Now that South African Marius Kloppers is running Australian-icon BHP (ASX:BHP), is he more interested in Canadian aluminium producer Alcan (NYSE:AL) or America’s own Alcoa (NYSE:AA)? Or should he be more interested in his own shares?
Kloppers does not exactly have the same problem David Neal has at the Future Fund. Neal has to invest the money in something to offset a future liability. He cannot return cash to public pensioners.
BHP, on the other hand, does not have to make an acquisition. In February the company bought back nearly US$13 billion in its own shares. Chip Goodyear decided the best use of cash was to return it to the shareholders in the form of a buy-back.
Whether the new regime at BHP – or Rio Tinto (ASX:RIO) for that matter – decides to pursue major acquisitions depends on where they think we are in the commodity cycle. If you think we’re at the top of the cycle, where prices are more likely to decline than increase, you return cash to shareholders, or save it for a rainy day when assets are on sale for cheap. Or, cashed-up from years of bumper profits, you see consolidation in the sector as the big fish buy the little fish, and prices for metals gradually (or not so gradually) decline back to cyclical lows.
But BHP and Rio must think there is more life to the boom yet. We don’t know what their price forecasts for base metals are. But we do know nearly everyone on the planet has been surprised and taken a bit off guard by the strength and persistence of metals demand from China and the emerging world and is rushing to meet the demand with new resources.
Then again, maybe we shouldn’t be so surprised. Nearly three billion people are emerging into the industrial, resource-intensive modern economy. It’s the third great industrial period of the last two-hundred years…with by far the largest number of people generating resource demand. It could keep surprising us all-in terms of demand-for quite a while.
It will probably surprise us all with massive volatility in financial markets, too. Hence our periodic warnings about the credit bubble. And truth be told, the exact nature of the relationship between the credit bubble and the current super-business cycle isn’t exactly clear. Is China’s growth itself just an aspect of this massive global bubble? Or will it have staying power? Our bet is on the staying power. But we expect a lot more financial instability.
By the way, BHP’s chances of actually buying Alcoa are, in our opinion, not good. It’s an election year in America. Alcoa is an icon of the age of America’s industrial might. Pittsburgh is the Steel City and occupies a special place in American economic mythology. American regulators would be as eager to approve a foreign buyout of Alcoa as Australian regulators would be to approve a Chinese buyout of BHP.
Markets and Money