UBS cuts earnings outlook at BHP, Rio

By Rebecca Keenan  |   2008-12-23  |     NEWSPAPER EDITION

BHP Billiton Ltd and Rio Tinto Group had their earnings forecasts cut at UBS AG after the bank lowered its estimates for coking coal prices as steel makers limit output.

BHP's profit may be US$13.3 billion in the year ending June 30, 2009, a 7-percent decline from previously forecast, UBS analysts led by Glyn Lawcock said in a report last Friday. Rio's profit may be US$6 billion in the year ending December 31, 2009, he said. That's 5.6 percent lower than previously estimated.

The global recession has curbed demand for steel, prompting mills in Asia, Europe and North America to slash purchases of raw materials. UBS cut its forecast for annual coking coal price contracts by 53 percent to US$85 a metric ton next year on "poor" demand.

Need for balance

"Production still needs to be taken down in order to balance with much lower demand," Lawcock said. This may make production from some producers in the United States and Canada unprofitable, he said in a separate report on the same day. BHP dipped 0.9 percent to A$29.64 (US$20.19) at the close in Australia. Rio fell 4.1 percent to A$37.40.

UBS cut its profit estimate by 21 percent for Centennial Coal Co, Australia's fourth-largest coal producer, and by 17 percent for Felix Resources Ltd, Bloomberg News said.

Xstrata Plc, the world's biggest exporter of power-station coal, had to accept a cut in prices for the coal sold to Japanese utilities, Citigroup Inc and Merrill Lynch & Co said last week. Contracts for coal to be delivered in the year starting January 1, 2009 have been settled at US$80 a ton, according to Citigroup and Merrill Lynch.