Some pro-BHP reading if you haven't come across it from the man who was the first to inform us that a rate cut was on the way. Hopefully he is accurate with this as well.
China in the next decade will use as much steel as the US in the last centuryFont Size: Print Terry McCrann | August 23, 2008
IN just the next 10 years China will consume about as much steel as the US did in the entire 20th century, when it was the world's industrial powerhouse.
This projection is drawn from a graph in BHP Billiton's presentation on its - there really is no other word - stunning $2 million an hour 2007-08 profit.
The point of the graph, from BHP's perspective, was of course to emphasise, as the presentation put it, "a huge call on steelmaking raw materials".
The two main ones being of course iron ore and metallurgical (formerly known as coking) coal - both of which BHP happens to have quite a lot of. Or to be more exact, Western Australia and Queensland, respectively, have a lot of.
BHP sought to make two points: that it is going to sell a lot more iron ore and m-coal to China. And implicitly at higher prices.
We certainly know that's the case in the coming year, when contract iron ore prices will rise by nearly 100 per cent, and m-coal by more than 200 per cent.
The important point I'm adding is that Australia is also going to sell a lot more, more expensively, of not just these two materials. It will sell the full range of commodities in demand in an industrialising, urbanising, increasingly prosperous China. Minerals, energy and people energy - otherwise known as food.
A further point that gets lost in translation is the very different nature of China's current and coming development, compared with the earlier Asian tigers, starting with Japan, that makes it so much better - both quantitatively and qualitatively - for Australia and companies such as BHP and its target, Rio Tinto.
The Chinese take-off was just as similarly rooted in exports, especially of consumer products and to some extent processed input materials, as Japan's South Korea's and Taiwan's, but it will be very different. Most of that coming indigenous expanded steel will stay at home in infrastructure and then increasingly domestic capital and consumer goods.
In short, it will add to global steel-making. Whereas Japan, especially in the days of its steelmaking growth and dominance, was largely replacing old, inefficient steelmaking elsewhere. The same with South Korea.
So we are not only going to see Chinese demand for iron ore and coal continue to grow at a volume never seen before, and for a while it will be mind-bogglingly unlike anything seen before.
That gross Chinese demand is going to add largely to the global net demand. Yes, it will replace some steelmaking elsewhere in the world, but not to the same extent the Japanese and Korean expansions did.
This is the core reality of the world in which we are going to live over the next decade or so. It makes an absolute nonsense of shrill cries that the "commodity boom is over", just because the oil price has dropped to $US115 or so.
"If only," BHP might say. Because $US115 is nearly $US20 more than the $US96 it averaged over the course of 2007-08. Yes, other commodities have fallen further, and we are seeing marginal production being shut down around the world.
The point of the China story, though, is to look through the short-term noise of combined over-bought commodities and speculative activity, to understand that global commodity consumption is trending in only one direction.
Let me, in passing, mention two other incidental points that flow from this. The fact that Australia is going to sell more resources at higher prices will deliver us a surprise trade surplus in 2008-09.
Not a current account surplus: our income deficit will leave us a current account deficit, although it will be dramatically lower than the deficits of about 6 per cent of GDP in recent years. Somewhat perversely, the income deficit is actually increased by the commodity profits that accrue to foreign shareholders.
It will be, though, a bigger trade surplus than Treasury anticipated at the time of the May budget. It forecast a small one. It's not clear whether the likely $20 billion, or even higher surplus, is in line with that expectation.
Secondly, if you believe carbon emissions cause global warming, go short on fur coats. What is going to happen in China is going to emit an awful lot of carbon. It will swamp whatever - repeat, whatever - we do, not just in Australia, but in the developed world, to cut emissions.
Kevin Rudd's emissions trading scheme and all the rest is like trying to empty a swimming pool with a garden hose, while China has a half-dozen fire hoses pouring water in. Even if the US followed us, we might get up to a half-dozen garden hoses taking water out.
So BHP's profit, and even more its future, is in microcosm Australia's future. It is also Rio Tinto's future. For when you really understand the comparative drivers, even Rio's "absolute value" argument to reject BHP's offer evaporates.
A BHP share, adjusted for the terms of the offer, is arguably not only relatively better value than the comparative Rio paper, but better in absolute terms as well.
The Rio board will have to look into its collective soul in coming weeks. Resistance might not only be futile but destructive of value for Rio shareholders.
The second most stunning profit of the week came from Macquarie Bank wannabe Babcock & Brown. In an important sense it is the other iconic marker of our investment present. That's to say, where B&B goes, and how it goes over the next several months, will largely be how the overall market goes.
On the surface, adjusted for those one-offs, the profit actually looked quite good. Well, let's say, reasonable. Which of course begs the questions: will there be more one-offs and when does a continually cascading and expanding series of one-offs become one-not-offs?
I just want to highlight one problem. The further shredding of B&B's share price left it selling at less than three times reported interim earnings per share, calculated after the write-offs. Something is not right - the share price or the profit.
The bigger point is that the longer-term China story is likely to be overshadowed by the continuing fallout from the global financial meltdown - and not just among paper entrepreneurs such as B&B, but into the real economy, obviously especially in the US, but even China as well.
We all have to live in the present, but it would be a huge mistake to believe that B&B defined our future. The board's failure to aggressively or seriously tackle its pervasive corporate malaise will provide plenty of raw material in the months to come, but none of it will be shipped off to China.
BHP Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)