[Ferro-alloys.com]:Declining Commodity Prices and Rising Inflation

Reported figures for the financial year ending on June 30, 2023, reveal a steep slump in earnings for Australia’s largest company, known for its domination in the commodities sector. Revenue fell by 17%, from $US65.1bn ($A101bn) in FY22 to US$53.8bn ($A83.8bn). Similarly, underlying profits witnessed a massive drop of 37% from $US21.3bn ($A33.2bn) in FY22 to $US13.4bn ($A20.9bn) BHP reports.

The company attributes the decline to a mix of inflation, dwindling prices across major commodities, and increased tax burdens. The average realized price for its chief commodity, iron ore, plummeted from $US113 per wet metric tonne (wmt) in FY22 to $US92.54/wmt in FY23.

Metallurgical Coal and Copper Follow Suit
Not only iron ore, but averages of other commodities have also witnessed a downward trend. The average realized price for metallurgical coal dipped by 21%, from $US347 per tonne in 2022 to $US271.05. Additionally, copper prices fetched less for the company than the previous year, falling from $US4.16/lb to $US3.65/lb.

The firm also highlighted significant cost pressures, with an effective annual inflation rate of about 10%. This sharp uptick in costs stemmed from increased labor costs, diesel prices, and electricity costs BHP reports.

Increased Royalties and Operational Costs
Changing regulations have also played a role in the firm’s declining profits. The company reported an additional payment of US$700m ($A1.1bn) in royalties to the Queensland government in FY2023 following the introduction of a new royalty regimen in June 2022.

“Our operating costs include $US3.8bn (A$5.9bn) of revenue or production-based royalties,” the company explained. Furthermore, the firm recorded US$1.7bn ($A2.7bn) in royalties from its Queensland operations alone. Combining this with income taxes, the resultant adjusted effective tax rate inclusive of royalties amounts to a substantial 55%.

Future Implications and Strategies
While these figures reflect a less than ideal scenario for the company, the underlying factors are industry wide. Across the board, companies in the sector are grappling with a volatile market featuring declining commodity prices, growing inflation, and increased regulatory burdens.

As such, players in the sector will be keen to revisit their strategies to safeguard against persisting market pressures. This could involve efforts towards streamlining operations, focusing on high-impact commodities, and exploring opportunities to optimize costs.

The coming months will indeed be telling of how the industry responds to the ongoing challenges, and how well companies can adapt to maintain their profitability amidst such stormy conditions.

• [Editor:Alakay]