BHP sets its market cement

The closure of BHP's Norwich Park mine is an important signal of the company's patience and cautiousness in its quest to solidify its position as the major global supplier of coking coal.

The shut down of the Norwich Park mine by BHP Billiton-Mitsubishi Alliance is an important signal that BHP is sending to both its unions and the markets. BHP is becoming apprehensive about the size of its expansion at a time of possible global slowdown, and so it's time to underline that it is not in the business of running high-cost operations.

BHP is very bullish about the long-term coking coal market and it wants to cement its position as the major global supplier of coking coal.

But the BHP strategy is to be a low-cost producer in all its mines and rely on the market price of coking coal rather than long-term price guarantees. Using these twin strategies BHP believes it will maximise its long-term gains.

Norwich Park had become a higher cost producer partly as a result of union action but it was by no means the sole cause. If BHP gave in to the unions then other Queensland coal mines would come into the same high-cost category and would be required to be shut. Moreover, it would mean that the $10 billion in new and expanded facilities that BHP has on the Queensland drawing board would be much higher cost. Worse still, once BHP allows unions to regain management control over the coal mines then its other Australian mines would be infected and become higher cost.

The company has been remarkably patient, clearly believing that in the longer term the high wages that miners receive would overcome union power. But the length of the strike clearly shows that BHP has not been as skilled as Rio Tinto in generating staff engagement.

The moderate words BHP used in its Norwich Park closure announcement indicates it is working on staff engagement, which is a vital part of productivity.

For Australia’s largest company to be engaged in a re-think of what was an enormous program of expansion is one the factors that is causing weakness in the BHP share price. Of course many institutions do not want BHP to expand but rather would prefer BHP to give back the cash flow to shareholders via dividends or buy backs. This is an incredibly short-sighted view but it underlines the fact that BHP expansions must deliver value.

Meanwhile the dominance of the Australian sharemarket by large miners like BHP plus the banks means that we are dominated by the two areas of the global economy that are under most pressure.

That’s why our sharemarket has not performed as well as the US or Hong Kong. For the overall global market, the next 48 hours will be important. The avalanche of liquidity that has been behind the rise in US stocks staged a technical rally over night. The bulls need to see this rally consolidated and if it does consolidate the world will be a much safer place. At least for a while.

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