Hello. Welcome to Company Focus. My name is Aamer Nawid, Analyst at Fat Prophets. Today I'm going to be taking a look at mining heavyweights Rio Tinto and BHP Billiton in context of recent events in China and look at the impact of Chinese steel demand in the long-term on the mining companies' earnings.

Now as if stock markets didn't have enough to deal with, earlier this week the Chinese raised interest rates as a result of a sort of uptick in inflation, or suspected uptick in inflation. The policymakers in China have ramped up bank reserve requirement ratios to 20 per cent. What they've decided to do now is increase interest rates for the fourth time since October.

Any sort of tightening in China is going to result in a bit of nervousness or a bit of volatility in the mining sector. Great, the US last week positive jobs numbers, but China remains the global growth engine. China is also the earnings growth engine for BHP and Rio because both companies derive most of their revenue from the sale of iron ore, a key constituent of steel which the Chinese quite frankly can't get enough of. I mean for both companies, the Chinese contribution is 25 per cent plus.

Now looking at this chart here you can see that so far this year the performance of the miners has been pretty much in line with the broader market, pretty abject. Not surprising when you consider the amount of black swans that have prevailed in the quarter, but both remain very, very strong fundamentally, very robust balance sheets and in terms of valuation metrics, very cheap to historical values. So I wouldn't be surprised if there was some strength in the near term as things settle down.

As you can see from this chart here, BHP in black here is up at sort of all time highs or close to all time highs and Rio Tinto has a lot of catching up to do in red to previous highs back in 2008.

Over the longer term I can see both BHP and Rio doing very well and sort of going on and seeing their earnings increase and that translates to share price gains. Reason being China, steel production from China, commodities demand from China. In fact, BHP recently held a presentation in which they outlined a number of interesting forecasts and some eye-opening facts.

Now China has been responsible for 88 per cent of the increase in steel production since the year 2000 and going forward, there are numerous factors which suggests that this is going to continue.

An interesting statistic is in 2009 China's population stood at 1.35bn, of which 46 per cent were considered urbanised. Now by 2025 it is estimated that this population will increase to 1.45bn, of which 64 per cent will be urbanised. Now basically what that means is there will be 310m people joining the urbanised Chinese population, a population which is basically equivalent of the United States' population today, so quite a number of people.

Rio Tinto has actually estimated that that degree of urbanisation is going to require an additional 50,000 skyscrapers to accommodate the trend, so it's going to create quite a demand for commodities and it's going to keep a floor under the price of commodities.

Now looking at the importance of China for BHP, Rio, you can see from this graphic here it has been fairly indifferent over recent years, the Chinese contribution in red here to BHP's revenue, but I expect that trend to increase. In the years ahead, these red sections will increase in value.

I suppose another factor which underpins the reason why I think both companies, the earnings of both, will do very, very well is India. We're overlooking India. Their population by 2025 is set to increase to 1.4bn also of which 38 per cent will be urbanised.

Now a good thing about India, or the interesting thing, is their per capita steel consumption is at the same level as China was in 1990, so there is a 20-year difference. I think that 20-year difference, I suppose it leads us to believe that if China does sort of dry up in terms of its demand for steel or raw materials, or if it does soften, I think India is going to be there to pick up the slack.

Overall I think it is fair to say that Rio, BHP both are going to do well and both are going to capitalise on this increase in, I suppose, prominence of China and India and both you can see are frantically trying to make sure they capitalise. Not a week goes by without BHP or Rio being linked to an additional takeover or an output expansion. Whichever way they choose to do it, organically or through acquisition, I think the earnings outlook for both is positive in a big, big way.

Thanks for watching. Make sure you tune in again next week.