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ASX 200 falls flat as mining sector disappoints: BHP, Fortescue, Rio Tinto+ more

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The Australian stock market (ASX) stumbles following the share price decline of leading mining companies.

The S&P/ASX 200 Index (ASX: XJO), the barometer of the Australian stock market's health, closed down by 0.08% at 7,659 on Tuesday after a rather muted day of trading. The trend seems to continue as the index fell to 7612.50 at the time of writing.

But what was behind this dip, especially on a day that seemed uneventful at first glance? Let's take a closer look at it.

Mining sector leading the fall

The mining sector, a cornerstone of the ASX, faced significant headwinds.

Specifically, the S&P/ASX 300 Metals and Mining index saw a notable drop of 1.2% by the end of Tuesday.

Giants such as BHP Group (ASX:BHP), Fortescue Metals Group (ASX:FMG), and Rio Tinto (ASX:RIO) experienced declines in their share prices.

The causes behind this downturn are complex, encompassing factors from dropping iron ore prices to geopolitical reasons that disrupt global supply chains. These elements have resulted in performance that falls short of expectations, overshadowing the sector's typically strong showing.

BHP experiences a dip amidst disappointing half-year profits

BHP Group Ltd shares fell by 1.09% to $45.54 by the end of trading hours.

So, what's behind this downward trend?

On 20 February 2024, BHP unveiled its half-year ended 31 December 2023 HY24 results, which to put it mildly, didn't quite hit the mark.

Despite a 6% boost in revenue, bringing it up to US$27.2 billion, the company's profit after tax plummeted by an eye-watering 86% to US$927 million.

This steep decline was largely due to a whopping US$5.6 billion in exceptional costs related to issues like the impairment of Western Australia Nickel and the aftermath of the Samarco dam failure.

BHP Chief Executive Officer Mike Henry said: "This is an uncertain time for the Western Australia nickel industry and we are taking action to address the current market conditions. We are reducing operating costs at Western Australia Nickel and reviewing our capital plans for Nickel West and West Musgrave."

"BHP Brasil along with Samarco and Vale continue to progress negotiations towards a settlement of the Federal Public Prosecutor Office Claim and Framework Agreement obligations in Brazil. The Renova Foundation has made good progress on reparation and compensation programs and over 84% of the community resettlement cases have been completed."

The BHP board found itself in a position where it had to reduce its fully franked interim dividend by 20% to 72 US cents per share, which works out to $1.10 in our local currency.

Other mining companies, such as Fortescue, dropped by 0.67%, Rio Tinto fell 2.20%, and Pilbara declined 1.7%.

Some positives to consider

When we strip back these exceptional items, BHP's underlying profit seems to stand still compared to the previous year, clocking in at US$6.6 billion or $10.1 billion in our local currency.

However, it wasn't all smooth sailing. Speaking to Finder, Saxo Asia Pacific Senior Sales Trader Junvum Kim said:

"BHP's first-half underlying profit of USD 6.6 billion was little changed year on year, supported by high iron ore and copper prices. However, the interim dividend of USD 0.72 is the lowest since 2020, as the company battles lagged inflationary pressures on labour and unit costs, which offset the FY24 sales growth outlook of 10%."

Understanding the 'lagged inflationary pressures on labour and unit costs'

Lagged inflationary pressures refer to the delayed effects of inflation on various costs within a company, including labour and unit costs.

Inflation leads to an increase in the cost of goods and services over time, which in turn affects how much companies need to spend to produce their products (unit costs) and pay their employees (labour costs).

These increases don't always happen immediately following a rise in inflation; instead, there can be a lag as contracts are renegotiated, suppliers adjust their prices, and wages catch up to the increased cost of living. This lag means companies might not feel the full impact of inflation until later, impacting their profitability and financial decisions, such as dividend payments, as they have to allocate more resources to cover these rising costs.

Adding to the complexity, Australia's unemployment rate has risen to 4.1% in January 2024, marking the highest level since January 2022. This increase from the previous month's rate of 3.9%, which exceeded the forecasts of 4.0%, signals a tightening in the labour market. When unemployment rates rise, it might initially seem like labour costs could decrease due to more people looking for work, potentially leading to lower wage demands.

However, in an environment of high inflation, the costs of living increase, and workers may seek higher wages to compensate, further exacerbating the inflationary pressures on labour costs. This situation creates a challenging balancing act for companies like BHP, where they must manage increased costs against the backdrop of a fluctuating economy and labour market.

Considering buying BHP shares?

If you are keen to buy shares of BHP or any of the companies discussed above, you can invest through an online share trading platform.

Keep in mind that not all platforms offer the same list of stocks. Some offer US stocks only, so make sure to select a platform that offers ASX-listed stocks.

Choose from the dozens available for Australian investors. Compare the features and fees from the plethora of trading platforms available.

Looking for a low-cost online broker to invest in the stock market? Compare share trading platforms to start investing in stocks and ETFs.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involve substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances and obtain your own advice before making any trades.

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