BHP optimistic for the longer term outlook as profits fall

Mining giant BHP Billiton has reported a 15 per cent fall in profit and a 30 per cent fall in earnings per share for the first half of the year (release).

Earnings per share fell to 204.4 cents (130.6p) from 289.6 cents – less than half the 429.1 cents reported in 2011.

In the face of falling commodity prices, most major miners have had to find significant savings. BHP has found $2.7bn of savings from operating costs, and new chief executive Andrew Mackenzie has announced a bigger-than-expected 26 per cent cut in capital and exploration spending next year to $16.2bn.

BHP sees more balanced global economic growth over the long term as China develops it economy and large developed ecoonomies like the US grow in spite of fiscal challenges.

We expect the rebalancing of the Chinese economy to be significant in terms of the nature of domestic demand as well as the types of goods and services the economy will produce. These changes will take place gradually, particularly in relation to savings behaviour and levels of fixed asset investment. We also see India and South East Asia as significant sources of economic growth in the long term.

In terms of commodities, BHP saw prices or iron ore, metallurgical coal and copper fall as supply more than kept pace with increased demand, but a lower rate of investment growth across the industry should balance supply and demand in the medium to long term.

As the Chinese economy rebalances, the growth rates for steel demand is expected to moderate, but there should be a growth in demand for other industrial metals, energy and agricultural products.

We expect overcapacity in the aluminium and nickel industries to persist, while robust near term supply in copper and US domestic gas should, over time, give way to market conditions more influenced by resource decline.

Over the long term we maintain a positive outlook as the fundamentals of wealth creation, demographics and urbanisation continue to create demand for commodities across Asia and other markets. On the supply side, the Company's diversified portfolio of large, long life, low cost assets ensures it is well placed to fulfil this increasing demand for commodities as a low cost supplier throughout the cycle.

Meanwhile, BHP will be investing $2.6bn to finish the excavation and lining of the Jansen Potash project production and service shafts, and to continue the installation of essential surface infrastructure and utilities.

This will be spread out over a number of years, highlighting the company's cautious approach to the investment. Completion of both shafts is expected during the 2016 calendar year, and the works programme into 2017. It added that the long term outlook for potash – a fertiliser – is “strong”. This comes as the break-up of a Russian potash cartel sent share prices in major producers tumbling.