BHP and RIO Chiefs offer firm evidence on China

There was comforting commentary for the mining sector during the weak from sector leaders BHP and Rio Tinto.Both agreed that the all-important Chinese economy – for the resources sector at least – was on the march after coming out of COVID lockdowns.

They can be accused of talking their own book in the wake of their sharply lower profit reports, the December half for BHP and the full-year for Rio.

Their shares prices have been under the pump since the lower profits were announced, due mainly to the paring of their dividends in line with their profit falls.

But commodity price action in the opening months of 2023 does suggest that the uncertainty around Chinese demand that dogged the mining sector in the back half of 2022 is lifting fast.Iron ore is up 29% from its December half average, and copper has put on 16%.

If the higher levels are maintained, profits and dividends will substantially be higher in the next reporting periods.

Still, the market remains wary on China, leading to share price weakness for big two of the mining game.

BHP and Rio are forensic on reading the Chinese market, as might be expected given their reliance on its demand levels.

So perhaps the market should be listening to what amounts to most the upbeat assessment on China demand by the pair in recent times.

BHP CEO Mike Henry said on Tuesday that while Europe and the US could see slowing growth, China’s late reopening from COVID is progressing well.He pointed to “positive social and economic signposts emerging”. “Bank lending, mobility data, new home prices and business surveys are all showing solid signs of improvement in early calendar 2023,” Henry said.

“The pent-up demand being released as China opens back up from the COVID lock-downs, coupled with growth-promoting policies such as the support for the housing market, are expected to drive stronger economic growth and increased demand for the commodities we produce.

“We said in August that we believe that China will be a stabilising force for global growth over the remainder of this year and we now have even greater conviction in this view.”

Rio CEO Jakob Stausholm followed up on Wednesday with the observation that while much uncertainty remained, there are some green shoots emerging.

“Commodity prices have found some support in recent months with global base metal inventories at low levels and Chinese policy pivoting to pro-growth,” Stausholm said.

He finished up with an anecdote involving Rio’s biggest customer, the Chinese state-owned steel group Baowu.“I spoke to our biggest customer, Baowu, last week and certainly from them, there is a positive way of looking at where the economy is going and there’s a need for steel,” he said. “So, I am quietly optimistic. It’s not going to be wild swings but the market has already steadied itself for good demand from China and that’s what we are seeing happening.”

China acting as a stabilising force to weaker growth in Europe and the US is good news for the entire mining sector.The question now is when will the market get on board with the thematic that China is back.