Demand Headwinds Refocus Materials Companies

Due to weak macroeconomic conditions, as well as tempered demand from China, we’ve seen several materials firms announce structural changes. BHP (click ticker for report: ) announced plans to focus on cost cutting rather than production increases in the wake of weaker iron ore prices and end markets. Rio Tinto (click ticker for report: ), one of our favorite miners due to its attractive cost position, also announced cost cuts in its Australian mining business due to a long-term decline in demand growth from China. The firm thinks economic growth in the country could slow to 5%-6% by 2020, and we think a policy shift in favor of consumption rather than production could occur in the nation. Another diversified miner, Anglo American, has had strikes ravage production and expects weak results for 2012. AK Steel (click ticker for report: ) also must focus on the cost side of the equation, as it warned earlier this week that it would lose $0.34-$0.39 per share during the fourth quarter, almost twice the loss it previously expected. Though iron ore prices are lower, steel prices have also been lower.

With weak end markets for most commodities and declining optimism regarding Chinese resource consumption, we’re seeing cost control become more paramount than ever before. In 2010, following Chinese stimulus, companies were scooping up assets and struggling to meet demand, a condition far different than what we’re seeing today. Falling demand for steel production could impair demand for both metallurgical coal, as well as iron ore. On top of that, lower demand for energy, as well as carbon taxes could put some pressure on thermal coal consumption. Luckily, both BHP and Rio are in fairly solid cost positions.

                             Source: Valuentum Securities, Corporate Filings