BHP upbeat on iron ore, expecting China stimulus

TOKYO — BHP Billiton said Tuesday that China’s iron ore demand will remain supported by Beijing’s efforts to prop up the economy, as the world’s largest mining group announced its highest full-year profit in four years against a backdrop of a trade war.

BHP’s underlying profit — the company’s preferred earnings gauge —  jumped 33% on the year to $8.9 billion for the fiscal year ended in June, helped by an 8% rise in overall production and higher prices for most of the commodities it deals in. Net profit dropped 37%, undercut by a $2.8 billion write-down of the company’s shale assets as it withdrew from the shale-oil business.

“Higher prices clearly help, but so do our actions,” Andrew Mackenzie, BHP’s chief executive, told analysts the same day, referring to the company’s cost-cutting efforts since he took the helm in 2013. The Anglo-Australian miner announced a record dividend of 63 cents per share, as investors await the proceeds of BHP’s $10.8 billion shale asset sale.

The Melbourne-based miner announced its results amid simmering Sino-U.S. trade tensions, as the two countries brace for a second round of tariffs, scheduled to hit on Thursday. But the effect of the escalating trade war on BHP’s iron ore shipments, 80% of which go to China, and on its iron ore business, which makes up around a third of its earnings, is “much less than people think,” said Mackenzie.

China’s government is prepared to intervene with stimulus, he said, with the country already considering alternative destinations for exports hit by U.S. tariffs. “We anticipate that a number of things will be done to stimulate domestic demand,” said Mackenzie. “All the usual measures — fiscal, monetary, credit — will be applied in order to do that.”

Daniel Hynes, a senior commodities strategist at Australia and New Zealand Bank, agreed. “Certainly, it appears the Chinese government has been surprised by the longevity of trade tensions, and that has clearly resulted in more proactive fiscal policy,” he said, adding that he expected to see domestic demand for steel and its principal ingredient, iron ore, to rebound as infrastructure demand is stoked again in China. That “would reverse the declines of the past six months, and certainly provide a fillip in terms of prices,” Hynes said.

In a separate report published the same day, BHP cut its economic growth forecast for China by between one quarter and three quarters percentage point, pointing to the effects of trade protectionism. The report said the trade slowdown would weigh on broader demand for BHP’s commodities.

The company’s revenue was lifted in the just-ended fiscal year by record production of 275 million tons of iron ore, beating slightly an earlier estimate. Among BHP’s growth projects, the South Flank iron ore mine is intended to upgrade rather than expand supply. It is scheduled to go into production in three years.

BHP intends to lift the average iron content of its mines to 62%, bringing it into line with rival Rio Tinto, a move prompted by China’s rising demand for higher grade ore, as steel mills attempt to maintain profitability in the face of stricter environmental rules.

Brazil-based Vale is pursuing the same strategy, on even higher grades. Fortescue Metals on Monday announced a 58% on-year fall in its net profit. The difficulties at the pure-play Australian iron ore miner, which has comparatively lower grade ore, appeared to vindicate the bigger miners’ strategy.

The U.S.-China trade spat looms over diversified mining companies, which up to now have seen earnings fueled by a sustained recovery in commodity prices. But caution has taken hold and is weighing on industrial metals, say analysts. The secondary effects of tariffs could sap demand for highly traded metals such as copper and aluminum.

Mackenzie said BHP was “somewhat cautious about the short-term outlook as we monitor closely the trade and geopolitical developments.”

If a prolonged trade conflict undercuts demand for base metals, UBS forecasts a 12% decline in BHP’s net profit forecast for 2019, and a 4% downward revision for Rio Tinto.

Globally, “our downside scenario sees the leveraged names impacted the most, with certain companies’ earnings wiped out,” according to analysis led by the bank’s commodities strategist Lachlan Shaw.

Aside from concerns on trade, BHP outlined further challenges it faces in the coming years: a deferred productivity target, cost pressures in copper and coal,  and natural decline across some assets.

Despite risks, “Our long-term view remains positive,” said Mackenzie. “Population growth and higher standards of living across the world will sustain demand for decades to come.”

SARAH HILTON, Nikkei staff writer