BHP looks at aluminium businesses

DIVERSIFIED miner BHP Billiton expects the volatility in the commodity markets to continue as sovereign debt problems in Europe weigh on customer behaviour, it said yesterday in its report for the six months ended December last year.

The company reported a 5,5% fall in profit to $9,9bn. Revenue was up 9,7% to $37,4bn. It declared an interim dividend of 55 US cents per share versus 46c in the previous interim period.

BHP said it would not allocate more capital for its struggling aluminium businesses, including smelters in SA. CEO Marius Kloppers said: "Our view is that aluminium has had a structural profitability downturn ... At this stage we don’t want to allocate more capital in this sector.

"Our rules around what to run and not what to run are pretty straightforward. If you don’t make a cash contribution or the customers don’t want your products ... we are going to rationalise capacity.

"I don’t want to predict anything in SA’s aluminium smelting system at this stage."

BHP’s aluminium business took a knock. It posted an underlying loss of $67m in the six months to end December. Analysts said it was important for the company to cut costs in areas that were struggling.

"One of the key areas to focus on for the group is cost control and to prove to investors that spending excessive capital on operations is worth it. They will look at operations and parts of the business operating at a loss," Charles Cooper, a mining analyst from Oriel Securities said. "Gas prices are lower than they were. They have to think how to proceed with the US shale gas business."

Late last year BHP acquired US shale gas assets for $20bn, but since then gas prices have been falling.

BHP pointed out that in the longer term, "it expects the rate of growth in steel making raw materials demand, particularly in China, to decelerate as underlying economic growth rates revert to a more sustainable level".

But copper and iron ore were expected to be supported by supply-demand fundamentals.

With iron ore, BHP said it was well placed to achieve a production rate of more than 200-million tons a year at Western Australia Iron Ore (WAIO) by the end of 2014, without the need for additional major growth project approvals. The company achieved a record production in iron ore in the six-month period.

At WAIO iron-ore output rose to a record annualised rate of 178-million tons per annum.

BHP said broader challenges for the group were industrial action and lower iron-ore grades at Escondida, Chile and the effect of wet weather at Queensland Coal in Australia.

BHP downplayed the threat of the Glencore and Xstrata merger.

"If you look at the two companies that you have spoken about, their strategy has been quite different, which is to own mid-tier assets. We don’t see anything that is going to change the intrinsic dynamics of the market," Mr Kloppers said.