BHP takes $1bn hit from inflation but optimistic on China and India growth

The world’s largest mining company has forecast that “strengthening activity” in China will bolster global commodities demand after soaring inflation and weaker commodity prices hit its profit in the second half of last year.

BHP, the Australian miner, said that revenue fell 16 per cent to $25.7bn and pre-tax profit was down 30 per cent to $10.2bn during the six months to December 31 compared with the same period a year before.

The company cut its dividend to 90c a share from a record $1.50 in the comparable period when commodity prices drove record profits. The $4.6bn payout was nonetheless the fifth-highest half-yearly dividend in its 138-year history. BHP shares were down 1 per cent on Tuesday.

Inflation and higher labour costs have started to bite in the global mining industry, forcing companies to consider consolidation and to shed underperforming assets to improve returns.

“Commodity prices are down — this is a cyclical industry after all,” chief executive Mike Henry told the Financial Times. “But the underlying performance of the business is really strong,” he added, pointing to increased copper production as an example.

Demand from China and India has increased BHP’s confidence in its outlook. The company maintained its financial forecasts for the full year.

Henry described the markets as “stabilising counterweights” to the slowdown in the US and Europe and said he had greater conviction that demand for commodities in China would improve. “This will be another year of a billion tonnes plus, for Chinese steel production, possibly an increase on last year,” he said.

Inflation has hit the mining sector hard, particularly in countries such as Australia where it has combined with a labour shortage to drive up costs. BHP said that inflation added about $1bn to its costs through factors such as higher diesel prices, which were up 70 per cent, according to the company, and other materials including explosives. The company said there were signs those effects were easing in 2023.

Prices for iron ore, which typically accounts for more than half of BHP’s earnings, were about 25 per cent lower during the second half of 2022 compared with a year before but have risen sharply since November as Chinese activity has picked up following the relaxation of Covid-19 restrictions in the country.

Henry also welcomed the recent news that China had relaxed an unofficial ban on Australian coal imports. “We are very encouraged by the improvement in trade relations,” he said, adding that BHP was “ready to engage with Chinese customers”.

Tyler Broda, an analyst at RBC Capital Markets, said in a note that the results were “surprisingly poor” as inflation and higher costs proved to be a key factor for miners in the period.

BHP, Australia’s largest company, has reacted to the increased royalty rates in the state of Queensland, one of the biggest coal mining regions in the world, by putting two mines, Blackwater and Daunia, up for sale. Around 2,000 people work at the mines, which are jointly owned with Japan’s Mitsubishi.

Henry said the move to increase royalties had triggered the decision to sell. “It’s super clear,” he said. “There are options for us to invest elsewhere.”

He sounded a warning to Australia’s government that heavy-handed interventions and higher taxes could scupper the country’s ambitions to capitalise on investment in critical minerals.

“The world is really at Australia’s feet,” he said, “but it does require the right policy settings.”