BHP Billiton Profits from Chinese Consumption

Mining stock BHP Billiton has repositioned to take advantage of China's economy emerging from investment to consumption driven

Mark Taylor 21 August, 2013 | 2:20PM
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BHP Billiton is planning to unlock more cash and higher returns from fewer incremental investments next year. This is music to our ears, and we suspect also to those of the market. Surprising then is news the company will invest $2.6 billion in Jansen potash, a commodity whose market is presently in turmoil and one that is still very immature.

Still, $2.6 billion won't break the bank and can be viewed as BHP planning for China's economy emerging from investment to consumption driven. Rising living standards will demand higher-quality food and potash is potentially a key beneficiary, but this is in the longer term and the company is still taking a considerable leap of faith.

BHP was positive on the medium-term outlook, saying continued Chinese urbanisation, in conjunction with a slowed investment supply, are suggestive of a more balanced rather than oversupplied market. We concur, and a low-cost producer like BHP can thrive in that scenario.

Following 30 years of decline, the world has again experienced a sustained increase in commodity prices. The last long-cycle uptrend, born at the end of the Great Depression, was driven by the rebuilding of Europe after the wars and later on the rise of Japan to economic powerhouse status. The oil shocks of the 1970s were an effective death knell.

The most recent rise, forged on the industrialisation and urbanisation of the world's most populous country, began early in the final decade of the 20th century, though the seeds were probably sown considerably earlier. China's rise from economic obscurity has sustained commodity price growth into the 21st century. Despite now accounting for the lion's share of global consumption of many commodity staples, its per capita use remains well below that of industrialised nations--the difference being China's vast population. India's near-equivalent numbers portend a lagged reinvigoration of commodity price support. Yet after more than a decade of growth the current resource boom is likely drawing to a close.

Positioned in the centre, BHP is the world's largest publicly traded mining conglomerate, with the wherewithal to weather the boom-and-bust cycles of the volatile commodity markets. Geographic and product diversification give BHP more stable cash flows and lower operating risk than most of its mining peers. Most revenue comes from the relative safe havens of Australia/New Zealand, North America, and Europe.



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Mark Taylor  is an equity analyst at Morningstar.