Australia's Iron Ore Giants Are Under Pressure in The Second Half

Many analysts and industry insiders are pessimistic about the future of commodities because of fears of a global recession. Australian iron ore giants Rio Tinto and Fortescue are the first to suffer from falling iron ore prices, soaring costs and Labour shortages and are unlikely to continue their run of record profits.

The price of iron ore plummeted in the early days of the pandemic before recovering sharply in 2021 as the broader global economy began to recover, reaping huge profits for mining companies.

Both Rio and BHP nearly doubled their 2021 profits from 2019, while Fortescue tripled over the same period.

However, the days of the iron ore giants lying on their backs making money may be over. Rio Tinto's first-half earnings could fall by about a third, according to estimates, while ForMG's annual profit could fall by 40%.

Rio Tinto, which is expected to report earnings on Wednesday, and BHP Billiton, which is expected to report its half-year results in mid-August, are both listed in the United States through ADRs.

Ubs analyst Lachlan Shaw said the continued decline in iron ore prices would weigh heavily on the results of Australian mining giants such as Rio Tinto.

Added to rising high costs, earnings momentum for the iron ore giants will slow further, particularly in the second half of 2022 and into the full year, Shaw added.

Western Australia is home to the vast majority of Australia's proven iron ore resources, but the region is short of skilled Labour. A surge in global inflation could also dampen the earnings prospects of iron ore giants this cycle.

Notably, Rio Tinto and BHP Billiton have both recently warned about the outlook for the industry. Unlike Rio, however, BHP, the world's largest listed mining company, is expected to report 30 per cent growth this year, thanks in part to its investments in commodities, including coal. Prices of fossil fuels such as oil and coal received a significant boost following the outbreak of the Russian-Ukrainian conflict.

Inflation and aggressive interest rate hikes will lead to a sharp slowdown in the global economy, with both the energy and materials sectors likely to struggle in the coming years, research firm Capital Economics has warned. While high costs may support metal prices, they will continue to weigh on corporate profits.