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Last week, BHP Billiton reported strong production numbers for the three months to June 30. For the full year, annual production records were achieved for seven commodities: petroleum, copper, iron ore, manganese ore and alloy, alumina and molybdenum. Output rose in another 13 commodities, including crude oil and condensate, uranium, lead, zinc, silver and diamonds.

Given the robust commodity price environment (with a few exceptions), BHP's strong June quarter production results set the stage for a bumper profit announcement in a few weeks' time.

BHP's production was particularly strong in iron ore, petroleum and copper. Iron ore and petroleum output were each up 13 per cent, year on year, while copper production increased 10 per cent. These divisions alone should generate a torrent of cash for the world's biggest miner.

Metallurgical coal output recovered strongly from the March quarter, when flooding in Queensland closed some of BHP's mines. With big price increases set for next year's coal production, continued improvements on this front will be welcome.

The outlook

As the market is prone to do, it sold BHP's shares down following last week's positive announcement. BHP may announce a big full-year profit but investors factored that in months ago. The focus is now on the next 12 months. Actually, the focus of some institutional investors is on the next quarter and, with the financial sector off its deathbed, rotating from resources to financials has been all the rage lately. Giving momentum to this view, there is evidence that the Chinese economy is slowing down - albeit from unsustainably high levels. The slowdown is partly engineered by the Chinese Government (via tighter monetary conditions to contain inflation) and partly due to weaker Western consumption, which is affecting the exports. However, it's not the end of the world and not the end of BHP's main market.

As far as we can tell, China and other developing nations are still in the early stages of industrialisation. Billions will be spent on infrastructure projects over the next 10 years, meaning demand for BHP's products should remain strong. It's a well-worn story but one grounded in common sense.

Price

Over the past five years, BHP has been on a steady upward trend. The price movement hasn't always been one way, though. In the second half of 2006, BHP moved from about $33 to $25 before heading far higher. We're probably in another period of consolidation, where the share price could trade in a range for another six months or more. The shares recently traded at just under $38.

Worth buying?

We think BHP's in a consolidation phase, so if you don't own the stock, we see little reason to rush in and buy now. But if you do own stock, then we think you should ride out the volatility and stick with the long-term trend, which is up. BHP trades on a price-to-earnings ratio of about nine times next year's earnings. The market is saying that BHP's profitability has peaked. We think that, in time, the market will change its mind.