bhp headed for 17 with conservative pe ratio, page-17

I don't get your thinking. I fully understand that you see BHP as overvalued on a PE of over 20. (I agree with you totally). All I am pointing out is that 1. They are actually trading on a fwd PE lower than 20 and 2. The market (which at the end of the day is what determines the price) SEEMS to be looking fwd 2 years to FY11 prices to "price" the stock.

You're not the only one I suspect, as I don't get it either(valuating based on trailing PE). To imply product subsitution as something so simple and could happen in a flashso easily is simply naive. Valuing any commodity stock (with the volatility in pricing) would surely require as commodity price assumption (usually at a decent discount to be safe - such as the typical backwardation price curve for oil) over the next 7 years (typical boom to bust cycle) so that one can normalise their earnings profile (discounted of course) going fwd as well as identifying where we are in the cycle.

There are also other factors which affect commodity pricing, such as potential (inevitable IMO) devaluation of the greenback, as well as high inflation. Commodities provide a good hedge against both. And China, despite their large consumption, isn't the only significant consumer of raw materials. They can scream and jump all they like, and there's a reason why we only saw a 33% cut to contract iron ore pricing as opposed to the 40-50% they wanted - and it is what the spot market has been saying, which is demand is holding up far better than expected, whether it is due to high, abnormal level of stocking or otherwise.

618