BHP Billiton , the world's biggest miner, reported its first half-year profit fall in two years on Wednesday, hurt by lower commodity prices and higher costs, and said it expected longer-term demand from key customer China to slow.

The Anglo-Australian giant warned that commodity markets would remain volatile until year-end because of stuttering global growth, underlining uncertainties also facing mining's new goliath in the making: the proposed $90 billion merger of commodities trader Glencore and miner Xstrata .

In the longer term, we expect the rate of growth in steelmaking raw materials demand, particularly in China, to decelerate as underlying economic growth rates revert to a more sustainable level, it said in a statement.

As expected, BHP did not announce any new share buybacks following a $10 billion buyback and $17 billion in shale gas acquisitions last year, saving its cash for expansion projects in iron ore, coal, copper and potash.

Investors and analysts seemed unfazed by the cautious outlook, confident that Chinese demand would remain strong for steel-making raw materials such as iron ore and coal. Iron ore is BHP's largest income-earner by a wide margin.

The company is emphasising an uncertain outlook, cost pressures and cash flow is, well, not tight but they are living within their means, said mining analyst Glyn Lawcock of UBS.

They have more growth options than they have cash for them (those projects) at the moment.

BHP stuck to its plan to splash $27 billion on projects, as part of a massive $80 billion spending plan over the five years to 2015, counting on expansions in key areas such as iron ore and energy to drive growth in the near term.

At a time when some commodities prices have fallen, we have contrasting fortunes in different parts of our portfolio, BHP Chief Executive Marius Kloppers said in a briefing on the results, which showed price weakness in nickel and aluminium.

Attributable profit before exceptionals fell to $9.94 billion for July-December from $10.7 billion a year ago, roughly in line with an average forecast of $10.0 billion.

The company, battling unions in Australia -- as are its peers everywhere from South Africa to Canada -- warned that rising labour costs will remain a challenge.

Iron ore made up half of the group's earnings, with underlying profit from the core ingredient in steel rising 36 percent to $7.9 billion.

Petroleum earnings, a focus for investors concerned about the company's push into shale gas in the United States last year, rose 38 percent, with a four-month contribution from Petrohawk, its biggest U.S. gas acquisition.

Investors are worried that the move into shale gas will dent BHP's returns for some time as a gas glut has knocked U.S. natural gas prices down nearly 50 percent since last June.

Analysts have warned the company may have to slash the value of the shale gas business on its books later this year.

After underperforming the market last year, BHP's shares have jumped 11 percent so far this year, nearly double the rise in the broader market, on confidence in a U.S. recovery and a soft landing in China.

On Tuesday, Glencore unveiled an agreed takeover offer for sister company Xstrata to create a new mining giant rivalling BHP and Rio Tinto .

(Additional reporting by James Regan, Miranda Maxwell and Mark Bendeich; Editing by Richard Pullin and John Mair)