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Commodity Price Slump Hammers BHP Billiton’s Profits

The financial collapse in China hits mining hard, as BHP Billiton records an 86% drop in annual net profit, following an 82% slump for Rio Tinto and an 88% drop for Fortescue Metals.

STDNEY — Global mining giant BHP Billiton posted an 86.2% slump in annual net profit on Tuesday despite slashing costs, as a collapse in Chinese demand for key raw materials hit hard.

The $1.91 billion result in the 12 months to June 30 compared to $13.83 billion a year earlier, as the prices of key commodities — including iron ore, coal and oil — plunged over the year. 

Underlying earnings, which exclude one-off writedowns, were down 52% to $6.4 billion, below analyst expectations. As expected, the result included numerous impairments, including an already-announced S2.0 billion after-tax writedown against its U.S. shale division as falling oil prices hit shale gas.

BHP’s share price, which has been trending down in recent months, closed 1.97% higher at Aus$23.34 before the results were announced. Despite the profit slump the company maintained its final dividend at 62 cents per share, and said capital spending would fall from $11 billion in the 2014-15 financial year to $7 billion by 2016-17.

The miner has been cutting jobs and trimming operating expenses, which reduced net debt, to try to counter sliding commodity prices, and this helped offset some of the damage.

“We will cut costs further and exercise our growing capital flexibility to improve our competitiveness and support our progressive dividend policy,” CEO Andrew Mackenzie said.

But he admitted uncertain times lay ahead, notably with its largest customer, China, amid global fears the world’s second-largest economy is weaker than thought. The fears have left its stock market and other Asian and world stock markets reeling this week.

“In the short term, we expect ongoing economic reforms in China to contribute to periods of market volatility,” he said, with the price of steel-making commodity iron ore under pressure. “And, while we remain confident in the long-term outlook for commodities demand as emerging economies continue to urbanize and industrialize, we have lowered our forecast of peak Chinese steel demand.”

A simpler portfolio

BHP now forecasts Chinese steel production will peak between 935 million and 985 million tonnes in the mid-2020s, but Mackenzie said this would “favor low-cost producers with economies of scale,” such as BHP.

“Longer term, in emerging economies other than China, the continuing rise of population, creation of wealth and urbanization will increase demand for all of our commodities,” he said.

During the year, BHP spun off non-core assets into a new independent company, South32, to help simplify its operations. South32 now operates assets including aluminum, coal, nickel, manganese, silver, lead and zinc, leaving BHP to focus on its most profitable core long-life operations — iron ore, copper, petroleum, coal and potash.

South32 reported a maiden net profit on Monday of $28 million for the year to June 30, and outlined a strategy focused on reining in costs and internal restructuring.

Mackenzie reiterated that “with a significantly simpler portfolio, we are even better placed to achieve further productivity improvements in the assets that underpin the value of the company”.

Fellow mining giant Rio Tinto posted an 82% slump in its first-half net profit earlier this month, with softer commodity prices also taking their toll. It was a theme followed by Fortescue Metals on Monday, whose annual net profit slid 88%, with China’s economic slowdown weighing heavily.

By Martin Parry

Copyright Agence France-Presse, 2015

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