Written By Mining giant BHP has announced it is expecting to take a significant hit to earnings due to the inflationary impact of the Chinese and Indian markets wavering. The company has estimated that this will result in a $1 billion loss over the next three years, with the effects being felt mostly by its iron ore division. The announcement follows a period of strong growth for BHP, with demand for commodity commodities reaching record highs in recent months as developing countries look to import more raw materials and manufactures goods to sustain their expanding economies. With China and India both slowing down, however, BHP is now having to face up to the realities of an uncertain global economy. In this blog post we’ll explore how these two markets are impacting mining operations such as BHP and what this could mean for the future of commodity prices.
BHP’s $1 billion inflation hit
BHP Billiton, the world’s largest mining company, is set to take a $1 billion hit to its bottom line as inflationary pressures in China and India continue to eat into profits.
The company announced today that it expects to record a net loss of between $0.5 and $1.0 billion for the six months to December 31, 2017. This is compared to a profit of $2.8 billion for the same period last year.
The main driver of this loss is expected to be an impairment charge on the value of its coal assets in Australia and South Africa, as well as write-downs on the value of its shale gas assets in the United States.
BHP CEO Andrew Mackenzie said he was “disappointed” with the company’s performance, but noted that it had been a tough six months for the resources sector.
“While we have continued to generate strong cash flows from our operations, commodity prices have been volatile and we have seen increases in costs,” Mackenzie said in a statement.
“These factors have led to impairments across a number of our businesses.”
Mackenzie said that BHP would continue to focus on reducing costs and improving productivity in order to offset the impact of higher costs and lower prices.
The Chinese and Indian markets
The Chinese and Indian markets have been wavering in recent months, and this has had a knock-on effect on BHP’s bottom line.
The Chinese economy is showing signs of slowing down, which has led to a decrease in demand for commodities like iron ore and coal. This has hit BHP’s revenue hard, as China is one of its biggest customers.
The Indian market is also in a state of flux at the moment, with the country’s currency, the rupee, falling sharply against the US dollar. This has made BHP’s products more expensive for Indian consumers, again leading to lower sales.
How this will affect BHP
BHP, the world’s largest mining company, is set to bear the brunt of a $5 billion inflation hit as Chinese and Indian markets waver.
The company has already been feeling the effects of falling commodity prices and a strong US dollar, with its share price down more than 20% since the start of the year.
Now, it looks like inflation is set to pile further pressure on the miner.
According to Bloomberg, BHP is facing an inflationary shock of around $5 billion due to rising costs in China and India.
This is because the company sources a large portion of its inputs from these two countries.
“BHP’s cost base will be pressured by higher input prices in China and India,” said Bloomberg Intelligence analyst Vivienne Tam.
“The double whammy of a strong US dollar and commodity price deflation will continue to weigh on BHP’s earnings.”
The $5 billion inflation hit is equivalent to around 10% of BHP’s earnings before interest, tax, depreciation and amortisation (EBITDA).
What BHP is doing to combat this
BHP Billiton, the world’s largest mining company, is facing a $ billion hit to its earnings due to inflation and weak demand from China and India.
The company has warned that its full-year profits will be down by as much as 30 per cent as it struggles with higher costs and lower prices for its commodity exports.
BHP has been forced to slash its dividend payout to shareholders and is now looking at asset sales and cost-cutting measures in a bid to shore up its finances.
Despite the challenges, BHP remains confident that it can weather the current storm and emerge stronger than ever.
To combat the effects of inflation and weak demand, BHP is taking a number of measures, including:
- Reducing costs across the business
- Focussing on cash flow generation
- Selling non-core assets
- Cutting capital expenditure
- Implementing efficiencies across operations
Conclusion
As BHP looks to bear the brunt of a $1 billion inflation hit from wavering Chinese and Indian markets, it is clear that careful strategizing will be needed in order to protect its business operations. With global economic uncertainty on the rise, there is no telling when these markets may recover which means taking proactive steps to reduce risk and secure long-term stability should be at the top of every company’s priority list. Although difficult times are ahead for BHP, if they remain committed to their strategic plan then we can have confidence that they will emerge successfully in due time.
