Analysts have forecast higher dividends for BHP shareholders and capital returns after a positive production update from the world's biggest miner on Wednesday.

Far higher average prices for the bulk of BHP's commodities in fiscal 2017 than in the previous year were a highlight of the report, with average prices for hard coking coal up 117 per cent.

But the big rises went far beyond this commodity, with coking coal average prices up 75 per cent, thermal coal up 56 per cent, US natural gas up 33 per cent and iron ore up 32 per cent. The surge in commodity prices coincided with declining capital expenditure by BHP.

Morgan Stanley analysts said investor attention was now likely to "move to what BHP will do with growing excess capital".

The analysts said that while some investors feared excess capital could be directed towards "risky growth avenues", they didn't expect this to happen.

"Instead capital returns and higher dividend payouts are likely to feature more prominently, in our view. The FY17 result due August 22 will be a key opportunity for BHP to demonstrate this capital discipline and could represent a positive turning point for sentiment," they wrote.

Morgan Stanley has put a new price target of $29.75 on BHP shares, which is slightly higher than its previous price target. They have also given BHP stock an "overweight" rating.

But analysts from Citi were less optimistic about the outlook for BHP shares. A new Citi report downgraded the stock to "neutral", with a target price of $25.50.

Citi said the downgrade was "driven by share price appreciation and reduction in our target price to $25.50/share, previously $26.50."

It also said: "Our bearish view on bulk commodity prices presents a key risk to BHP's medium-term earnings. We believe the company's current share price suitably reflects its earnings profile and cash generation capacity."

The Citi analysts also expressed a preference for Rio Tinto over BHP, saying "we prefer buy-rated Rio Tinto as our diversified/iron ore/aluminium exposure".

BHP shares closed down 27¢ on Wednesday to $24.83, a move that bucked the upward move from the market in which the All Ordinaries was up 0.72 per cent.

BHP's operational review for the year ended June 2017 revealed record iron ore production from Western Australian iron ore operations, as well as from two Queensland coal mines. The company hit its annual production target for iron ore for fiscal 2017.

The record iron ore production was attributed to "productivity improvements across the supply chain and additional capacity at Jimblebar", one of its Pilbara mines.

For the first time BHP has confirmed the high financial cost of the long-running strike at the Escondida copper mine in Chile earlier this year, the world's biggest copper mine.

BHP recorded a loss of $US367 million after taxation as a result of the industrial action, the operational review revealed. But total exceptional items recorded in the second half of fiscal 2017 were $US740 million (post-tax), when withholding tax on Chilean dividends ($US373 million) was included.

BHP said its global copper production was down 16 per cent on the previous year, due to the Escondida industrial action "and the power outage and unplanned maintenance at Olympic Dam".

BHP's chief executive Andrew Mackenzie was upbeat about the company's production performance. "Our people have stepped up to unlock low-cost latent capacity and achieve strong productivity gains across our tier-one assets," he said.

Challenged by activist investors who are demanding an overhaul of the company, Mr Mackenzie also sent a direct message to shareholders. "Our relentless focus on safety, productivity and capital discipline will support strong growth in shareholder value," he said.

He said copper production was expected to "rebound strongly" in the current year, with the company forecasting a 25 per cent to 35 per cent increase.

The company also reported a 7 per cent lift from mines producing coal for use in power stations.

BHP said it lifted production of thermal coal to 29 million tonnes in fiscal 2017, and forecast a similar level of production in the current financial year.

Average prices for thermal coal in the first six months of this year, at $US75 a tonne, were 63 per cent higher than for the same period last year.