Record metal prices led mining titan BHP Billiton Ltd. to report the largest ever annual profit for an Australian-based company, and it's counting on commodity-starved China to further propel demand for its products despite growing fears of another global economic downturn.
BHP, the world's largest mining company, also cast doubt on the overall industry's ability to follow through with ambitious plans to expand and build new mines to increase production, a drive that threatens to depress metal prices over the longer term.
"The price rises that we have seen over the last 10 years is mainly because the supply side has always underperformed to what the expectations of the market is," BHP chief executive officer Marius Kloppers said Wednesday.
Rising costs and inflation are hurdles only well-financed miners can clear in the race for what's left of the world's shrinking resources, he said.
The confident outlook for metal prices and demand comes as BHP boasts a record profit of $23.65-billion (U.S.) for the year ended June 30, up 86 per cent. Revenue rose 36 per cent to $71.74 billion as prices for such metals as copper and coal hit record highs earlier this year.
BHP, alongside other major mining companies, believes demand for commodities will remain strong despite recent market volatility that has caused prices to fall in recent weeks. Prices have dropped as investors fret over the possibility of another global recession due to debt issues in the United States and some European countries. Meanwhile, China's economy is slowing as it takes measures to try to prevent its economy from overheating.
Still, miners are relying on China's continued strong appetite for commodities as they increase production through new mines and acquisitions. China accounts for about 40 per cent of consumption of key industrial metals such as copper and aluminum.
"Over the longer term, we expect strong demand for our core commodities to be underpinned by the industrialization and urbanization of China, India, and other emerging economies," Mr. Kloppers said.
Supply also remains tight in many segments, such as copper and iron ore, which will help elevate prices, noted Patricia Mohr, vice-president economics and commodity market specialist at Scotia Capital. "Ongoing demand growth in the 'emerging markets' - particularly China - will provide considerable underpinning as will ultra-low interest rates," she said in a report Wednesday. "In judging the outlook for industrial commodities, it is important to recognize the massive dominance of China."
BHP, which failed last fall in its $38.6-billion bid to buy Potash Corp. of Saskatchewan Inc., said Wednesday it has a hefty balance sheet to make more acquisitions, but there is limited selection.
"Opportunity has always been the limiting factor, not ability to fund, and I don't think that that has changed," Mr. Kloppers said. "Non-organic growth really has got to come from perhaps base metals, copper, or petroleum, oil and gas, or potentially in potash," he added, noting that regulatory issues would make buying many coal and iron ore assets difficult due to the company's current dominance in those businesses.
The Melbourne-based miner bought U.S.-based Petrohawk Energy Corp. for $12.1-billion in July, shortly after paying $4.75-billion for shale gas company Chesapeake Energy Corp. in March. Mining and energy acquisitions are picking up again now that prices and mining stocks have fallen as a result of the recent market turmoil.
Rio Tinto PLC said on Wednesday it increased its stake in Vancouver-based Ivanhoe Mines Ltd. by another 2 per cent to 48.5 per cent, as part of its plan to hold 49 per cent of the company by January, 2012. Last year, Rio took over management and provided financing for Ivanhoe's $6-billion Oyu Tolgoi project in Mongolia, one of the world's largest untapped copper-and-gold deposits that is set to begin production late next year.
Also on Wednesday, Glencore International PLC, the world's largest publicly listed commodity trader, offered $284-million in cash to buy the remaining shares it doesn't own in Minara Resources Ltd., Australia's second-largest nickel reserve and a major cobalt producer.
Australia's Macarthur Coal is expected to respond next week to a recent $5-billion takeover offer from U.S.-based Peabody Energy Corp. and ArcelorMittal, while at the same time talking to other potential bidders.
With a report from Bloomberg