BHP BHP Group Limited

By Rhiannon Hoyle 

SYDNEYSHY--The world's biggest mining company BHP Billiton Ltd. unveiled its weakest annual earnings since 2003 on Tuesday and cut its long-term forecast for Chinese steel demand. But its top executive expresses confidence its most important customer, China, is on track, despite its current bout of market and economic turbulence.

Speaking after his company revealed an 86% dive in net profit for the year ended June to $1.91 billion, BHP Chief Executive Andrew Mackenzie said China's economic-reform program would likely make world markets more volatile. Still, he said the mining company expects China's broader economy to lift in the second half, meeting its 7% growth target for 2015. Interest-rate cuts, along with moves to support the property market and infrastructure spending, should buttress growth for the rest of the year, he said.

As the world's leading commodities producer, with interests in iron ore, coal, oil and gas and copper, BHP is arguably one of the major global businesses most exposed to China's fortunes. The mining company relies on China for roughly 30% of its revenue, UBS estimates.

Weaker prices for all the commodities it produces cut into earnings last year, and it wrote down the value of assets including a gas field and nickel mine by more than $2 billion.

BHP also lowered its closely watched forecast of peak Chinese steel demand to between 935 million tons and 985 million tons in the mid-2020s, from a previous projection of 1 billion-to-1.1 billion tons.

Still, Mr. Mackenzie said China's leaders had a clearly articulated strategy, and that his company had adapted accordingly.

"You have to look deeply and you have to look across at the sectors, and that is what we do," he said. "We have been at this game for decades. We have made very sound business decisions off those forecasts that have proved to be correct."

Global financial markets have been pummeled and commodities dumped in a broad-based selloff in recent days, rooted in concerns over China's economic slowdown. An equity-market rout in China continued for a second day on Tuesday, after its main Shanghai stock market recorded its worst single-day loss in more than eight years the previous day.

Concerns about China's economy, and particularly its demand for commodities, have been escalating since the surprise devaluation of the yuan two weeks ago. Recent economic data have also been uninspiring.

BHP's own London-listed shares slumped by 9.1% Monday. But they recovered by 5.6% Tuesday despite the profit slide, as the company said it had paid down debt, cut costs more than expected and would keep paying a steady-or-rising dividend each year.

"Cycles are part of our industry," Mr. Mackenzie said. "We have to get better in the way we operate" rather than rely on markets improving, he said.

China's breakneck economic growth during the 2000s led to a seemingly endless appetite for commodities used to build new cities and in the factories that fed an export boom. That led mining companies such as BHP to aggressively dig new pits and build new processing plants to profit from surging resources demand.

Now that demand growth has cooled, several commodities face a period of oversupply. Iron ore, BHP's primary money spinner, has been at the sharp end of the deceleration, with the commodity recently slumping to a decade low. It traded above $190 a metric ton in 2011 but now trades at roughly $50 a ton.

China's appetite for steel, used in skyscrapers and bridges, has been eroded by a cooling construction sector, resulting in a glut of the material and the materials used to make it, iron ore and coal.

"The problem lies in infrastructure-led growth," said Steve Johnson, chief investment officer at Sydney-based Forager Funds Management, adding that he was "very negative" on the outlook for China. "A collapse in that part of the economy is very bad for resources demand."

Still, he said BHP is better placed to deal with the slowdown than smaller rivals. "You know they are still going to throw off cash, and they are a company that is going to be around in 20 years' time," he said.

China is now trying to direct its economy away from exports and manufacturing to consumer-led growth. BHP has already been adjusting its strategy to account for that.

It has no plans for big new investments in iron ore or coal, instead choosing to prioritize growth in copper and petroleum, which it thinks a more urbanized, wealthy China will need in greater volumes.

BHP consequently feels "to some extent vindicated" by the shifts in the Chinese economy, Mr. Mackenzie said.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

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(END) Dow Jones Newswires

August 25, 2015 07:01 ET (11:01 GMT)

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