BHP Says China’s Worst Problems are Behind It

BHP Billiton Ltd
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BHP Billiton [ASX:BHP] CEO Andrew Mackenzie believes China’s economy has turned a corner. Having been a ‘bear’ on China three months ago, Mackenzie now counts himself among the bulls.

The evidence is stacking up in BHP’s favour.

The miner’s iron ore, coal, copper and oil are all moving through Chinese ports at a clip. Reports show iron ore inventory is at two month lows.

Low inventories are important because rising stockpiles indicate lack of demand for steel. With demand steady, it suggests China’s economy is performing better than many give it credit for.

This goes against everything we’ve heard of late. The news coming out of China suggests the economy is slowing, not recovering. Trade, manufacturing, and consumer demand have all fallen in recent months.

But BHP is better placed than most to assess the situation. Its core business is a strong indicator of the health of the Chinese economy. When business is good, then China is growing.

If the Chinese aren’t stockpiling materials at ports, it means they’re buying them. If these materials are flying out of ports, then the economy is more robust than it appears. After all, everything from infrastructure to cars requires steel.

Iron ore prices aren’t recovering

Strong demand doesn’t suggest that iron ore prices are heading for a rebound. Mr Mackenzie knows this.

He says the price risk for iron ore remains ‘slightly to the downside’. He would say that, considering his company is a large reason why prices remain low. BHP is behind the market-share driven strategy putting downward pressure on prices. Both BHP and Rio Tinto [ASX:RIO] have been raising iron supply to hurt smaller competitors.

Mr Mackenzie forecasts Chinese steel demand growing at 2% a year. That’s down from 20% on previous years. But this would validate BHP’s market share strategy. Any kind of growth benefits BHP’s iron ore business.

BHP knows the price of iron ore won’t rebound to last year’s peak of US$92 a tonne. Let alone the peak of US$187 a tonne at the height of the mining boom in 2011. But it’s trading higher than the US$44 floor it hit earlier this year. And prices won’t change much from their present US$60 levels.

On the Dalian Commodity Exchange, iron ore for January delivery fell 3.2% to US$62 a tonne.

China lends the economy a boost

The jury remains out on whether China has turned a corner. We need to look at the current situation in the context of China’s recent economic policy.

The People’s Bank of China cut interest rates five times in 12 months. The cash rate now stands at 4.6%. It’s also eased capital requirements for certain lenders. These measures have expanded the amount of credit in the system. And they help explain why things look better than they really are.

China is putting the brakes on the its sliding economy. For the time being, that’s keeping their problems at bay. Yet this is only masking the fact that economic activity is slowing.

BHP prepared for this. It knew China’s transition to a service and consumption economy would slow demand for materials. And it saw iron ore demand bottoming out. But China is still at the start of its slowdown. Shifting to consumerism comes with its own upheavals. And this change takes years, if not decades, to play itself out.

BHP is putting on a brave face for the time being. But it knows Chinese demand for materials will soften further. China’s transitioning economy guarantees as much.

No small wonder then that BHP is pushing US policymakers to relax rules on oil exports. BHP knows its business needs new sources of growth to offset China’s slowdown.

Yet even 2% yearly iron ore growth in China is better than nothing. BHP will hope that investors agree.

Mat Spasic,

Contributor, The Daily Reckoning

PS: China’s growth rates of 7% are still the envy of the world. But they come with risks attached. That’s especially true for stock markets.

The difference between China and Australia is one of degrees. Chinese policymakers have a lot of room to prop up the economy.

The central bank is cutting rates, and lowering capital requirements. The message its sending is clear: we’ll do whatever it takes to keep the economy growing.

That’s why The Daily Reckoning’s editor, Phillip J. Anderson, is optimistic on China.

Phil disagrees with economists who say that slowing growth rates in China point to economic disaster. In fact, he thinks China’s boom is only beginning. And he says it’s set to last another decade.

Phil’s written a free report on China that he wants to share with you. In it, he shows you why China still presents the perfect opportunity for investors. By equipping you with the right tools, Phil will show you how to invest confidently in China. To find out how to download his report, ‘The Cassandra Syndrome: After This Report, You Won’t Worry About China Again for Another Decade’, click here.

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