Commodities: World's biggest miner banks on China and India as a rich source of cash

BHP Billiton Monday played down fears that the boom which has driven commodity prices to record levels could turn to bust as global growth slows. The world's biggest mining group, involved in a $130bn (£70bn) hostile bid for rival Rio Tinto, said it expected demand from developing countries, led by China and India, to offset the impact of weakening demand from developed economies. Commodity prices enjoyed their best run for 35 years in the first half of 2008, according to the Reuters/Jefferies CRB index, but fell 10% in July. Some analysts have argued that slowing demand from the US and western Europe will feed through to developing economies by reducing demand for their exports. Chief executive Marius Kloppers said yesterday that such a view over-estimated the importance of exports to the balance of the Chinese economy. "We have always said that China is not an export-led economy. It is driven by domestic demand ... We think the supply side is going to have a harder time keeping up [with demand] than people think." BHP said that in the year to the end of June, revenue rose by more than a quarter to $59.5bn while profit from operations climbed about 22% to $24bn. Net profit was a record $15.4bn, a 12.4% rise. The company underlined its confidence by increasing the dividend for the year by almost 50% to 70 cents a share. "Our results were outstanding in the context of a challenging supply environment which was characterised by unexpected disruptions, rising input prices, skills shortages and the further devaluation of the US dollar," the company said in a statement. Kloppers said that six months ago he had expressed the view that commodity prices would remain resilient and "that view has not much changed". BHP has a broad range of commodities, spanning petroleum, aluminium, base metals, iron ore and manganese to coal and diamonds. "I think there is a difference between those [commodities] more leveraged to the emerging economies and those more leveraged to the developed economies," he said. Price volatility A debate is raging as to whether the recent surge in commodity prices has come to an end. After reaching highs this year, the price of many raw materials has tumbled. The price of oil surged from $90 a barrel at the beginning of the year to a record $147 in July. The price then started to weaken as US demand slowed with the downturn in the economy. Yesterday it briefly edged above $115 a barrel on fears that tropical storm Fay - which is building strength in the Caribbean - could disrupt production in the Gulf of Mexico, before falling back to $111. Gold had risen steadily to breach $1,000 a troy ounce in March as the value of the dollar plunged, but is now back below $800. Soaring demand from China and India had driven industrial metals such as copper and aluminium to their highest points in 10 years. These booming markets attracted financial speculators who pushed prices even higher. But weakness in the world economy has meant a fall in consumption, taking commodity markets off the boil. Consumption of aluminium, which Kloppers said is called the middle-class metal because it is heavily used in packaging, fridges and beverage cans, was much more linked to developed economies. Coking coal and iron ore were tied to developing economies where demand was more likely, on average, to be stronger. BHP said that in the short term it expected commodity prices "to remain high relative to historical levels, albeit with higher volatility". Although commodity prices increased strongly over the second half of the group's financial year, BHP said its costs had risen sharply, with higher charges for diesel, coke and explosives adding to the burden of labour shortages. Kloppers said that, unlike a number of its peers, BHP had increased its volume by 7% over the year and was looking for further growth in the current period. He noted supply remained constrained by the length of time needed to bring new projects on stream because of bottlenecks within the industry. BHP's confidence was well received. Its shares rose 8p to £15.37 with stocks across the sector getting a boost from the company's upbeat tone. Matthew Kidman, head of investment at Wilson Asset Management, said: "The outlook still looks good even though there may be some impact over the next six months from the weakness in western economies. BHP doesn't appear to be too worried, because of the ongoing demand coming from China's industrialisation." BHP's bid for Rio Tinto is being vetted by the European commission competition authorities, which are expected to rule on the matter towards the end of the year. If successful, it would be the world's second-largest takeover, behind Vodafone's acquisition of Mannesmann in 2000. ---Guardian