The world’s biggest mining group insisted that the panic over the Chinese economy was unwarranted even as it lowered its own estimate of peak demand arising from China’s urbanisation.
BHP Billiton, in its first results since spinning-off its less-favoured mines and plants into a company called South32, detailed the battering it has taken from falling commodity prices by revealing its sharpest fall in annual profit in more than a decade. Profit slumped 62 per cent to £8.7 billion, allowing for disposal of South32.
But Andrew Mackenzie, chief executive, said that BHP’s analysis suggested that Chinese growth would actually pick up in the second half and that he still expected the economy to hit the government’s 7 per cent growth forecast.
The company attempted to shrug off the plunge in Chinese share prices and devaluation of the yuan as short-term volatility created by the Chinese Communist Party’s avowed transition from an investment and export –driven economy to a consumption-based economy.
Mr Mackenzie said: “It’s important we recognise that the changes we see in China are things that we have foreseen for several years – that China’s rate of growth would slow, although we still think the rate of growth will be 7 per cent this year.
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“We also believe the second half of this year will be stronger than the first. So yes, there is volatility. The programme we’re pushing at the moment, that we’ve spoken about for two years, of improving efficiency of our operations, unlocking cash, improving the efficiency of our capital, is built for these kind of circumstances.”
Mining companies are on the frontline of the China turmoil because it is the world’s most voracious consumer of raw materials. Of BHP’s four product groups, China is the biggest consumer of three: it consumers 45 per cent of the world’s copper and about two-thirds of internationally-traded iron ore. Its coal-fired power power stations and steelmills also make it the world’s largest buyer of coal. It consumers about a third of the world’s oil and gas, but its disproportionate impact on global growth means that it holds a far greater sway on oil prices than its share of demand would suggest.
BHP and its biggest rival, Rio Tinto have been among the chief beneficiaries of China’s urbanisation and economic growth. Much of the iron ore that went into China’s hundreds of new cities over the last decade was dug from BHP and Rio’s vast operations in Western Australia.
Iron ore prices have crashed as over-supply has met fears of a Chinese construction crash. BHP and Rio, who operate the world’s lowest-cost mines, have refused to stand back from their ambitious expansion plans. BHP said yesterday that it would produce iron ore for as little as $15 a tonne from Western Australia, while iron ore prices have not gone lower than $44 a tonne this year.
However, BHP cut its estimate of peak Chinese steel demand, which determines demand for iron ore, to between 935 million tonnes and 985 million tonnes by the mid-2020s, down from a billion tonnes previously.
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“We’re not subscribers to the view that steel has already peaked”, Mr Mackenzie said.
Shares in the company rose 5.2 per cent to £10.17½ after it recommitted itself to maintaining its progressive dividend. The dividend this year was raised 2 per cent to 124 cents a share.
The strength of the balance sheet also allayed some concerns. Amid the bad news, BHP said it had reduced its net debt by 5 per cent year-on-year to $24.4 billion and had achieved $4.1 billion in cost cuts. It said it would generate more savings in the year ahead by working its operations even harder.
Mr Mackenzie said that his decision to simplify BHP on just a handful of product areas was “to some extent vindicated by what’s happening in China right now”. BHP’s thinking is that Chinese consumers become more affluent, and its economy shifts from being driven by the construction of infrastructure and cities to consumption, that a growing hunger for copper and oil and gas will displace iron ore and coal.