BHP bullish long term but cautious and unexcited for now

BHP Billiton managing director Marius Kloppers saw no reason to get excited about the global economic outlook and its impact on commodity prices at the release of the group's better than expected December-half profit.

By InvestSMART · 11 Feb 2010

By InvestSMART ·
11 Feb 2010

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Speaking yesterday at a Sydney briefing, Mr Kloppers said BHP's view remained unchanged: that economic recovery would remain fragile and its duration protracted. But BHP remains a super bull on the longer-term outlook.

"In contrast to our relatively modest outlook for shorter-term world economic growth, our longer-term demand outlook for the products that we produce continues to be robust," Mr Kloppers said. Two key factors underpinned that outlook. First, China's economy was tipped to remain relatively strong compared with those of developed countries, with its gross domestic product growing at a compound annual rate of a little less than 8 per cent out to 2025.

But more importantly, and a development that Mr Kloppers said would have a huge and lasting impact on commodity pricing, was the consequence of the growth in China being materials intensive.

"The materials intensity of the developing economies is much higher per unit of GDP than in the developed economies," Mr Kloppers said. "The consequence of this materials-intensive growth is that the developing countries like China tend to overwhelm their domestic resource endowment over time, product by product, which is basically the same pattern we saw in the industrialisation of Europe," he said.

Mr Kloppers said China's growth story had already overwhelmed its "indigenous endowment of iron ore". Next cab off the rank would be coking coal, a key raw material in steel making. China is the world's biggest producer of coking coal but in 2009 became a net importer for the first time.

"We have been waiting for this moment to happen," he said. "While we are not sure that 2010 will be an exact repeat of 2009, we do expect the trend towards imports of this product to continue (about 30 million tonnes in 2009)."

Mr Kloppers said it was possible to generalise that the overwhelming of domestic resources would extend beyond iron ore and coal. He reminded the audience that, apart from iron and coking coal, BHP had a world-class resource base in all the commodities needed to feed the hungry dragon.

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Frequently Asked Questions about this Article…

What is BHP's short-term versus long-term outlook on commodity prices and the global economy?

BHP says the short-term outlook is modest and the economic recovery remains fragile and protracted, so there's no reason to get excited right now. However, the company is very bullish on the longer-term demand outlook for the commodities it produces, calling that outlook robust.

Why does BHP say China is so important for future commodity demand?

BHP highlights that China’s economy is expected to remain relatively strong — with GDP growing at a compound annual rate of a little less than 8% out to 2025 — and that China’s growth is materials‑intensive, meaning it will drive sustained demand for commodities.

What does 'materials intensity' mean and how does it affect commodity pricing?

According to BHP, materials intensity means developing economies use more materials per unit of GDP than developed economies. That pattern causes countries like China to overwhelm their domestic resource endowments over time, driving lasting upward pressure on commodity demand and pricing product by product.

How has China’s demand already affected iron ore according to BHP?

BHP says China’s growth has already overwhelmed its indigenous iron ore endowment, meaning domestic supply could not meet the scale of demand from industrialisation and construction.

What did BHP say about coking coal and China's import trends?

BHP noted that while China is the world’s biggest producer of coking coal, it became a net importer in 2009 (about 30 million tonnes) and BHP expects the trend toward imports of coking coal to continue, even if 2010 might not exactly repeat 2009.

How does BHP position itself to benefit from rising demand from China?

BHP says it has a world-class resource base across the commodities needed to 'feed the hungry dragon,' implying the company is well placed to supply materials demanded by China’s industrial growth.

Were these comments made in connection with BHP's financial results?

Yes. Managing director Marius Kloppers made these remarks at a Sydney briefing when BHP released a better-than-expected December-half profit, while stressing continued caution about the near-term global outlook.

What key takeaway should everyday investors note from BHP's commentary on commodity demand?

BHP’s message for investors is clear: expect a fragile, protracted short-term recovery but strong long-term demand driven by materials‑intensive growth in China, which could support commodity markets over the longer term.