In an Uncertain World, the Big Australian Gets Lucky

I start with an alert to all those who are saving substantial sums in superannuation. Through press leaks and announcements, the government has made it known that major changes to the superannuation rules are coming.

The first change is that there is likely to be a cap of $5 million on the amount that can be invested by an individual in superannuation. Also on the agenda is not allowing the tax-free superannuation component that arises with people in pension mode to be fully escalated with inflation.

The government is also considering mandating that superannuation funds invest in rental housing for social needs and in the equipping of the Australian power system for renewables. It is not known whether future restrictions on investments by superannuation funds will apply to self-managed funds. We are dealing in great uncertainties. I will keep you posted.

Now to the Big Australian.

For BHP, nickel has been the “lucky metal”. On the other hand, at least in Australia, and unlike Chile, copper has given BHP a different experience — it could be described as the “unlucky metal” for BHP in Australia. But, as we look at what BHP is planning in both copper and nickel in Australia, we can see a new BHP emerging. 

When BHP bought Western Mining back in 2005 it was attracted by WMC’s enormous low-grade copper/uranium deposit at Olympic Dam. It planned to use its iron ore cash to create a massive open cut mine so that the riches of Olympic Dam would be exposed. 

A side play was the Kambalda nickel mine. Soon after BHP bought WMC the nickel market boomed and the Big Australian almost paid for the entire acquisition as a result of the profits made at Kambalda during that boom.

But then nickel fell sharply in price and Kambalda was almost a forgotten asset. When BHP was splitting off smaller mines into the South32 company it offered the new board its nickel operations at Kambalda and Mt Keith. They didn’t want them, so BHP kept them. 

Now those two nickel assets – but particularly Mt Keith – will be important generators of future cash. Mt Keith was discovered in 1969 soon after Poseidon and was then owned by the Metals Exploration company. Metals Exploration disappeared and the leases ended up with WMC and then, of course, BHP. 

Mt Keith is a huge low-grade nickel reserve with the potential to be developed into a major global mine and the world is set to be short of nickel for the battery boom. Meanwhile, at Olympic Dam, BHP found even more copper than WMC had discovered but abandoned the idea of a massive open pit. 

Western Mining’s initial mine incorporated a smelter which separated out copper and uranium and both could be sold on the world market. BHP did not want to erect another smelter and did enormous work trying to leach copper and uranium out of the ore but, at least so far, has failed. 

But copper, like nickel, is part of the electrical revolution and BHP has gone back to planning an enormous smelter to produce copper metal and uranium – a modern version of the original version of the Western Mining strategy.

Both nickel and Olympic Dam will be big projects. The company would love to buy Oz Minerals which has discovered two major copper ore bodies which are much easier to mine and treat than Olympic Dam. 

BHP has made a takeover bid, but Oz Minerals has a very close-knit culture and will fight any BHP takeover unless the price is very high which BHP says it won’t offer. I suspect that BHP’s operation in Australia outside of iron ore will be concentrated on Olympic Dam and Mt Keith. 

China's Demand for Iron Ore

But in the medium-term, BHP’s fortunes will depend to a large extent on the demand from China for iron ore. 

Right now, China is in a difficult position because over a million apartments are being constructed by builders who don’t have the capital to finish those projects and the Chinese families who bought the unfinished apartments are starting to stop paying instalments as their contract requires them to do. 

Quite sensibly, they know that unless the government intervenes the apartments will never be built. Worse still for China, the building companies were often funded by local regional banks and the banks themselves are teetering on the brink of insolvency. 

In what is good news for BHP, Rio Tinto and Fortescue, there are signs that the central government is instructing the local governments and their banks to lend money to the builders to get the apartments completed. In addition, infrastructure spending is now being ramped up.

At some point the Chinese will have to undertake a longer-term rescue operation of the local banks. If stimulation continues it will lift the demand for iron ore. 

Taiwan and Global Trade

Historically, whenever a dictator faces problems at home, an obvious strategy is to start a war and there is no doubt that China wants to acquire Taiwan. It won’t be an easy decision for Xi Jinping because if he invaded Taiwan, the Taiwanese would almost certainly fight in a way not dissimilar to the Ukrainian people. 

A Taiwanese invasion by China would start an lengthy war where the Americans would almost certainly duplicate the Ukrainian strategy and send arms and they might send troops. Unless China achieves a very quick win the war would almost certainly close the South China Sea because it would be too hazardous to send merchant shipping through it. 

The South China Sea handles about one third of the world’s shipping. Iron ore and other exports from Australia and other countries would stop. China would struggle with its construction industries and would run short of food. The end result would be a significant world downturn.

It is evident that the days of globalised trade are set for severe decline. Russia is not going to be able supply Europe with most of its gas; America’s companies are going to be much more wary about exporting to China, particularly technology products. Nothing illustrated this better than the American government’s action to boost investment in high technology chip-making by making some $US50 billion available to technology companies.

But those accepting money would need to pay it back if they used the new technologies in China. The big chip-makers in Taiwan, South Korea, Japan and China depend on the American-based EDC chip systems to develop their new products. China has now embarked on an all-out race to replace the American technology that its computer businesses depend on. 

Meanwhile, the share markets need to watch the China-Taiwan saga very carefully. The globalisation era has ended and step by step there will be an aligning of countries that are like-minded.