Falling commodity prices hit BHP's profits

Cost cutting and business rationalisation begins

a woman

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BHP Billiton Limited (ASX: BHP) has today reported a 34% fall in full year net profit to US$15.4 billion, compared to last year. Despite the fall, the company still beat analysts' expectations of earnings of US$14.6 billion.

The company has blamed weak commodity markets and industry wide cost pressures for the fall. Lower commodity prices, especially for iron ore and base metals, reduced underlying earnings before interest and tax (EBIT) by US$1.3 billion and $1.6 billion respectively. Aluminium, manganese and stainless steel materials realised lower prices as well, reducing EBIT by US$1.2 billion.

The Iron ore price recently hit a three year low of US$113 a tonne, and shows no sign of recovering.  Fellow iron ore miners Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG), Atlas Iron Limited (ASX: AGO) and even Arrium Limited (ASX: ARI) – ex-OneSteel are more exposed to falls in iron ore prices, as the commodity makes up the majority, if not all of their revenues.

In an effort to reduce costs and non-essential expenditure, BHP is assessing other high-cost operations, following the suspension of its unprofitable Norwich Park coal mine and other projects. The company is also selling its 37% interest in Richards Bay Minerals to Rio Tinto and reviewing its diamonds business.

BHP already has US$22.8 billion committed to 20 major projects for the 2013 financial year, and doesn't expect any other mega-projects to be approved over the next 10 months. The US$20 billion expansion of BHP's Olympic Dam project appears dead in the water, with the company declaring that it will investigate an alternative, less capital-intensive expansion.

BHP made no mention of its US$20 billion expansion of the Port Hedland outer harbour project, but that looks dead in the water too, with the company suggesting it could better utilise its existing infrastructure to increase capacity. Development of the multi-billion dollar Jansen potash project in Canada appears to be going ahead, although at a much slower rate.

The Foolish bottom line

The outlook for BHP appears clouded. While some commodity prices have fallen heavily, there's no certainty that they will recover. Other commodities, such as copper, oil and gas appear to have a brighter future, with prices expected to increase or at least stay stable over the short to medium-term.

In the meantime, BHP looks to be ramping up production of iron ore, copper, coal, oil and gas to compensate for falling revenues, caused by lower commodity prices.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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