BHP profit dives, forcing it to slash dividend, as inflation bites

Mining giant BHP is grappling with higher inflation costs and lower commodity prices as its key iron ore business faces two major uncertainties - China’s unfolding property crisis and potential cuts to steel production by the Asian powerhouse.

Commodity demand is still relatively robust in China and India, but a global slowdown is hitting iron ore prices as higher costs bite, the company said in its full-year result on Tuesday.

Australia’s largest miner reported a 37 per cent slump in full-year underlying profit to $US13.4 billion ($20.9 billion) after a corresponding slide in revenue, down by $US11.3 billion, largely as a result of falling iron ore, metallurgical coal and copper prices.

Inflation and slowing global growth is weighing on iron ore prices.Credit: Michele Mossop

BHP shareholders will receive a US80¢ final dividend, taking the full-year total to $US1.70 a share, below analysts’ expectations of $US1.72 a share. The full-year payout is down 48 per cent on last year’s dividend of $US3.25 a share, but is still the fourth-highest in BHP’s history.

The profit and revenue reset wasn’t unexpected, coming after the miner reported its highest annual profit in a decade in 2022. Last year it paid out record dividends to shareholders following a boom in prices - that have since come back to earth - for the commodities it digs up and ships to customers across the globe.

Costs for diesel, explosives, machinery, labour and other outlays needed to run its mines inflated by 10 per cent over the financial year, although the company thinks it has passed the peak and costs are starting to peg back.

“Commodity demand has remained relatively robust in China and India even as developed world economies have slowed substantially,” chief executive Mike Henry said.

The miner’s iron ore output is tied to China’s handling of its unfolding property crisis and buoyant construction activity in India, which is underpinning an expansion in that country’s steelmaking capacity.

China’s latest property slump has intensified concerns about demand for iron ore, Australia’s largest and most lucrative export, which added $41 billion to federal government taxes last year and underpinned Treasurer Jim Chalmers’ $4.2 billion budget surplus.

BHP said it faced “two key uncertainties” over the next six months - how effective China’s stimulus would be in reviving its real estate sector, and the “breadth, timing and severity” of any mandated steel production cuts by Beijing.

On average, China is producing a billion tonnes of steel a year, and authorities in the Asian powerhouse may impose restrictions within months to keep production levels on target and avoid oversupply. About 35 per cent of the country’s steel output is gobbled up by housing, but new home starts have slumped dramatically.

Henry said he expected any mandated steel cuts to quickly eat into Chinese steelmakers’ iron ore inventories, which “aren’t at a particularly high level.”

The company estimates “real-time cost support” will keep iron ore prices between $US80 and $US100 a tonne. “It will come back to how sharp is the pullback in demand,” Henry said.

Iron ore peaked above $US210 a tonne in 2021, before falling back to around $US109 this week. The average prices fetched by BHP’s iron ore were 18 per cent lower than the previous year, copper prices were down 12 per cent, coking coal prices fell 22 per cent, while thermal coal rose 9 per cent and nickel was up by 3 per cent.

Analysts with investment bank RBC Capital Markets, who track BHP’s performance, said it remained in a “robust position.” They said the miner had sizeable medium-term growth options, including from its Jansen potash operations in Canada, potentially higher incremental iron ore volumes, and from copper in South Australia and its Escondida mine in Chile.

The $217 billion company’s shares traded lower over midday, down by 1.5 per cent to $42.82 in the early afternoon.

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