The Overnight Report: China Looking For A Stake In BHP

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By Greg Peel

A report overnight from The Australian’s Rowan Callick, who is travelling with Prime Minister Rudd on his overseas tour, sent BHP Billiton ((BHP)) shares soaring 5% on the London and New York exchanges.

Callick reported that the 200% increase in contracted coal prices and a likely 70-85% increase in the contracted iron ore prices have driven Chinese state-owned steel companies to act in an attempt to both sterilise the soaring cost of raw materials and to prevent a merger of BHP with Rio Tinto ((RIO)), which would result in the world’s largest iron ore and coal producer with a lot of dominant leverage in future price setting. Callick noted:

“Sources in Beijing said China was in the early stages to snare a bigger chunk of BHP than the 9 per cent stake in rival Rio Tinto it bought with [US aluminium producer] Alcoa for $15 billion in a stock market raid in February.”

Mr Rudd has indicated to China he will not make any attempt to intervene in the setting of commodity prices out of Australia. The Rudd government, while ratifying foreign investment laws pertaining to sovereign wealth fund investment recently, has indicated it will not stand in the way of the Chinese pursuing resource deals in Australia. This issue becomes a bit cloudy however when it comes to state-owned companies.

The move overnight in the BHP share price came despite a weaker session for commodity prices. The US dollar was slightly weaker against the euro but stronger against the yen and Swiss franc. This is a clear indication of the re-emergence of carry trading, where investors sell the low interest rate currencies of Japan and Switzerland and buy high interest rate currencies such as Australia’s. The Aussie shot up yesterday as news spread about BHP’s US$300+ coal deal with Korean steel-maker Posco, with carry trading helping to finance purchases. The Aussie rose half a cent in 24 hours to US$0.9316.

Oil fell US59c to US108.50/bbl, while gold fell US$6.00 to US$915.30/oz on both dollar strength and news the IMF is intending to sell an amount of bullion.

Base metals were weaker in London as the recent rash of commodity fund buying in copper began to slow. Copper has come close to breaking through the US$4.00/lb mark but without sufficient fund support attention turns back to the extent of a global slowdown. News out of China is that demand has been moderate for the red metal in what is usually a strong month.

Copper fell over 2% in late trade, as did lead and zinc, while aluminium lost close to 1%.

The SPI Overnight gained 44 points, spurred on by the BHP news and despite a weaker Dow.

The Dow fell 36 points, or 0.3%, while the S&P lost 0.5% and the Nasdaq 0.7%. The close in the Dow represented a claw-back from earlier lows of down 87.

Early in the session the National Association of Realtors reported its index of existing home sales fell 1.9% in February to 84.6 – the lowest level recorded in the index’s history and 21.9% down from February 2007. There was further disappointment in the building and finance sectors as Congress suggested it was not happy with the Bush Administration’s plans to provide tax breaks to builders and home owners.

Earnings are now in focus, and Alcoa’s 54% fall in profit, as reported after the previous session, set a downbeat tone. This was further exacerbated by weak results and dour guidance from two chip-makers.

That the Dow only fell 36 points in such a sombre environment provided bulls with some comfort. The clue is going to be in ongoing earnings reports from non-financial sectors, given current estimations put ex-financial earnings into positive growth, weighed down by anticipated 60%+ losses in the financial sector.

Shares in major thrift Washington Mutual had a 10% reversal last night following a 28% jump on Monday as details of the previously touted private equity injection were made public. The private consortium will acquire US$7bn worth of new capital rather than the US$5bn originally reported. The shares fell as it was also reported WaMu lost more in the first quarter than expected, increased provisions for bad loans more than expected, dropped its dividend from US15c to US1c, and that the private equity deal would result in 100% dilution of the shareholder base.

Australian bank investors take note.

To add to US recession concerns, last night saw the release of the minutes of the previous Fed meeting which resulted in the cash rate being cut by 75bps to 2.25%. While Bernanke has been relatively coy about recession fears to date in public, the market learned that behind closed doors some members of the board were not simply worried about a recession, but about a “deep and prolonged” recession. Hence the significant cut. Collective Fed thinking is now that the first half of 2008 will see contraction, followed by slight growth in the second half.

Which brings us back to why commodities began to lose their lustre last night.

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