After releasing its production report for the recently-ended quarter, global mining giant BHP Billiton (BHP) will begin Wednesday’s trading session gingerly.
Despite a year-over-year increase of almost 7 million tons, the company came up half a million tons short of production expectations in its crucial iron ore segment for the period ending on Dec. 31, with quarterly output at 48.9 million. Meanwhile, the company’s oil production segment was 2.5 million barrels short of the average of estimates for a quarterly output of 60.2 million barrels.
These misses may seem fairly insignificant, but they become more troublesome when considered in context. Major miners spent the entirety of the aughts attempting to sate China’s voracious demand for iron ore and copper, and made a killing off of the higher prices that resulted from consistent supply shortages.
Widespread expectations that Chinese economic growth will be relatively less exponential in 2014, however, iron ore prices are sure to take a hit. On Tuesday, Goldman Sachs (GS) analysts provided just the most recent expression of bearishness by lowering its price targets for both iron ore and copper prices. Major mining stocks were immediately hit, with BHP’s colleagues Rio Tinto (RIO) and Vale SA (VALE) shedding over 3 percent each by the bell.
It’s not so much that Chinese growth and infrastructure spending is grinding to a halt, or even slowing that much at all, but even a slight reduction will drag prices lower. Furthermore, the biggest mining companies have been on a cost-cutting, production-streamlining bonanza, selling off or closing up their least profitable assets in order to focus on metals like iron ore and copper that were until recently so profitable. With all of the investment, shareholders may not be too happy that the company couldn’t hit targets for its bread and butter product.
The same could be said of oil production. BHP stands out from its competitors in this regard in particular, with its attempts to get in on the US shale oil and gas bonanza, ostensibly in order to acquire the experience necessary to replicate some of the same projects in Australia and, perhaps, even in parts of Asia. Given all the money it has thrown into oil production, shareholders will likely be unpleased with the shortfall in oil output as well.
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