China’s demand helps BHP to record profits

Posted by admin on 19 August, 2008 under Business news | Be the First to Comment

Commodity prices will not be coming down in the near future, as the industry juggles ever-growing demand from developing economies with rising supply costs, according to the world’s biggest mining corporation.

BHP Billiton, the mining giant stalking British-Australian rival Rio Tinto, reported record profits for the seventh consecutive year yesterday. Annual production records for seven major product lines including petroleum, copper and manganese, alongside 10 new projects on stream, contributed to revenue growth of 25.3 per cent to $59.5bn (£31.9bn), attributable profit up by 14.7 per cent to $15.4bn, and a dividend increase of 48.9 per cent to $0.70.

“Strong demand, with supply-side constraints, resulted in a strong pricing environment for us,” Marius Kloppers, the BHP chief executive, said. “I want to emphasis the unbroken record of increased production, and we will continue this trend in 2009 with an estimated 10 per cent growth next year across the portfolio.”

But rising prices are also affecting commodities groups themselves. Rising energy costs added an extra $371m to BHP’s outgoings, and inputs cost $204m more than in 2006. Some, including coke, sulphuric acid and caustic soda, have gone up by more than 50 per cent since December alone. And while developed economies are slowing, the developing world – most particularly China – continues to show an unstinting appetite for raw materials. China’s construction industry alone will require three billion tonnes of steel within the next 20 years, equivalent to the entire output of Australia from 1963-2007, according to BHP.

“While the short-term outlook in developed economies remains uncertain, the longer-term fundamentals remain absolutely intact,” Mr Kloppers said. “Industry analysts are taking insufficient notice of supply-side issues and they will continue to be a key determinant in commodity prices going forward. That was my message in February and it is my message today.”

BHP’s strong financial performance is not just riding on high commodity prices. The company produced 13 per cent more petroleum, adding $1.1bn to the division’s revenues and pushing its earnings before interest and tax (Ebit) up by 82 per cent. Manganese was another stellar performer, with Ebit up a massive 549.8 per cent. The strong figures helped to offset dips in other product areas including aluminium, hit by power supply problems in South Africa, and metallurgical coal, disrupted by major flooding in Queensland.

As Mr Kloppers stressed BHP’s resilience and scale, the City showed similar confidence. Simon Toyne, an analyst at Numis Securities, said: “While a sustained upwards movement in BHP’s and/or the sector’s share prices will be difficult in the face of deteriorating macro data, both absolute and multiple-based valuation measures of BHP look cheaper than we have witnessed since 2001/02 and it remains our preferred stock in the sector.”

News reported by The Independent