China Growth Drives BHP Billiton Profit Increase

BHP Billiton (ASX:BHP) makes nearly AU$17 billion in profit in the last year. Markets rebound after their worst week in 17 years. Official unemployment remains below 5% for the 17th consecutive month. And the Australia economy rolls through its 17th consecutive year of expansion. Today’s Markets and Money, brought to you by the number 17.

Chip Goodyear contributed to the parade of 17s by announcing BHP’s AU$17 billion profit yesterday. The company’s full-year profit results were a 28% improvement on last year’s figures. They should also bring comfort to anyone increasingly freaked out about the depth and severity of America’s credit market meltdown.

Outgoing BHP chief Chip Goodyear had a lot to say about the rise of the Asian consumer yesterday in BHP’s conference call to announce results.

“We believe,” Goodyear began, “that the industrialisation and urbanisation that has driven China’s growth will continue for several decades, as billions of people strive for a better quality of life. This growth is resource intensive, and it represents a step change in resource demand. Once people get a view of a better way of life, and governments see that as a good thing, it’s very difficult to put the genie back in the bottle. And while we talk about China, India has a number of fundamental drivers that are quite similar. We also say that we see India as being ten or fifteen years behind China, but as you can see from the chart, they’ve begun that journey.”

“Now this growth in demand is happening in an environment where our industry, and those that service our industry, have underinvested for the last 30 years, and this will not change overnight. It’s created shortages in just about all the commodities, certainly that we produce. When combined with increased demand, and with the appropriate regulatory scrutiny, you see that that supply/demand issues and the shortages are certainly illustrated by this lengthening time period in which it takes new projects to be developed. And those items, we believe, will lead not only to a multi period of time when we expect to see the average price of raw materials to be higher than we’ve seen historically, but it will come with increased volatility. As inventories fall, volatility in our markets can increase dramatically.”

“Now while the US market remains important, it’s certainly not as important to commodity markets, as we saw 10 or 20 years ago. The growth that we’ve seen in India and China dwarfs the incremental movements in commodity demand in the United States.

Therefore we do find it curious, that on days when sub-prime markets and private equity debt seem to go into a meltdown, our industry underperforms financial services stocks in the United States and in Europe. Many investors have simply failed to appreciate that China and India are domestic economies. In the last week, we’ve had an opportunity to survey our customer base, we’ve talked to a huge number of people around the world, across all markets, to try to assess how recent credit issues in the United States, and perhaps in Europe, have impacted what they see as their business opportunity going forward.”

What did BHP’s customers say? “Within the United States, they’ve seen a moderation of growth that’s going back as the housing market has come off over the last year and a half or two years, but when you talk to people in China and India, they’re focused on strong demand growth, they’re focused on the shortage of raw materials, they are focused on their domestic market. Their fundamentals remain very much intact.”

You’d expect Goodyear to talk BHP’s book. But we think this long-term analysis is the correct one. It doesn’t mean there won’t be intense volatility in financial markets as the full impact of America’s woes is priced into financial shares. But it does mean you shouldn’t give up the search for quality resource companies that stand to benefit from the real boom in Asia (not the phony boom and real bust in America).

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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Greg Roach

Hi. I’m a new subscriber and I like your articles. Do you think the argument above still aplies now (Jan 2008)?

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