Production week starts with Rio

With the last major data drop from China now clear (it’s the first time in a very long time the market has cheered 'in line' results from China), bottom-up views can finally take centre stage.

Overnight, US earning season continued to dominate the headlines and overpowered macro data. This time it was Citigroup, which saw a 42% increase in second quarter profit, as trading revenue surged due to US markets activity increase and losses in the Citi Holding unit (the bad and doubtful debts unit); posting its smallest loss since its inception.

With Australian earning season now two weeks away, today sees the start of the final actuals before full year profit reporting in July/August.

The first look at cyclical plays comes from Rio, with the results scheduled for release at 3pm AEST.

Expectations are for iron ore output to jump by 5.4% year-on-year to 51.2 million tons - taking the total for 2013 to 265 million tons globally (Australia and Canada operations). With the average price of iron ore year-to-date now $134.70, second half results could see the full year results ramping up after a disappointing start to the year.

Concern for the Rio results stems from the amount of mine interruptions. Unseasonal wet conditions in the Pilbara could distort the forecasts for iron ore, and the Kennecott pit failure in Canada will almost certainly have an effect on copper mines. UBS expects future mining could be affected in the order of 100,000 to 200,000 tons if the pit wall isn’t fixed inside the next 12 months.

The other part of the result that will be closely monitored from a divestment point of view is coal production. Coal prices have been at historic lows, and could see Rio repeating very low margins if it hasn’t managed to create economies of scale.

Considering new CEO Sam Walsh’s mandate when he took over from Tom Albanese in February, the Riverdale and Coal and Allied assets will be under more pressure and could be set for divestment as RIO continues to stream line itself.

Tomorrow is the real trigger for cyclical stocks. BHP is releasing its fourth quarter sales and production results, unlike Rio it has not suffered anywhere near the kind of interruption which Rio suffered at its Pilbara sites. Iron ore output is expected to jump by 5.8% year-on-year to 40.9 million tons with medium estimates putting full year results in the order of 183 million ton for its Western Australian iron ore division.

The other advantage for BHP is its diversification, as the country’s largest producer of oil and gas petroleum output is expected to be 63.5 million barrels of oil equivalent (Mmboe) with full year forecasts now at 240 Mmboe, and this is where we believe BHP has the edge on Rio, as this revenue stream now making up 42% of BHP’s EBIT. Finally, the Escondida mine in Chile is also expected to jump up by 20% as copper output from the mine ramps up and will see strong long term results if this is the case.

Moving to other news that will affect the market today and 11:30am AEST will see the release of the RBA minutes. This will be an interesting statement considering the ‘very long time to deliberate’ off-the-cuff statement from Glenn Stevens following the cash rate decision. The expectation for an August interest rate cut continues to mount with the swaps market pricing in a 60% chance of a 25 basis point cut any signs of the board leaning this way will increase these bets and will see the AUD testing the 90 cent handle again.

Moving to the open, we are now calling the ASX 200 up 19 points to 5000 (+0.38%) as the ASX follows Europe and the US markets higher, and could see the market registering its sixth straight north print. BHP’s ADR continues to support the current rally in BHP, with the deposit receipts suggesting the stock should add another 19 cents today to $33.44 as iron ore continues to inch higher.

So let the bottom-up views rein as the market looks to test 5000.

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