BHP has reported its lowest profit in three year as the largest miner on the market warned that its future prospects depended on China’s efforts at reviving its property sector, and the severity of any cuts to steel production by Beijing.
The Australian group said that its underlying profit for the year ended June was $13.4bn. This is down 37% from the $21.3bn it recorded a year ago. BHP has cut its dividend almost in half, from $3.25 to $1.70.
China, the second largest economy in the world, is struggling with deflation, a high rate of youth unemployment, and a slowdown of the real estate sector. The lacklustre performance of China’s economy is affecting the prospects for big mining companies, who had previously enjoyed record-high earnings thanks to soaring commodities prices. BHP stated that lower prices for major commodities, and inflationary pressures, primarily on diesel, electricity and labour prices, are now putting pressures on profits.
Mike Henry, CEO of Xinhua, said that “China’s trajectory will depend on the effectiveness” of the recent policy measures.
BHP said that there are two major uncertainties in its outlook for iron ore, which is its largest source of revenue.
BHP’s presentation stated that the first question is whether China’s stimulus policies are implemented effectively, particularly in relation to real estate. BHP’s presentation said that the second factor is the extent, timing, and severity of any mandatory steel production cuts. In the past China has implemented steel production curbs to reduce oversupply.
Henry told a press conference that the demand for iron ore from China was “reasonably strong” as many sectors, including green technology and carmaking, were thriving. He predicted that the stimulus program of the Chinese government in the real estate market, if it is successful, would boost demand for iron ore by the end of 2023.
CBA analysts in Australia predict that the price of iron ore will continue to fall from its March high as the outlook for Chinese real estate worsens and it takes time for stimulus measures to boost consumer confidence.
India continues to be a brightspot of global demand. The government’s plans to increase steel production will boost demand for coking coal from the Australian company, which is used in blast furnaces.
Henry stated that “we expect a buoyant growth in India, with strong construction activities underpinning an increase in steelmaking capacities.”
BHP is now the latest mining firm to reduce its dividend payout, even though it was still the third highest dividend ever paid.
RBC analysts said that BHP’s increase of capital expenditure forecast to $10bn for the current fiscal year was “much more” than expected.
Henry said that the increase from $7.1bn by 2022-23 was due to the company’s “investment in growth” via potash and Copper — which has been boosted this year with its acquisition of Oz Minerals — to generate more cash.