Australia's iron ore miners will report higher profits next month, thanks to 12 months of brutal cost cutting and a huge increase in export volumes, which have more than offset lower export prices.
But the trend for higher exports to outpace price declines is set to reverse soon. The new financial year is expected to herald the start of an earnings decline for the nation's iron ore industry that could run for several years.
While the methods that have delivered better profitability in 2014 will be deployed again – Australian miners are expected to raise iron ore exports by 12 per cent in 2014-15 – most are tipping bigger declines in iron ore prices, with consensus suggesting the benchmark price will be between 15 per cent and 20 per cent lower.
The lower profits are likely to be most pronounced at single-sector iron ore miners such as Fortescue, Atlas and BC Iron, whose net profits after tax are tipped to fall by between 30 per cent and 50 per cent in fiscal 2015. That's despite plans to raise export volumes by more than 25 per cent at Fortescue and 17 per cent at Atlas.
BHP Billiton and Rio Tinto produce several commodities, but both rely on iron ore for more than half their earnings and the iron ore divisions of both are also tipped to suffer a slide in earnings over the next three years.
The outlook is rosiest at Rio, where the falls are expected to be slight, and halted by a strong improvement in earnings towards the end of the decade when iron ore shipments are tipped to explode towards 360 million tonnes a year.
The federal government's commodities forecaster, the Bureau of Resources and Energy Economics, in a recent outlook paper on the sector, said the volume of iron ore exports had risen by about 21 per cent in 2013-14 from the year before, while the value of iron ore exports rose by 30 per cent. But in the 2015 financial year, the forecaster expects a 12 per cent rise in export volumes to provide just a 3.1 per cent rise in export value.
The trade-off for investors of a low iron ore price is the fall in capital spending, particularly at BC Iron, Atlas and Fortescue.
Bell Potter analyst Stuart Howe said the expected trend for declining profits should not scare investors away from certain picks in the iron ore sector.
"You might see profits falling away on falling commodity price outlooks, but dividends could hold up or in fact increase," he said.
BC Iron is particularly known for its strong dividends, while all other iron ore miners have also hinted at better dividends in the near future.
"The likes of Fortescue should be able to increase dividends as capital spending falls and they get debt under control, so that's something for retail investors," Mr Howe said.
"BHP and Rio will be shielded to some extent by their more diversified businesses, enabling progressive dividend growth."
The benchmark iron ore price has been below $US100 a tonne since May 16.
Source:Sydney Morning Herald