Russell: Copper is the driving force behind BHP and Rio but getting more of it is the key.

Copper's role as a major profit driver is highlighted in the latest results of BHP Group and Rio Tinto. However, they also highlight how difficult it will likely be to gain more exposure for this industrial metal.

BHP, the world's largest ?listed miner, reported last week a stronger-than-expected half-year underlying attributable profit of $6.2 billion, up 22% from the same period a year earlier.

The results were notable because for the first time, the miner received 51% of its operating income from copper. This was more than iron ore.

Rio Tinto also experienced a similar dynamic, as annual iron ore revenues dropped to 60% of total miner earnings, from 70% the year before, while copper earnings doubled, to 30%.

Copper's greater contribution to mining company earnings can be explained by the price fluctuations. Iron ore has been struggling due to a softer Chinese steel industry and a rising supply.

London copper futures ended Monday at $12,868.50 per metric ton, a slight decline from the previous session. This is 11.4% lower than the record high of $14,527.50, which was reached on January 29.

Copper has seen a steady rise since April of last year. It has increased 59%, from an April 25 low of $8,105 per ton to Monday's closing price.

The rally was driven by several factors, including U.S. stockspiled amid uncertainty about the tariff policy of Donald Trump and disruptions in supply at major mines.

Copper is a fundamental long-term driver insofar it is an integral component of the energy transformation, given its role in electrifying power and transport systems.

Copper demand is expected to double by 2050, according to estimates.

It is difficult and expensive to find long-term deposits of copper, which is why BHP and Rio decided to buy existing mines.

DEALS STYMIED

BHP had proposed to buy Anglo American between?2024-2025 but walked away due to differences in asset valuations.

BHP was interested in Anglo's South American assets, but not the iron ore and coal that were also located at the former South African mining firm, which is listed on London.

Anglo found a new suitor, Canada's Teck Resources. The deal is worth $53 billion and will make Teck the fifth largest copper producer in the world when it's finalised.

Rio tried to increase its copper production by merging with Glencore. This would have created the largest copper producer in the world and a mining giant worth $200 billion.

The deal was again scuttled by differences in valuation, as Glencore wanted a larger share of the combined entity than Rio was willing to offer.

Anglo and Glencore, with the benefit of hindsight in light of the recent strong rally of copper, were likely correct to reject the overtures of BHP and Rio.

The failure of these mega-mergers demonstrates that a successful deal would?require an even higher premium to be paid for copper assets. This premium should reflect the likely demand for copper in 10 or twenty years rather than the current demand.

This also increases the likelihood that BHP and Rio are forced to start buying junior miners, explore and develop new mines or do both to increase their copper share in their portfolios.

What about iron ore? The commodity that made BHP and Rio the companies they are today?

China's steel production?fell under 1 billion tons in 2020 for the first year since 2019. It's now likely that it's reached its peak and will gradually decline in coming decades.

China will continue to be the largest market for iron ore, and the country's mines in Guinea are expected to increase their production to a capacity of 120 million tons per year.

Prices have reflected this, with Singapore Exchange contracts for iron ore trading in a tight range around $100 per ton throughout most of last year. However, they fell below that level in February and ended at $98.46 Monday.

BHP and Rio are facing a double blow, as lower prices meet waning demand from China.

It is a question of whether or not the growing steel industries in India and other Asian nations will be able to compensate for China's loss.

Disclosure: Clyde Russell, as an investor of a fund at the time this article was published, owned shares in BHP Group.

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(source: Reuters)