(Reuters) – After pouring billions of dollars into producing more iron ore to feed China’s construction boom, the world’s mega miners now face a self-induced price slump and are counting on other commodities to revive their allure to investors.
Base metals copper and nickel, oil and gas, as well as more offbeat commodities such as fertilizer potash, are increasingly important differentiators between the kings of iron – Vale , Rio Tinto and BHP Billiton – and could be welcome sources of growth this year as iron ore languishes near two-year lows.
BHP’s oil and gas portfolio and Vale’s nickel production have attracted positive attention. Glencore Chief Executive Ivan Glasenberg, meanwhile, has spoken of the advantage of smaller exposure to iron ore, saying it provided an “opportunity against our peers.”
Lack of diversity has not been an issue in recent years as Chinese demand for steel to build cities, railways and ports tripled iron ore prices from 2008 to 2011 – a windfall for the “big three” who produce 70 percent of the world’s seaborne iron ore.
But in May the price fell below the $100 mark for only the second time in four years, as production jumps just as Chinese demand growth appears to be slowing. Although many analysts see the price perking up again later this year, the fundamentals are worsening and the trend is downward.
Like a giant tanker, these companies are not designed to change direction at the first sign of rough seas, but those that kept a bit of diversity could find themselves in market favor if the going gets tough.
In recent weeks, as the price of iron ore fell, BHP’s stock value actually rose, breaking into a negative correlation with the commodity for only the second time in as many years. Rio also decoupled slightly, but Vale followed the steel-making ingredient lower
“Rio and Vale are so exposed to iron ore, and their investment programs are geared towards that, it’s pretty hard to see how anything cushions (a fall in price),” said Paul Phillips, a partner at Perennial Growth Management, adding “BHP has significantly more options than either of the other two.”
Whereas Vale and Rio Tinto get over 85 percent of their profits from iron ore and pellets, BHP gets less than half with oil and gas making up a fifth.
“The difficulty with a stock like Vale is that it tends to follow the iron ore price, regardless of the pretty successful cost cutting measures going on at the firm. With prices weakening it’s hard to see where the value could come from,” said Robert Secker, investment specialist at M&G Investments, whose fund sold its Vale stake last month.
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