Morning Note: Market news and an update from global mining major BHP.

Market News

US equities finished lower last night: S&P 500 (-0.3%); Nasdaq (-0.9%). The market is now focused on Nvidia earnings on Wednesday as the next key input for the AI secular growth theme. A beat and guidance raise is widely expected, though not the extent of recent quarters. Anything less might be met with share price disappointment.

Mary Daly echoed Jerome Powell’s view on cutting rates, saying “the time to adjust policy is upon us.” The trick is getting inflation down to the Fed’s 2% target without hurting the labour market. 10-year Treasury yields stand at 3.82%, while gold remains firm at $2,516 an ounce.

In Asia this morning, markets were mixed: Nikkei 225 (+0.5%); Hang Seng (+0.1%); Shanghai Composite (-0.3%). China’s industrial profits grew 4.1% year on year in July, faster than June’s 3.6% gain, and at the fastest pace in five months. However, weak domestic demand casts doubt on whether that resilience can last. The yen now trades above 145 to the dollar, well above the 161 level seen at the start of July.

UK shop prices fell 0.3% year on year in early August, their first decline in almost three years, according to the British Retail Consortium, and a sharp slowdown from July’s 0.2% gain. The FTSE 100 is currently trading 0.5% higher at 8,360, while Sterling buys 1.3202 and €1.1821.

The oil price surged over recent days to $80.50 a barrel amid rising geopolitical tensions. Exxon Mobil said it expects crude demand to stay above 100m barrels per day (bpd) until 2050, similar to today's levels, a forecast 25% higher than BP. Exxon estimates electric vehicles will not significantly alter long-term global oil demand, as the world’s population is expected to increase from 8bn today to nearly 10bn in 2050, adding to demand for energy.

According to Boeing, China’s jet fleet is set to more than double driven by a boom in travel as China becomes the world’s biggest air travel market by 2043.

Source: Bloomberg

Company News

BHP Group has this morning released results for the financial year to 30 June 2024 which were slightly above market expectations. The shares have been weak this year, in part due to the decline in the price of iron ore, combined with its failed attempt to acquire industry rival Anglo American. In response to today’s update, the shares are up 2% in early trading.

BHP is a diversified resources company with exposure to iron ore, metallurgical coal, copper, nickel, and potash. Assets are high quality and largely located in lower-risk jurisdictions, with strong development potential. The group’s capital allocation framework provides flexibility at the bottom of the cycle and discipline at the top, and has seen a shift in focus to low-cost, high-return projects. BHP has positioned itself to benefit from the unfolding mega-trends of decarbonisation, electrification, population growth, and the drive for higher living standards in the developing world, which it sees becoming key drivers of commodity demand.

During the latest financial year, underlying attributable profit from continuing operations rose by 2% to $13.9bn, slightly ahead of the market forecast of $13.3bn. The result was driven by solid operational performance and higher prices in key commodities. The company delivered record volumes at Western Australia Iron Ore (WAIO), where it extended its lead as the world’s lowest cost iron ore producer. Across its global copper assets, the company grew overall copper volumes by 9% for the second consecutive year and expects to deliver a further 4% in FY2025. Growth was partially offset by lower energy coal and nickel prices, and lower steelmaking coal volumes.

The group experienced an effective inflation rate of 4% across its markets in the period, predominantly driven by labour costs. However, productivity initiatives and cost discipline allowed the group to mitigate these pressures, with unit costs only 2.9% higher across its major assets. The group generated a 54% EBITDA margin, level with last year, and the eighth consecutive year above 50%. Underlying return on capital employed slipped from 28.8% to 27.2%.

Capital and exploration expenditure grew by 31% to $9.3bn as the group increased its exposure to future-facing commodities. 65% of medium-term capital spend is expected to be focused on these commodities. The company has a pipeline of copper projects under development in Chile and Australia, while construction of the Jansen potash project in Canada is ahead of the original schedule with first production now two years away.

During the period, free cash flow rose by 111% to $11.9bn and net debt fell from $11.2bn to $9.1bn (15.7% gearing). Borrowing remains in the target range of $5bn-$15bn, although the company has said it is comfortable to move above the range temporarily to execute value accretive opportunities in the portfolio. That said, the company highlighted it is not interested in bidding for Anglo American’s coking coal assets.

BHP’s dividend policy provides for a minimum 50% payout of underlying attributable profit at every reporting period. For FY2024, the group continued its track record of delivering robust shareholder returns through the cycle – dividend of $1.46 per share has been declared (or $7.4bn), equal to a yield of 5.3% and a payout ratio of 54%.

Looking forward, the company believes the longer-term fundamentals that drive demand for its products remain compelling. In the near term, however, management expects volatility in global commodity markets, with China experiencing an uneven recovery among its end-use sectors. The effectiveness of recently announced pro-growth policies will be an important contributor for the country to achieve its official 5% growth target. India is set to continue as the world’s fastest growing major economy, while developed economies are expected to face gradual relief from the lingering effects of higher interest rates in coming years.

While wage growth has largely normalised in Chile and has recently peaked in Australia, BHP still expects the lagged impact from inflation and some lingering labour market tightness to impact its cost base into FY2025. The company has previously made the point that the overall cost of mining production is now estimated to be higher than it was prior to the pandemic. This implies that price support is also expected to be higher than in previous cycles and low-cost operators stand to capture potentially higher relative margins in certain commodities.

Source: Bloomberg