BHP Billiton Ltd/Plc and Rio Tinto Ltd/Plc , the world's two biggest miners, are set to report sharp falls in profit for the June half, battered by a slump in metals prices and volumes.

The December half will be even worse, as the full impact of lower iron ore and coal prices hits. The question is how much worse the rest of the year will be, with base metals prices having rebounded.

Investors want to know whether the companies are seeing any real recovery in demand, especially in their biggest market, China, behind the recent price rallies in metals like aluminum and copper and spot iron ore.

Is it all good or is it just a restocking event and nothing more? said UBS analyst Glyn Lawcock.

So far the companies have been cautious in their outlooks.

BHP and Rio both cut capacity at a range of operations and delayed some growth projects late last year as demand slumped, and investors said they would be looking for signs that they might be ramping up capacity and projects again.

A willingness to turn that capacity back on will give investors confidence that the current buoyant commodity prices are maintainable, said Tim Schroeders, portfolio manager for Pengana Capital's global resources fund.


Iron ore will dominate earnings in the six months to June for both companies, which agreed in June to merge their iron ore operations in a deal yet to be sealed, after Rio Tinto ditched a planned $19.5 billion tie-up with Chinese state-owned Chinalco.

BHP is tipped to book a second-half profit of around $4.07 billion before one-offs, down from $9.37 billion a year ago.

Rio Tinto, poised to pay down nearly half its debt following a $15.2 billion share sale in June, is expected to report underlying earnings of around $2.76 billion for its first half, or about half the underlying profit it reported a year ago.

This year's underlying earnings include $797 million profit after tax on the sale of Rio's undeveloped potash assets.

Rio's bottom line will be marred by a loss in the aluminum business and writedowns on its Alcan assets. BHP's result will be scarred by writedowns on its nickel assets.

It is working to sell its remaining Alcan packaging assets, possibly to Amcor Ltd , and still wants to sell its U.S. coal business.

All eyes are on the outlook for iron ore sales, which have been clouded by a stalemate in negotiations with Chinese mills.

Chinese mills have largely rejected annual contracts agreed by other Asian mills from April, while at the same time China has been lapping up iron ore at a record rate, nearly triple the year on year growth seen last year.

That's a staggering amount of iron ore going into China, said Lawcock.

Tension with China escalated last month when Chinese authorities detained four Rio employees, who are still being held without charge, for allegedly stealing state secrets during iron ore negotiations.

(Editing by Valerie Lee)