By Sameer Manekar and Melanie Burton

(Reuters) – Global miner BHP Group reported a steeper-than-expected 32% fall in first-half profit owing to a drop in iron ore prices, sending its shares down, although it flagged a brightening outlook in China, its biggest customer.

China’s strict zero-COVID-19 policy curtailed economic activity and dented demand over the past year, driving iron ore prices down from lofty levels, while miners wrestled with surging costs and a tight labour market in Australia.

As a result, the world’s largest listed miner reported underlying profit attributable from continuing operations of $6.6 billion, down from $9.72 billion a year earlier.

That missed a Vuma Financial estimate of $6.82 billion, as earnings from copper and coal came in lower than analysts had expected. BHP’s giant Escondida copper mine was hit by road blockades in Chile that disrupted mining supply deliveries.

However, its interim dividend of 90 cents per share, while down 40%, beat Vuma Financial’s estimate of 88 cents.

Shares of the global miner fell as much as 2.8% to A$47.11, their lowest since Jan. 6 but recovered to finish down 0.3%, slightly weaker than the broader market.

“We have got BHP as a ‘hold’ primarily because their share price is sitting up at record highs and they are going to have to do pretty well to justify those levels,” said analyst David Lennox of wealth manager Fat Prophets in Sydney.

The miner said it sees “markedly higher” price floors for some commodities than prior to the COVID-19 pandemic given the rising marginal cost of production.

“The lag effect of inflation and continued labour market tightness are expected to impact our cost base into the 2024 financial year,” BHP said, as it logged a $1 billion inflation hit, primarily from diesel costs, for the half.

Analysts at RBC Capital Markets said BHP’s first half was “surprisingly poor, but is a strong indicator of what is a still challenging inflationary environment for the miners”.

BHP also said it expected aggressive global interest rate hikes from last year to slow growth sharply across the developed world.

CHINA GREEN SHOOTS

However, after a difficult first-half, the miner said China appears to be a “source of stability” for commodity demand, as the world’s second-largest economy and top metals consumer reopens and looks to revive its debt-laden property sector.

The company’s comments sparked a rally in iron ore futures, with prices on the Dalian Commodity Exchange jumping more than 3% to their highest since July 2021.

BHP’s confidence in China’s economy was buoyed by green shoots it had seen since the start of the calendar year, including new loans, house prices and business sentiment surveys, Chief Executive Officer Mike Henry said.

“There’s a lot there that is giving us confidence that we will see an acceleration in the Chinese domestic economy,” he told reporters on a conference call.

BHP brought forward first production at its huge Jansen potash project in Canada to late 2026 from 2027.

It also said that it, along with joint venture partner Mitsubishi Development, had decided to put up for sale their Daunia and Blackwater coal mines, two of their seven metallurgical coal mines in Queensland’s Bowen Basin.

BHP has threatened not to invest in Queensland after the state hiked its coal royalties to the highest rate in the world.

(Reporting by Sameer Manekar and Himanshi Akhand in Bengaluru, and Melanie Burton in Melbourne; Editing by Jonathan Oatis, Josie Kao and Sonali Paul)

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