THE DISTILLERY: Commodity blues

BHP Billiton came under selling pressure from London thanks to a media report that The Australian’s Barry Fitzgerald points out is old news. However, the reality is that BHP Billiton has lowered its expectations for coming years and the question is whether the cost of doing business in Australia should take some of the blame. Also in this morning’s edition of The Distillery, Gina Rinehart’s latest increase in her Fairfax Media stake appears to be too much for chairman Roger Corbett to resist.

Firstly, The Australian’s Barry Fitzgerald reports that BHP effectively shrugged its shoulders to a report from London that it has reduced its commodity price forecasts.

"Asked about the London report yesterday, BHP's head office in Melbourne's Greek quarter simply pointed back to Kloppers' mid-May warning and Nasser's later hammer response. No one has a crystal ball on commodity price moves, but due partly to BHP's efforts of the past 10 years or so in dismantling annual price negotiations to deliver short-term market-based prices across nearly all mineral commodities, the forward curve of price expectations by real world markets is the next best thing. Before his chat to investors back in mid-May, Kloppers had looked along that forward curve across BHP's key commodities, and realised the $US80 billion investment across five years, floated back in February last year, was no longer realistic.”

Business Spectator's Stephen Bartholomeusz explains just how significantly the mindset at the major miners has shifted in just over a year.

"Fifteen months ago, when commodity prices were in the stratosphere, the dilemma for the big resource groups like BHP Billiton and Rio Tinto was how quickly they could deploy the torrents of cash pouring into their coffers on their ever-expanding portfolios of mega-projects. Then the eurozone crisis emerged, China’s growth slowed, commodity prices began tumbling and the tide of cash dwindled. For the two Anglo-Australian miners, iron ore is their key commodity. Iron ore prices were nudging $US180 a tonne last September and are now closer to $US130 a tonne. If sustained and annualised, with every $US1 per tonne movement in the iron ore price impacting BHP’s earnings by $US90 million, that would rip $US4.5 billion from BHP’s bottom line and slightly more from Rio’s. Commodity prices generally are down about a third from their peaks. No wonder BHP and Rio have become progressively more cautious as this year has unfolded and have backed away from talking about their pipelines of new projects.”

While Bartholomeusz argues that the Australian miners aren’t helped by the ever-rising costs of dealing in resources down under, The Age’s Malcolm Maiden takes Tony Abbott and Christopher Pyne to task for blaming BHP’s hesitancy on Olympic Dam on the carbon tax and union militancy (Labor’s fault).

"The truth is more complex, as usual. It's the timing of the Olympic Dam expansion that is being reviewed, and the carbon tax and mining tax are not decisive. BHP chief executive Marius Kloppers, the group's chairman, Jac Nasser, Rio Tinto chief executive Tom Albanese and Glencore chief executive Ivan Glasenberg have all warned recently that Australia is becoming a more expensive place to invest in, and a more regulation-heavy one. But as BHP reacts to softer commodity markets by re-sequencing its lengthy line-up of potential resources developments, Australia's carbon tax and mining tax are not front of mind: hardly surprising really, given that Kloppers is a supporter of carbon pricing and helped negotiate a watered-down mining tax after Julia Gillard pushed Kevin Rudd aside in June 2010.”

Meanwhile, The Australian Financial Review’s Chanticleer columnist Tony Boyd argues that Rinehart’s latest raid has put the company in play and refreshed concerns about the company’s strategic direction.

"The intriguing aspect of this sharemarket raid was that the share price fell. That says the market has little confidence that Rinehart will make a full takeover bid for the company. People close to her say that is correct. The fact that Fairfax shares fell one cent on the day a billionaire was buying stock tells you that the hedge funds and others who followed Rinehart into the market were unable to offload their stock to her. The message from the sharemarket is that Rinehart wants the sort of influence a Fairfax directorship will bring but she does not want to spend another $1.2 billion taking full control of the company. However, she may be able to get complete control of the most influential parts of the company, the metro group, if other shareholders back her and she falls into line with their plan for a Fairfax break-up.”

The Sydney Morning Herald’s Elizabeth Knight writes that Fairfax chairman Roger Corbett held out for as long as he could for Rinehart’s boardroom push.

"But it now appears likely that Rinehart will get board representation. Her case has been bolstered by support from another of Fairfax's large shareholders, Allan Gray Australia. With a 9 per cent stake, its boss, Simon Marais, said of Rinehart's move, ‘I don't have a problem and I think it's good for the company to have people [on the board] with their own money invested – they tend to be more careful'. From the Fairfax board's perspective it seems like a fight it no longer wants to have. It is believed that neither Rinehart nor her representatives contacted Corbett before wading into the market yesterday and she has visited the company only once since taking her initial holding.”

While we’re on sharemarket raids, The Age’s Adele Ferguson looks at the steady stream of takeover rumours that have gripped the market and points out it will be interesting to see if building materials company CSR is next (it’s share price hit 25-year lows). And speaking of takeovers, The Sydney Morning Herald’s Michael Pascoe doesn’t accept the excuses that will be trollied out for past and present Qantas Airways chief executives if the company is ultimately broken apart.

In other company news The Australian’s John Durie asks whether competition tsar Rod Sims is fighting a battle from the past with the supermarkets. The Australian Financial Review’s Matthew Stevens says the renewed tension between Qantas and its unions, along with the protracted problems between BHP Billiton Mitsubishi Alliance and its unions, simply underlines the push by the workers united for managerial control.

In economics, The Australian’s Glenda Korporaal argues that there’s only so much that Reserve Bank Governor Glenn Stevens and Treasurer Wayne Swan can do to distract Australians from the ongoing European debt crisis.

The same newspaper’s economics correspondent Adam Creighton delivers a brutally succinct piece that questions the opposition’s unquestioning revulsion to debt when Australian government borrowing rates are at ludicrously low levels. Are low rates only good for mortgage holders, not the Australian government? However, Creighton also offers a separate piece that criticises Australia’s bloated bureaucracy, the headline for which invokes the Soviets.

Meanwhile, The Australian’s economics editor David Uren says business have the right to be scratching their heads when they hear that Prime Minister Julia Gillard prioritises a company tax rate cut. The budget would have been a good opportunity.

The Age’s Ben Doherty almost pleads with readers to see the gloomy state that India’s economy has descended into – the column cannot emphasise enough how under-represented India’s malaise is in the Australian press.

And finally, Fairfax’s Max Newnham takes on the Australian Taxation Office for its heavy tactics to bludgeon taxpayers into submission – a sentiment that all Australians can share in.