Global miner BHP Billiton painted a gloomy near-term outlook for metals demand on Thursday as it defended its decision to drop a $66 billion bid for rival Rio Tinto.
BHP, facing its shareholders for the first time since walking away from the Rio bid on Tuesday, told its Australian annual meeting that uncertainty in commodities markets would continue in the short term and it was ready to close loss-making operations.
“There is no doubt that these are very challenging times, uncertainty in the shorter-term outlook remains and we do not expect to be immune from the changes in the world economy,” Chief Executive Marius Kloppers told shareholders in Melbourne.
“If we look at Chinese steel production, the subject of much public discussion recently, we see a decrease of 17% year-on-year and this will eventually flow through to all of us in the industry,” Kloppers said, referring to current output compared with a year ago.
BHP and its former bid target, Rio Tinto, are the third and second largest producers respectively of iron ore, which is required in steel-making.
The scrapping of the proposed hostile takeover was warmly welcomed by steelmakers in Asia and Europe, who had feared the creation of a global giant that would hold the upper hand in annual price negotiations.
Kloppers said the company remains committed to pushing to link iron ore contract prices to spot market prices.
“Obviously we have to work with our customers in achieving that, and it can take some time,” he said, adding that BHP would take part in annual contract talks with steelmakers as normal this year.
BHP said it retained a strong balance sheet, despite the market slump, and remained ready to pursue other acquisitions, especially firms weakened by the financial crisis.
“Our longstanding focus on strong balance-sheet capability and financial stability stand us in good stead in the current volatile environment ... in being able to take advantage of opportunities that may arise as others falter,” Kloppers said.
He said the company would look at any top tier, long-life, low-cost assets that might be put up for sale by other miners, and was not ruling out any metals, except gold, as potential targets.
Mining analysts expect BHP to target rivals worth more than $1 billion and with assets still operating in the black.
“BHP's not going to get out of bed for just anybody,” said James Wilson of DJ Carmichael & Co. “They'll only look at the big elephants.”
Beyond acquisitions and expansion projects, BHP Chairman Don Argus said the group would consider spending its cash on buying back shares and remained committed to increasing its dividend. But he declined to predict how big a dividend it would pay this year.
Kloppers highlighted not only the heavy recent falls in metal prices, including copper, nickel and aluminum, in explaining the company's decision to scrap the Rio bid, but also the excessive financial risk of taking on Rio Tinto's $39 billion in net debt.
He said an acquisition would have left the combined group with gearing ratio of close to 48%.
“Your board believes that a heavily geared position, and reduced capacity to deal with that debt, creates unacceptable financial risks for BHP Billiton shareholders,” Kloppers said. (Reuters)