BHP chief executive Andrew Mackenzie has hardly sat still in his six weeks on the job. The Scot has travelled the world telling rooms full of fund managers and analysts that the world’s biggest mining company most important task is cutting costs. The reception to this message has been of almost universal praise. But Mackenzie has, of course, almost no influence over perhaps the most important determinant of the company’s bottom line, demand.
Demand for BHP Billiton’s iron ore, copper, nickel and other commodities is perhaps going to be considerably less than the company and many of its analyst friends had hoped. BHP’s stock has dropped 11% since May 10 when Mackenzie’s tenure began. The S&P/ASX200 Index has dropped by the same amount over the same period. But even if BHP shares rise today after two days of falls that have amounted to 5.1%, the longer-term outlook for the stock remains clouded because of a lack of demand for commodities, particularly from China, now the world’s second-biggest economy.
China’s leadership seems clearly less willing to fund the rapid headline economic growth that gets sellers of base metals excited. President Xi Jinping and Premier Li Keqiang may be more concerned that previously easy credit has fueled speculative activity that has made some very wealthy while the bulk of an increasingly critical population are voicing their concerns over pollution, living costs and inequality through an increasingly receptive state run media. China’s Communist Party leadership has historically valued social stability over everything else, haunted by the memory of a century of civil wars that were finally squashed in 1949.
Those analysts who have examined BHP Billiton in the last weeks and proclaimed it cheap have not taken into account the fragile nature of the world economy and demand for minerals, particularly in China. Europe remains in what some still charitably describe as recession. Markets seem convinced one day, but not another that the US economy is on the path to sustained growth. If China’s central bank, as it seems, is willing to tighten monetary policy, that means economic growth may be rather below analyst estimates of more than 7%.
This is hardly good news for BHP Billiton and its shares. Mackenzie may be able to urge his troops to greater efficiency but until there is evidence that Chinese steel mills want more iron ore and coal, the miner’s stock is likely to suffer. Yesterday, the spot price for iron ore imported through the north east Chinese port of Tianjin fell a second day by $US2.60, or 2.2%, to $US114. The Tianjin iron ore price has now fallen 5.5% in three days. Chinese commodity demand may be ebbing as Beijing turns the spigot of easy money slightly closed.