Australia | Oct 10 2006
By Greg Peel
BHP Billiton’s (BHP) China president, Clinton Dines, held an analyst briefing in Sydney yesterday, attended at least by Merrill Lynch and JP Morgan. It was a positive mood.
As metal prices have corrected recently, weight of argument has been that the US economic slowdown will impact not only on demand in that country, but on demand from China. Furthermore, China has been attempting to cool its own economic growth. This does not bode well for metal prices.
Yet as FN Arena pointed out yesterday (Metals Remain Stronger For Longer), falls in metal prices have belied demand/supply fundamentals, and fears of a global economic slowdown have potentially been overstated.
BHP’s Dines said nothing to dispel these theories yesterday.
The US slowdown will have little impact on China, said Dines. The export sector is not as significant as some seem to believe. BHP expects (as do other analysts) that China’s GDP growth will slow from 10% in 2006 to 9-9.5% in 2007 and settle at 8-8.5% in the longer term.
As exports accounts for only 1.5% of GDP growth, there is little to be worried about. The US does absorb around 22% of these exports, but most of it is in consumer goods such as toys and clothing – typical “Made in China” stuff that graces the shelves at Wal-Mart.
BHP notes investment in China continues to grow, with an emphasis on central government investment in infrastructure. Domestic demand is an important driver, but BHP refutes suggestions that the demand mix can switch to low material intensive at the drop of a hat.
Urbanisation is the main driver of domestic demand. This provides a challenge for the government to manage efficiencies as more and more rural peasants seek fortune in the cities. Consideration will need to be given to the environment, the remaining rural population and the growing rich/poor divide, notes Dines. At present, rural incomes are increasing. Were they to fall, Dines believes this would be a harbinger of problems ahead.
Dines doesn’t see the “character” of GDP growth changing in China over the next five years such that the country moves suddenly to a low material intensive basis, however efficiencies will be achieved in the consumption of energy and commodities.
China currently ranks number one in its consumption of iron ore, copper, steel and alumina, and number two in aluminium, nickel and oil. One suggestion that Merrill Lynch found surprising is that BHP doesn’t foresee any significant substitution threats amongst the high-priced metals. Most of this occurred in 2003, and while there are still some opportunities (less nickel for stainless steel, for example) such opportunities are regarded as limited, particularly in copper.
China is increasing its domestic iron ore production, but it’s low-grade and high cost, thus BHP doesn’t see this production holding out if prices were to drop by as little as US$10/t. Similarly China has vast reserves of coking coal but it is semi-soft, and not substitutable for hard coking coal needed for steel-making. The demand for coal (of which BHP is the world’s biggest supplier) is likely to be much stronger from 2008 onwards, said Dines, as steel demand grows.
That’s the view from China, but meanwhile over in the Gulf of Mexico things are looking bright for the Big Australian as well. Both SB Citigroup and GSJB Were have made note of newfound petroleum potential from BHP’s deepwater discoveries.
Deepwater is one of the new buzzwords in the oil market and is the sort of fuel that Stetson-wearers like to throw at the peak oil fire. There is undoubtedly a good deal of oil further under the Gulf, but recovering it is risky and costly. Nevertheless, substantial upside to returns exists.
Citi notes that BHP’s petroleum division accounts for 31% of its $26.60 valuation, and the analysts suggest division earnings could increase by as much as 15% this year to 25% by 2010. Further deepwater exploration could add over $3.00 to the price.
All in all the news remains healthy for BHP, and thus it’s no surprise every analyst in town recommends holding the world’s largest diversified resource stock in a portfolio. The FNA database shows Buys across the board, with an average target of $35.47 – 38% above yesterday’s close.