Prices dampen BHP's record coal production result

BHP Billiton’s record production of metallurgical coal despite wet weather disruptions in Queensland during March was still not enough to offset the effect of lower coal prices during the 2010 financial year, leading to a 56% year-on-year drop in EBIT for its metallurgical coal division to $US2.05 billion.

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The outlook for coal and commodity prices generally in the short term remains uncertain, BHP Billiton chief executive Marius Kloppers said in the company’s profit statement.

“BHP Billiton remains cautious on the short-term outlook for the global economy,” he said.

“Following a broad recovery in prices for the majority of BHP Billiton’s products, the short-term outlook for commodities is mixed.

“With global steel production running ahead of real demand in the quarter ended June 2010, we expect output to soften from the record highs achieved in April this year. This will impact near-term demand for steelmaking raw materials, however the fundamentals remain strong in those commodities.”

The company’s overall annual profit was 116% higher year-on-year at $US12.72 billion with revenues 5.2% higher at $52.79 billion.

Metallurgical coal production for the year was up due to improved operational and supply chain performance, supported by strong demand and the control of operating costs, the company said.

But lower realised prices for hard coking coal (34%), weak coking coal (33%), and thermal coal (11%) took their toll on the result.

During the second half of the financial year, the old benchmark pricing system for iron ore and metallurgical coal was replaced by shorter term market based pricing.

The transformation ensures the majority of BHP Billiton’s bulk commodities, including metallurgical coal and energy coal, are now linked to market based prices.

Underlying EBIT for BHP Billiton’s energy coal division was $US730 million, a 50% decrease year-on-year, mainly due to lower average export prices which decreased earnings by $US535 million.

This was offset by a $US76 million benefit related to price-linked costs.

Production was in line with the previous year with a 10% increase in export sales attributable to the continued ramp-up of the Klipspruit (South Africa) expansion and record production at Mt Arthur in the Hunter Valley of New South Wales.

Weaker production at New Mexico Coal (USA) reflected a downturn in demand from the dedicated power generators.

Operating costs were well controlled despite the adverse impacts of a weaker US dollar and inflation, the company said.

BHP’s shares were 38c down to $37.06 in morning trade.

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