Slump in demand for metals knocks BHP Billiton profits

BHP Billiton, the world's largest miner, said today it was too early to declare the bottom of the commodities slump as it posted a 62% fall in profits. Marius Kloppers, chief executive, said that sickly demand from the US and Europe had now "stabilised" but he warned that appetite for metals in China could weaken in the next few months. He also called for a change in the way iron ore is sold to avoid a repeat of the fractious negotiations that, this summer, formed the backdrop to the arrest of four Rio Tinto staff in China. Unlike most other metals, the price of iron ore is fixed by annual contracts negotiated by each miner and individual importing country. "The process is very protracted and exhausting," Kloppers said. "It's very difficult for two people to sit across the table and find a price in one go. There has to be another way."Kloppers said that it would make more sense for China, and other importers of iron ore, to be able to buy it using a variety of forward contracts of different lengths. Chinese authorities announced that the four Rio Tinto Shanghai-based employees had been arrested for bribery. It is understood that the more serious charge of stealing state secrets has been dropped. Kloppers offered a cautious outlook for world demand for metals, which is a good indicator of economic growth. He said that in the last six months, China had been buying more metals to restock its depleted inventories. This helped make up for anaemic demand in the US and Europe, which had been using up their stocks, but now demand there had "stabilised". But Chinese demand would now ease off in the short term, while the lingering effects of the credit crunch in the developed world would hold back growth there, he added. "We are not massively biased towards the downside [in terms of the prospect of prices falling] but equally we should not expect dramatic price spikes because things are going to be in short supply." He said it would not be until next year before the company would be able to more accurately predict underlying demand, unaffected by the distorting effect of restocking. BHP made a profit of $5.9bn (?3.6bn) for the year to the end of June, compared with $15.4bn the previous year. This compares with a 77% fall in profit for the second half of the year posted recently by rival Xstrata. BHP said that commodity prices fell by up to 90% in the last six months of last year. While prices had recently rallied, they were still up to 60% lower than last summer. Charles Kernot, analyst from Evolution Securities, said that BHP was coming out of the economic downturn stronger than any of its competitors. Unlike Rio Tinto and Xstrata, BHP is not encumbered by a vast debt pile, but this is partly because it lost out to Rio in the bidding for Canadian aluminium producer Alcan. The costly acquisition forced Rio to attempt a $20bn bail out from the Chinese government in order to pay back the debt. Shareholders revolted against the deal, forcing Rio to opt for a conventional rights issue and to set up an iron ore joint venture with BHP in Australia. Kloppers made a dig against Rio Tinto when he said: "Perhaps people do not fully understand that even after some of the fundraisings by several of the very major mining companies some of them are still pretty stretched in terms of their finances and in terms of cash reserves available for growth. That obviously creates an opportunity for us."