The French revolution, and BHP’s strategic shift

Change is in the air, in France and at the Big Australian.

Summary: France could be the catalyst for major change across Europe, with the country’s new President seeking to implement key economic changes. Meanwhile, big changes are underway at BHP too.

Key take-out: Spain, Italy and other European countries are watching developments in France, and BHP shareholders should also prepare for changes on potash and other fronts.

Key beneficiaries: General investors. Category: Investment strategy.

It’s amazing how sudden events can transform the strategic outlook for countries, regions and, of course, corporations.

A few months ago it was hard to get excited about Europe, because just about everything was moving in the wrong direction. Now, suddenly with France’s election of President Emmanuel Macron, the world has become bullish about Europe and the euro is rising.

We are also seeing a change in acceleration of the strategy at BHP in the light of the Elliott Group thrust, and it is worth drawing lessons from the Ford US chief executive change.

Tackling unions and bureaucracy

The Europe outlook has suddenly changed, because the market believes Macron will undertake three key tasks. First, to increase employment, he will take on at least part of the horrendous work practices and labour laws in France. That will mean strikes and much anguish with the unions, but the market believes he will win.

And if he does win, then the momentum will encourage the governments of Spain and Italy and other parts of Europe to do exactly the same thing. So, if all that occurred, Europe’s labour market would look much better.

Secondly, he is planning to reduce the size of the French public service and, once again, if he can handle the strikes and anguish that always goes with those actions it will inspire other countries and perhaps even Brussels itself to tackle their bloated bureaucracies.

And perhaps most importantly, his election comes in in the wake of the problems of President Trump. This has given a new sense of confidence to the Europeans that perhaps, after all, their form of government is better than the mighty United States.

Those two tasks are monumental, but even if Macron succeeds there are other hazards that Europe must tackle to justify the rising confidence tide.

European banks are hiding bad debts and slow payers, and that is holding back the whole banking system. There is always a chance that this will erupt, but given that it has gone on for so long the odds are against an eruption. Nevertheless, the banks do need to face the problem. Once they do, the Macron momentum will greatly increase.

And, lastly, Europe has a horrendous youth unemployment problem – they are not alone, but they will need a way to reduce it to really gather momentum. In the US, quantitative easing did almost nothing for the American economy. All it did was to transfer the bond assets that the banks were holding to the Federal Reserve for bank reserves.

The banks could have used those reserves to lend against, but Americans in light of the GFC were not great borrowers. By contrast, Europe’s quantitative easing was actually effective because it gave stability to the problem banks (albeit – it doesn’t eliminate the problem) and it enabled countries like Greece and Italy to stay in the euro. The reaction to Macron is clearly an important start for Europe, but here will be fluctuations in markets because there is a lot to do.

BHP accelerates its strategic reshuffle

Now to BHP. As we know, the Elliott Group wants BHP to lift its leverage and return more capital to its shareholders as part of the elimination of the dual corporate listing process.

The BHP strategy has been to reduce debt. But we are seeing that, when challenged, leading companies often relook at their strategies. So, at the recent Barcelona investor presentation, BHP CEO Andrew Mackenzie indicated that the company was beginning to set sail on the second stage of its Canadian potash project.

You will remember that during the mining boom BHP bid $US40 billion to buy the Potash Corporation, which was at the time the leading global potash group. Incredibly, and thankfully for BHP shareholders, the Canadian government did not allow the bid to go through. BHP was left with the much more conservative strategy of developing its own potash mines based on excellent reserves that it discovered in Canada.

The Big Australian was lucky, because not long after the BHP bid was stopped the potash market collapsed and the Potash Corporation was worth only a fraction of the bid BHP had put on the table. The company currently has a market capitalisation of $US14billion.

The fall in potash happened because Russia increased its production. Potash is an essential ingredient in fertiliser and will be part of the boom we are expecting in farm production. BHP plans to spend just under $US4 billion to take its potash deposits to the next stage of production. The potash market is nowhere near its peak, but it is starting to pick up.

If President Trump announces his tax package BHP is almost certain to respond by restarting the Resolution mine in Arizona, which it owns jointly with Rio Tinto. It will also be under considerable pressure by the Australian government to hurry up with Olympic Dam, especially given the government stood behind the Big Australian when Elliott was initially thrusting for a change in control.

The sums on all three projects—potash, Resolution and Olympic Dam – will have to add up, but BHP has a new mindset. It is possible that the company will sell its shale deposits in the US to satisfy the Elliott people.

I can’t see any reason why BHP should sell its oil interest in the US unless it thinks the oil price is going to collapse. Indeed, the price is currently moving in the other direction.

Ford backs over its CEO

Finally, Ford has dropped its CEO, Mark Fields. He was an ambitious CEO who wanted to turn Ford into a mobility company and not just a car maker and marketer. He vowed Ford would have a commercial driverless car by 2021.

When the US motor trade turned down, the market turned on him and he has been dropped. It is not easy to be a visionary leader when the market for your base products turns down.

The institutions hate you, but vision in tough times is exactly what should happen amongst large corporations.