【Ferro-alloys.com】:BHP Group reported its lowest annual profit in three years, but the decline isn't the most worrying factor for the world's biggest mining company. That prize goes to an increasingly uncertain outlook for its key commodities.

BHP said on Tuesday the company's underlying attributable profit for the year ended June 30 dropped to $13.42 billion from $21.32 billion a year earlier.

This was below a Refinitiv estimate of $13.89 billion, and the lower profit resulted in the divided being slashed to $0.80 a share from $1.75 the prior financial year.

Much of the blame for the lower profit can be put on weaker commodity prices, especially for iron ore, which accounts for almost 60% of BHP's underlying earnings.

While BHP lifted output in the year to June 30 to 257 million metric tons from 253 million previously, the average realised price slipped to $92.54 a metric ton from $113.10 in the prior year.

The company also reported lower realised prices for copper and metallurgical coal, although there were small upticks in the prices of thermal coal and nickel, but these two commodities are small contributors to the company's earnings.

The challenges facing commodity producers like BHP are evident from the statement accompanying the results.

"In the near term, while the outlook for the developed world is uncertain, we expect China and India to remain relative sources of stability for commodity demand," BHP said.

"We anticipate that these competing forces may have a variable impact on commodity prices in the period."

The language used is typical of the corporate world in its restraint, but the message is clear.

The developed world is facing economic issues related to high inflation and the accompanying tight monetary policy.

But perhaps more concerning is that China and India, the two major sources of commodity demand in Asia, are at best stable in their demand outlooks, and even then BHP qualified this with the word "relative."

When it comes to China, BHP acknowledged the current struggles Beijing is having in re-igniting growth in the world's second-biggest economy and top commodity importer.

"The authorities have acknowledged that more policy support is needed to fully embed the recovery. For fiscal year 2024, the key question is how effective this latest policy push will be," BHP said.

CHINA STIMULUS

This the question that commodity markets are starting to grapple, as it appears that Beijing is unwilling, or perhaps unable, to repeat its grand scale stimulus efforts that were effective in previous episodes of weak growth, such as after the 2008 global financial crisis.

Rather, China's policymakers have been rolling out smaller and more targeted measures, but the problem is that confidence in their effectiveness is starting to wane, especially in the light of continuing soft data outcomes in key sectors like construction and manufacturing.

The scenario that may be emerging in China is one where the economy continues to potter along, still recording growth but not at a pace fast enough to spark increased demand, and prices, for commodities such as iron ore and copper.

BHP is more confident about India, stating that an investment upswing is happening in the world's most populated country, and commodity demand has been "robust."

This may be the case, but the problem for BHP is that India buys very little of the commodities it produces, with only coking and thermal coal of any significance.

This means that even if India does perform strongly, it won't be of much benefit to BHP, or indeed to most global mining companies.

The bottom line for BHP and its peers is that they are largely hostage to developments in China, as this well set the tone for demand for commodities like iron ore and copper.

And at the present time, hoping for relatively stability in China's demand looks like a best-case scenario.

At the time of publication, Clyde Russell owned shares in BHP Group as an investor in a fund.

The opinions expressed here are those of the author, a columnist for Reuters.

• [Editor:Alakay]