BHP's profits plummet, but confidence in the Chinese market remains strong.

On Tuesday, BHP Group indicated that it is too early to assess the impact of policy measures on China's real estate market. Despite recording its lowest annual profit since 2020, the company experienced robust growth in certain industries within China. Apart from new house construction, the demand for steel in China's sectors such as infrastructure, green infrastructure, automotive, and real estate completion remains "quite strong".

With the exacerbation of the real estate market downturn, weakened consumer spending, and a significant decline in credit growth, China's economic momentum post-pandemic is diminishing, presenting more reasons for the Chinese government to introduce additional policy stimuli. However, BHP CEO Mike Henry stated that he is closely monitoring how policies supporting new house constructions in China translate into actual impacts.

Although BHP has lowered its Chinese economic growth forecast from 5.75%-6.25% to 5%-5.5%, it still expects China's steel production to exceed 1 billion tons for the fifth consecutive year, a relative highlight in the global market. BHP notes that despite the uncertain economic outlook in developed countries in the short term, it expects China and India to remain stable supports for the demand for commodities.

BHP warns that inflationary pressures will continue to impact its business and profits for the fiscal year 2024. Data reveals that due to skyrocketing costs and a tight labor market in Australia, the company's baseline profit for the fiscal year ending June 30 decreased by 37% to $13.42 billion from the previous year, falling short of Refinitiv's expectation of $13.89 billion.

Over the past year, as global supply chains normalized post-COVID, the price of iron ore, BHP's main revenue source, fell from a peak of over $165 to $100. However, BHP expects inflation to raise the price floor for commodities such as copper and iron ore.

Andy Forster, Portfolio Manager at Argo Investments, stated that the company's profits and dividends were somewhat disappointing. Although commodity prices have fallen from their peaks, it's undeniable that the commodity market remains fairly healthy, especially with strong iron ore prices. However, considering the inflationary environment and rising financing costs, capital expenditures for commodity companies are likely to continue increasing.

Moreover, BHP's capital and exploration expenditures increased by 16% to $7 billion, with an expectation to grow to $10 billion over the next two years. Henry mentioned that this expenditure includes acquiring Oz Minerals business, as well as projects like the Jansen potash project in Canada.