“The Inflation Sting: BHP’s Plunging Profit Triggers Harsh Dividend Cut”

Business Companies Earnings season: BHP profit dives, forcing it to slash dividend, as inflation bites

Overview

Mining giant BHP is facing significant challenges in the form of higher inflation costs and lower commodity prices. Its key iron ore business is being impacted by two major uncertainties – China’s unfolding property crisis and potential cuts to steel production by the Asian powerhouse. While commodity demand remains relatively robust in China and India, a global slowdown is causing iron ore prices to decline.

Impact of Inflation and Global Slowdown

BHP reported a 37 percent decline in full-year underlying profit to $US13.4 billion ($20.9 billion), primarily due to falling iron ore, metallurgical coal, and copper prices. The company’s revenue also took a hit, decreasing by $US11.3 billion. The rising inflation costs and slowing global growth have led to higher expenses for diesel, explosives, machinery, labor, and other operational outlays. These costs increased by 10 percent over the financial year, although BHP believes they have reached their peak and are starting to stabilize.

Dividend Reduction and Shareholder Impact

In light of these challenges, BHP has announced a slash in its dividend. Shareholders will receive a final dividend of US80¢ per share, bringing the full-year total to $US1.70 per share. This is below analysts’ expectations of $US1.72 per share. The full-year payout is down 48 percent compared to the previous year’s dividend of $US3.25 per share. However, it still remains the fourth-highest dividend in BHP’s history.

China’s Property Crisis and Steel Production Cuts

BHP highlights two key uncertainties that will significantly impact its iron ore business over the next six months. Firstly, the effectiveness of China’s stimulus in reviving its real estate sector, and secondly, the “breadth, timing, and severity” of any mandated steel production cuts imposed by Beijing. China’s ongoing property slump has raised concerns about the demand for iron ore, Australia’s largest and most lucrative export.

Impact on Chinese Steelmakers

China’s steel production, which averages a billion tonnes per year, may face restrictions in the coming months to avoid oversupply. Approximately 35 percent of the country’s steel output is used in housing, but new home starts have decreased dramatically. BHP’s CEO, Mike Henry, expects any mandated steel cuts to quickly deplete Chinese steelmakers’ iron ore inventories, which are not currently at a high level.

Future Iron Ore Prices

BHP estimates that “real-time cost support” will keep iron ore prices between $US80 and $US100 per tonne. The sharpness of the pullback in demand will determine if prices remain within this range. Iron ore prices reached a peak above $US210 per tonne in 2021 but have since fallen to around $US109 per tonne.

Analyst Insights and Future Growth Options

Despite the challenges faced by BHP, analysts from investment bank RBC Capital Markets believe the company remains in a “robust position.” They highlight BHP’s medium-term growth options, including its Jansen potash operations in Canada, the potential for higher incremental iron ore volumes, and the opportunities in copper production in South Australia and its Escondida mine in Chile.

Conclusion

BHP’s recent financial results reflect the impact of inflation and a global slowdown on its iron ore business. The company has made the decision to reduce its dividend, which may have a direct impact on shareholders. The uncertainties surrounding China’s property crisis and potential steel production cuts add further complexity to the situation. BHP’s medium-term growth options provide some optimism for the company’s future, but the challenges ahead will require careful navigation and strategic decision-making.