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2006 profit expected at $us9.1 billion to $us9.4 b By Barry Fitzgerald
December 29, 2005

JUST shy of three years as BHP Billiton's managing director, US-born Chip Goodyear is spending the holiday season overseas with family.

The break will allow him to recharge his batteries ahead of what could be his most challenging year atop the global resources giant.

While the group's 2006 (June-year) profit to be unveiled in August is tipped to be an amazing $US9.1 billion ($A12.5 billion or $A34.2 million a day), it is also tipped to be as good as it gets, given expectations for commodity prices to fall from their multi-year highs.

If the market has got its commodity price and exchange rate assumptions right, the consensus is for BHP's profit to fall back to $US8.6 billion in 2007 and to about $US8.4 billion in 2008.

For the first time since Goodyear's appointment to the top job, he will have to deal with a market that dislikes non (profit) growth stories.

Since becoming managing director in January 2003, Goodyear and BHP have reaped the benefits of the China-led boom in commodity prices, with profit surging from $US3.37 billion in 2004 to a record-breaking $US6.39 billion in 2005.

BHP shares are up 150 per cent in the same period, but the looming end to the dream profit run also means the dream share-price run is also set to run out of puff.

However, market consensus for BHP profit for the next three years might be overly bearish. Goodyear last August hinted that might be case after announcing the $US6.39 billion profit for 2005 — a record for corporate Australia.

He suggested that analysts were suffering from the same paranoia about the sky falling in that bedevilled Chicken Little.

He said the investment community, like the resources industry, had grown up on a diet of cyclical highs and lows in commodity prices.

Given that diet, investors had "to believe Chicken Little — the sky is falling or is going to fall. They may be right. But there is the possibility that they are not right. That is, it may be a secular change."

History shows that most analysts were caught hopelessly short on their 2005 commodity assumptions. Few analysts believed copper would march through $US1.20 a pound, let alone $US2, as it did. And it was only when hurricane Katrina hit the Gulf of Mexico that they upgraded their oil price assumptions for (calendar) 2005 from less than $US40 a barrel to more than $US50 a barrel.

Should the commodity price boom become a "super cycle", fed by the high-growth economies of China, India, Brazil and Russia, the same analysts will spend much of next year upgrading profit expectations, not only for BHP, but for the entire resources sector.

As it is, the five locally based analysts considered to have a good handle on BHP and commodity prices expect BHP will do better than consensus.

Against the broader consensus for a 2006 profit of $US9.1 billion, their consensus is for $US9.4 billion. And for 2007, they expect $US9.21 billion compared with the broader consensus for $US8.67 billion.

The reporter owns BHP Billiton shares.