Miners prepare to reveal billion-dollar profit falls

Rio Tinto and Xstrata pincered by rising costs and lower prices

The FTSE 100 mining giants Rio Tinto and Xstrata are set to reveal that profits nose-dived in the first half of the year as a vice-like squeeze of rising costs and tumbling commodity prices strangled their bottom lines.

Xstrata, led by Mick Davis, will kick off the miners' earnings season on Tuesday and the City expects its profits to have halved to £1.4bn in the first half of this year.

The next day, Rio Tinto will unveil a 38 per cent decline in its interim profit to $4.8bn (£3.1bn) in the first six months, after sales tumbled by 13 per cent to $31.7bn, analysts forecast.

Like most miners, Xstrata and Rio Tinto are suffering from rapidly declining prices for commodity such as nickel, copper and iron ore, which have tumbled on concerns about the economic outlook in Europe, the US and China.

Nickel, which peaked at $29,500 per tonne in 2011 stood at $15,350 a tonne on Friday. Meanwhile, iron ore, a key steelmaking ingredient forecast to comprise 86 per cent of Rio Tinto's profits this year, fell to a two-and-a-half year low of $115 a tonne in recent days after declining about 15 per cent in the past three weeks.

At the same time, labour and machinery costs globally are still rising as the inflation prompted by the rapid expansion of the mining industry typically lags commodity price falls by 12 to 15 months.

The rise in the value of the currencies of Australia, Brazil and Canada – against the US dollar, in which commodities are priced – has put further pressure on miners, making it relatively more expensive to pay wages and other bills in those countries.

Xstrata and Rio Tinto's profit slump comes after BHP Billiton, another FTSE 100 mining giant, announced that it too was suffering at the hands of rising costs and falling prices – in this case of nickel and US shale gas.

Marius Kloppers, the group's chief executive, and Mike Yeager, the petroleum division head, said on Friday they will waive their bonuses for the year to June 30, after writing down the value of BHP's Nickel West business in west Australia and its shale gas assets in Arkansas by $3.3bn.

Investors will also be looking for clues about Xstrata's proposed tie-up with Glencore, the commodities trading giant, when the miner reports its results on Tuesday.

Xstrata is hoping to be acquired by Glencore after agreeing a £57bn mega-merger in February that some key shareholders, such as the Standard Life and the Qatari sovereign wealth fund, have opposed. Some opponents argue that the price is too low, while others have questioned the rationale for the up to £170m worth of retention bonuses that are due to senior staff if and when the deal is finalised. Mr Davis alone stands to gain up to £29m for staying on at Xstrata for three years to run the newly-merged group.

Although shareholders are hoping to find out on Tuesday if Glencore intends to raise its bid – and by how much – it is thought any statement on price will be reserved for Glencore's own results day, on August 21.