The world’s biggest mining group said yesterday that panic over the Chinese economy was unwarranted even as it lowered its estimate of peak demand from urbanisation in the country.
BHP Billiton, in its first results since spinning off its less-favoured mines and plants into a company called South32, revealed its sharpest fall in annual profit in more than a decade, down by 62 per cent to £8.7 billion.
However, Andrew Mackenzie, chief executive, said that BHP’s analysis suggested that Chinese growth would pick up in the second half and that he still anticipated the economy to hit Beijing’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 government’s transition from an investment and export-driven economy to a consumption-based economy.
“It’s important we recognise that the changes in China are things 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,” Mr Mackenzie said.
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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, 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 bearing the brunt of China’s woes because the country is the world’s most voracious consumer of raw materials.
Of BHP’s four product groups, China is the biggest consumer of three. It consumes 45 per cent of the world’s copper and about two thirds of internationally traded iron ore. Its coal-fired power stations and steel mills also make it the world’s largest buyer of coal.
China consumes 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 during the past decade was dug from BHP and Rio’s vast operations in Western Australia.
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Iron ore prices have crashed as over-supply combined with fears over a Chinese construction crash.
BHP and Rio, which operate the world’s lowest-cost mines, have refused to rein in 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 fallen below $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. “We’re not subscribers to the view that steel has already peaked,” Mr Mackenzie said.
Shares in the company rose by 5.5 per cent, or 53½p, to £10.21 after it recommitted itself to maintaining its progressive dividend.
The dividend this year was raised by 2 per cent to 124 cents a share. BHP said that 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 would generate more savings in the year ahead by working its operations even harder.
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Mr Mackenzie said that his decision to simplify BHP to just a handful of products was vindicated by the situation in China.
BHP believes that as Chinese consumers become more affluent and its economy shifts from being driven by construction of infrastructure and cities to consumption, a growing hunger for copper, oil and gas will displace iron ore and coal.