BHP Billiton Ltd., Vale SA and Rio Tinto Group, the world’s three largest mining companies, are set for record profit totaling $52 billion as they accelerate earnings growth at the expense of their biggest customers.

The companies, also the largest iron-ore exporters, may post an average 66 percent jump in the annual earnings they report this year compared with 2007, according to analyst estimates compiled by Bloomberg. In contrast, ArcelorMittal, Baoshan Iron & Steel Co., Posco and Nippon Steel Corp., the largest publicly traded steelmakers, may see an average 31 percent slump in profit over the same duration.

The contrasting fortunes will probably widen further this half should steelmakers fail to pass on rising iron ore and coal costs, forecast to peak in the second quarter, according to Bank of America Merrill Lynch. 

(Bloomberg)















The steel producers have struggled to adapt to changes in raw-material pricing introduced last year as mining companies ended a decades old system of annual contract talks in favor of quarterly accords.

“It was a dramatic impact,” said Charles Kernot, director of metals and mining at Evolution Securities Ltd. in London. Mining companies are going to see “very significant earnings growth,” he said.

BHP led the change to price iron-ore and coking-coal sales each quarter, saying it better reflected shifts in the market. Steelmakers opposed the move, arguing it hampered efforts to predict costs and pass them onto consumers.

“The pricing power remains firmly in favor of the miners,” Richard Knights, an analyst at Liberum Capital Ltd., said by phone from London. “The change to quarterly pricing has been significant because if we had settled iron-ore and coking- coal prices in March last year, the average achieved price over the course of the year would have been significantly lower.”

In January of last year, analysts estimated that the iron- ore annual benchmark may increase 30 percent to 50 percent in 2010 from 2009’s $61 a metric ton. Instead, the first quarterly contract for BHP’s ore was set starting April 1 at $120, double the previous annual price, according to UBS AG. It rose for two of the three subsequent quarters and was set at $143 for the current quarter, UBS said.

Vale and London-based Rio also ship coking coal, and BHP is a partner in the world’s biggest exporter, the BHP Billiton-Mitsubishi Alliance. Steel producers use about 1.6 tons of iron ore and half a ton of coking coal to make 1 ton of the alloy.

The combined cost of the raw materials may peak next quarter, Merrill said in a Jan. 25 report. The contract coking- coal price may leap 78 percent to a record $400 a ton during the quarter, the bank said. Credit Suisse Group AG said last month that the spot price of iron ore could jump to $250 a ton.

“2011 will see record amounts of cash generated by the industry,” said Andrew Keen, an analyst at HSBC Holdings Plc in London. “You are seeing high coking coal, very high iron ore prices and that’s all accreting to the miners.”

BHP, the world’s biggest mining company, may report record profit of $21 billion for the year ending June 30, according to the average estimate of 16 analysts surveyed by Bloomberg. The company’s iron-ore unit delivered 26 percent of BHP’s earnings in the previous fiscal year and may contribute about a third of earnings before interest and tax for the first half, Liberum Capital said. BHP will report first-half results on Feb. 16. (Bloomberg)