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Commodity prices to fall further

Wednesday, May 16 09:19:48

BHP Billiton said it expects commodity markets to cool further and that investors have lost confidence in the longer-term health of the global economy, in the most cautious comments yet from the world's biggest miner. BHP also put the brakes on a plan announced by Chief Executive Marius Kloppers in 2011 to spend $80 billion over five years to expand its iron ore, coal, energy and base metals divisions, banking on continuing high demand from its main market, China.

"It is all about appropriate allocation of capital. When Marius (Kloppers) talked about the $80 billion, the environment was different," Chairman Jacques Nasser told reporters after a Sydney business lunch today. "We should pause, take a deep breath and wait and see where the pieces fall around the world," he said, stopping short of announcing a spending cut. The company was re-thinking its expansion plans "every day," Nasser said. Asked if BHP would spend $80 billion over five years, he replied: "No."

"It's a sign that their view is that commodity prices are not going to go up from here, and in that sort of scenario, you can't be spending $24 billion to $25 billion a year," said Hayden Bairstow, an analyst at CLSA. BHP shares tumbled 4 percent to the lowest since July 2009, while the broader market fell 2.2 percent. The Australian dollar slid to its lowest since December.

"Now that commodity prices have plateaued in the medium term, there is pressure on companies with the costs going up," said Ric Ronge, fund manager at Pengana Global resources Fund, which owns BHP shares. "We are seeing a cycle within a super cycle largely because of the macro events in Europe and to a lesser degree in China." The Reuters-Jefferies CRB index, a closely followed indicator for commodities, has slumped more than 11 percent since hitting a five-month peak in late February amid a broader sell-off in financial markets.

"The tail winds of high commodity prices have contributed to record growth in the sector. Now we have a period where those tail winds are moderating and we expect further easing over time," said Nasser, a former president of Ford Motor Co.. Much of BHP's earnings hinges on demand growth in China, the biggest importer of iron ore, copper, nickel and other industrial staples needed to support mass urbanization underway in the world's No. 2 economy. ( C) Reuters