Whats up with BHP and RIO?

BHP (BHP) has fallen spectacularly – down 13.13% or $3.90 – in the last day on the back of the negative news coming out of Rio Tinto’s (RIO) – down 15.91% or $14.49 – third quarter production report. The fall in Rio’s stock price makes the the BHP 3.4 share offer now all the more likely.

On Wednesday afternoon, RIO (RIO) released its third quarter production report which stated that the China boom is over and that all the talk of the supposed “supercycles” in commodities is all but finished. Rio’s report suggested that demand from China has fallen significantly, and exports in commodities such as steel have dropped from all time highs, and imports of iron ore into China have been put off from suppliers in Australia and India. Additionally, Rio CEO – Tom Albanese – stated that China is “cooling off”, which the market interpreted as meaning a lower demand for commodities was being felt in China which consequently affected prices across the board.

Metal Prices are all down – gold, copper and so on – but the Australian Dollar is trading weaker, which should improve things for big exporters here – but this just doesn’t seem to be reflected in the current market at the moment. Mix this news in with the fact that the Dow Jones (DJI) plummeted more than 700 points overnight, and US Economic data was released indicating that a decline in retail sales has lead to lower consumer activity and lower manufacturing activity – and investors in Australia have been spooked.

Of course, Mr. Albanese comments that China won’t recover until next year didn’t help either company, and nor does the fact that the record iron ore and coal contracts that were part of the explosive growth of both companies are drying up in China. He stated most specifically:

Over time, as economy-wide inventories are dissipated, industrial production and commodity demand can be expected to accelerate. Nevertheless, it now seems clear that any bounce in net demand will be delayed until next year. The long-foreshadowed deceleration in economic activity has resulted in a marked reduction in Chinese commodity demand growth from the overheated levels we saw in 2007.

But we should expect that investment, construction and therefore commodity demand in a fast growing developing economy like China’s will have a cyclical pattern around a strong underlying trend. While apparent demand for steel making raw materials, copper and aluminium has slowed, lower prices mean that Chinese producers are facing margin pressure and should be expected to cut their production. For example, it is likely that the vast majority of Chinese aluminium producers are now making operating losses.

On the BHP (BHP) front – lower oil and gas prices are just hammering the companies stock price in addition to the negative market sentiment that is being transferred from Rio Tinto. If either Oil or Natural Gas were to improve in BHP’s favour, even slightly, in the next few days and a minor market correction were to occur in the US and Europe – then the price of BHP may very well improve on these positive indicators. These are definitively key factors that you want to be looking out for which will be reflected in the stocks price.

There is some news filtering through however that Rio Tinto (RIO) is going to get hammered by its refusual to negotiate with train drivers in the WA Pilbara region tomorrow which may spell bad tidings for BHP (BHP). If train drivers strike, then that may halt production deliveries – which in the current market – may not be the greatest thing for the company. It would seem that a lot rides on the overall overnight movement on the Dow Jones (DJI).