infrastructure such as ports and rail networks in place that allowed them to keep costs in check when expanding their Australian mining operations. 

That allowed them to sidestep massive paper losses faced by rivals such as Anglo American PLC, which has been forced to take hefty impairment charges in recent years after the cost of a iron-ore mine it has built in Brazil grew to more than triple its original budget.

“In mining, the holes in the ground are relatively low-cost—building your rail and port infrastructure are the big-ticket items,” said Melbourne-based Pengana Capital fund manager Tim Schroeders. “For BHP and Rio, they were in early and did that at an order of magnitude below the others.”

Icy Stillness and Muted Fishing in a New England Port

Is this man made? I can't wait for how the man made climate change guys will explain this weather.  Aivars Lode

By Katharine Seelye

NEW BEDFORD, Mass. — Mark Abraham, who has fished the New England coast for decades, kept a sharp eye on his catch as the slimy haddock spilled onto a dockside conveyor belt. He had just returned from 10 frigid days at sea, among the most brutal he has spent.

“It’s probably been the worst winter in 10 years,” he said as workers sorted the fish by weight and slid them into bins. “It’s not even the ice that’s stopping you, it’s the wind. It’s too rough to fish. If it’s rough like that, you don’t catch anything.”

This winter has pounded much of New England with record snowfall, encased the region in a deep freeze that has kept the snow from melting, and disrupted work, school and lives in general for millions of residents. Here in New Bedford, the top commercial fishing port in the nation, the winter has also slowed commerce, as was instantly apparent from Mr. Abraham’s relatively meager haul.

He unloaded 18,800 pounds of haddock at the Whaling City Seafood Display Auction here; Richard Canastra, president of the auction, said that in good weather, Mr. Abraham might have brought in 40,000 pounds.

A glance at the historic harbor, the epicenter of the whaling industry in the 19th century, when New Bedford was the richest city per capita in the world, also tells the story.

The Acushnet, the river that is the city’s lifeline to the sea — and the name of the New Bedford whaling ship that Herman Melville shipped out on in 1841 — is nearly frozen over. Vast ice floes clog the harbor, and many smaller vessels are locked in place. For an active port, it is astonishingly still. Nothing moves for hours.

Old salts who know their history know the dangers of trying to navigate waterways caked with ice. The Whaling Disaster of 1871 was a teachable moment, when 33 whaling ships, many of them from New Bedford, were trapped in the Arctic off the Alaskan coast; the ice tightened like a noose around four of the vessels and eventually crushed their hulls.

For the first time in more than a decade, the Coast Guard in February issued “severe ice” bulletins for southeastern New England. “The severe frigid weather we have experienced for the past two weeks or so is expected to continue for at least another five days,” read one bulletin, issued Wednesday.

The Army Corps of Engineers has banned vessels shorter than 65 feet from Cape Cod Canal. The Coast Guard has no mandatory restrictions in place, but warns that buoys and other navigational aids have been submerged or blown off their stations and rendered useless. It recommends daylight passage only and one-way traffic.

“Virtually all mariners have adopted these measures,” said Edward G. LeBlanc, chief of the waterways management division of the Coast Guard for Southeastern New England.

Mr. LeBlanc helps assign the Coast Guard cutters that break up the ice, though the latest bulletin warned that the ice was so thick in spots that it could not be broken.

“Every day we look at where the ice is forming, what deliveries are expected and what ships need to get out,” he said. “Is it to bring in automobiles, which is important for the economy, or is it to bring heating oil and gas, which is vital to keeping people warm? Keeping ferries running to the islands is also key, not just a convenience but a necessity.”

Bigger fishing vessels, like the Humbak, on which Mr. Abraham sailed, continue to operate because livelihoods depend on them. Mr. Canastra, who runs the last fish auction in New Bedford, auctioned Mr. Abraham’s haddock to buyers and processors the morning after it was unloaded. They in turn sold it to restaurants and supermarkets. The prices have climbed, Mr. Canastra said, because supply is low and demand is high; heavily Catholic New England is in the Lenten season and needs more fish on Fridays.

From Jan. 1 through last Monday, Mr. Canastra said, the haul from all of his fishermen was 45 percent lower than in the same period last year. He attributed the decline to the weather as much as to federal quotas.

“In a way, the quotas are worse,” he said. “The storms are only two months of the year, while the quotas are 12.”

The harbor is not the only victim of the harsh winter. New Bedford is enduring record snowfalls and bitter temperatures; on Feb. 21, they plunged to 12 below zero. Like Boston, the city has had to truck snow out of its compact downtown to outlying snow farms. One of them, along the harbor here, is so vast that Jonathan F. Mitchell, the mayor of New Bedford, calls it a mountain range.

Mr. Mitchell said he had set aside $350,000 for snow removal but had already spent twice that, with little to show for it since nothing has melted.

“It’s a big pain in the butt,” he said. He had to close City Hall for several days, which also meant shutting down the schools and libraries, which in turn ground many businesses to a halt.

Over the last several years, New Bedford has done much to pull itself out of the economic doldrums that have stymied so many other old Northeast industrial towns. But one growing concern here is that the harsh winter may nip that progress because it knocked out the transit system in Boston. That could mean little political will — and no spare money — to build a long-promised commuter rail line between New Bedford and Boston, 60 miles away.

Mr. Mitchell said that while he wanted the rail service, it was not central to the city’s economic development strategy, which he said depended more on growth at the port and on building out the campus of the nearby University of Massachusetts Dartmouth.

The mayor has another plan in the works, saying that New Bedford could bolster Boston’s bid to host the 2024 Summer Olympics by staging the sailing races in nearby Buzzards Bay. Those races are tentatively planned for Boston Harbor, but, Mr. Mitchell said, “New Bedford may well be the best place in America to host Olympic sailing.”

If the ice ever melts.