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BHP and Rio Tinto's solid output masks shaky demand

By Sonali Paul

MELBOURNE (Reuters) - BHP Billiton and Rio Tinto are set to report this week solid iron output for the September quarter, but prices and cost will be the top concern for the miners as even their most profitable division is hurt by slower Chinese demand.

The production reports by BHP, the world's biggest miner, and Rio Tinto, the No.3 miner, will be closely watched for signs of how weaker consumption of steel in China is playing out on demand for commodities such as iron ore and coal.

Weaker demand for resources is fueling worries that a decade-long mining boom in Australia is faltering. BHP and Rio have in recent months been cutting jobs, closing coal mines, shelving expansions, selling assets and scaling back spending.

The main concern of investors is how the companies manage profit margins for iron ore, given that they are among the lowest cost producers and will continue digging as much as they can, shareholders and analysts said.

"The biggest challenge is managing costs. It's not a question around volumes," said Ric Ronge, a portfolio manager at Pengana Capital, which owns shares in Rio Tinto and BHP.

Rio Tinto, the world's no.2 iron ore miner behind Brazil's Vale , and world no.4 iron ore miner Fortescue Metals Group are both due to report September quarter production on Tuesday, with BHP reporting the next day.

Despite a 34 percent rebound in iron ore prices from a low of $87 a metric ton (1.1023 tons) in September, prices remain more than 20 percent below this year's high.

"Given the volatility over the past quarter, investors will be looking for the companies' comments on current market conditions, particularly for steel making raw materials," said Rob Craigie, an analyst at broker FW Holst.

Fortescue is likely to give the clearest view on market conditions as it is the only one of the three iron ore miners holding a briefing after its production report.

FOCUS ON SHIPMENTS

Any reduction in shipments rather than production would provide more evidence of weaker demand in China, where steel mills had been running down stocks of iron ore to historically low levels as local, higher cost iron ore producers continued to dig up ore despite losing money.

Rio Tinto said this week that around 100 million metric tons of Chinese iron ore output had become unprofitable.

For Rio, UBS is forecasting iron ore production at its Pilbara operations in Western Australia to fall 4.8 percent from the June quarter to 47.3 million metric tons in the September quarter, but said shipments could increase using supply from inventory.

Analysts expect the firm to maintain its production guidance at 250 million metric tons on a 100 percent basis for calendar 2012.

UBS expects BHP's iron exports to be flat quarter on quarter and possibly down slightly, as export figures from Port Hedland, used by BHP and Fortescue, showed a 4 percent drop for the September quarter from the June quarter.

Fortescue is expected to report a 15 percent drop in iron ore shipments quarter on quarter due to its expansion work, following a record in the June quarter, but the focus will be on progress on its ramp up to 115 million metric tons a year capacity.

The debt-laden firm last month slammed the brakes on its plan to triple capacity to 155 million metric tons this year as the iron ore price slump forced it to slash spending. It managed to raise $5 billion last week, $500 million more than planned, to help refinance debt and shore up its funding.

COAL GLOOM

Coal prices are an even bigger concern than iron ore prices, as demand for both thermal coal for power and metallurgical coal for steel making have been depressed by China's slowdown.

Spot prices for metallurgical coal are down more than 25 percent since July at around $150 a metric ton, while thermal coal has fallen about 30 percent this year to $86 a metric ton. Production cuts by major miners are expected to help shore up the market.

"BHP's proactive stance is certainly necessary but will also help stabilize the market sooner than would have been the case," said Octa Phillip analyst Lawrence Grech.

While BHP has shut its Norwich Park mine and is in the process of closing its Gregory mine in Queensland state, UBS expects its output to rise slightly thanks to the end of work stoppages at the BHP Mitsubishi Alliance mines that were hit by an 18-month dispute.

On copper, a bright spot for both companies in the year ahead, improving grades are expected to boost production sharply over the next 12 months.

(Editing by Ed Davies)

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