REUTERS

Marius Kloppers, BHP Billiton Chief Executive.

Global resources giant BHP Billiton (BIL) on Wednesday reported basic earnings per share of 186.8 cents for the six months ended December 2011 from 189.2 cents a year ago. Excluding exceptional items, EPS were down 2.9%.

Revenue was 9.7% higher at US$37.48 billion, while profit from operations was 8.1% higher at $15.69 billion.

A dividend of 55 cents was declared, up 19.6% from 46 cents a year ago.

Underlying EBITDA for the December 2011 half year increased by 8% to US$18.7 billion while the group's underlying EBIT margin remained in excess of 40% despite significant volatility across many of BHP Billiton's core markets.

Underlying return on capital remained at the robust level of 28%.

The company said record Western Australia Iron Ore production and stronger bulk commodity and petroleum product prices were the major catalysts for the 6% increase in underlying EBIT.

A series of operational challenges did, however, constrain margins across the broader portfolio as the temporary reduction in production at leading businesses such as Escondida (Chile) and Queensland Coal (Australia) further exacerbated underlying cost pressure.

The company said the first half of the 2012 financial year had its challenges in terms of global economic growth reflecting continued difficulties in Europe and slowing levels of activity in the high growth economies of China and India. Two bright spots were the United States, which saw stronger growth on the back of robust performance in the manufacturing sector, and Japan, which saw a rebound in activity following the impacts of the March 2011 tsunami.

“Barring an acceleration of activity in the United States housing market, both of these developed economies are likely to see modest growth in the coming quarters as the challenging global economic environment and generally weak consumer confidence is expected to weigh on underlying activity. Our base case is a protracted recovery for the developed world with the disorderly unwinding of European government debt remaining one of the key downside risks,” it said.

In China, after an extended period of policy tightening, the expected slowdown in fixed asset investment and industrial production is now occurring. As a result, growth rates are weaker although there is evidence that monetary policy is becoming more accommodating. Providing there are no large external shocks, it is expected that China will pursue targeted, albeit moderate measures to support balanced growth in its economy.

While Indian growth contracted more quickly than anticipated as inflation forced policy makers to tighten aggressively, inflation has started to slow, which in time is expected to increase the scope for the relaxation of monetary policy.

“In the longer term, we remain positive on the outlook for the global economy as the drivers of urbanisation and industrialisation in China, India and other emerging economies are expected to underpin global growth and robust commodities demand,” the company said.

Turning to the commodities outlook, the group said prices for many of its products declined during the latter part of the 2011 calendar year as concerns surrounding broader European liquidity culminated in a general deterioration in commodities demand.

“We expect volatility in commodity markets to persist as the European sovereign debt crisis and general weakness in the manufacturing and construction sectors across key markets are expected to weigh on customer behaviour and sentiment.”

“However, we expect underlying demand growth rates to remain robust, so long as the macroeconomic policy setting of the developing world retains a growth bias.”

Of the commodities, copper and iron ore are expected to remain supported by their compelling supply-demand fundamentals while the structural shift in Chinese demand for metallurgical coal remains well entrenched. Geopolitical factors are once again likely to influence crude oil pricing.

In contrast, the outlook for the aluminium, nickel and manganese alloy industries remains challenging and has led to significant margin compression for most producers, almost irrespective of their position on the various global cost curves.

“In the longer term, we expect the rate of growth in steelmaking raw materials demand, particularly in China, to decelerate as underlying economic growth rates revert to a more sustainable level. Slowing activity in the steel intensive construction and infrastructure sectors is, however, expected to be partially offset by robust growth in consumption related sectors such as machinery and transportation, thereby supporting the fundamentals for iron ore and metallurgical coal. More broadly, higher cost sources of new supply will be required in an expanding market which, in turn, are expected to support long run margins for the incumbent low cost producers such as BHP Billiton,” it said. - I-Net Bridge