A hearty welcome to Alan Kohler’s new Business Spectator. We’re all for more independent voices in the financial media. Looking at the site yesterday, we ran across a great point about the BHP (ASX:BHP) -RIO (ASX:RIO) merger from Robert Gottliebsen.
He writes that, “The sheer diversity of assets and geographies and the low-cost position of each asset means that the cash flows [of the new entity] will be much more stable than any miner in the world. That will enable the joint company to leverage its balance sheet and will give it a much higher sharemarket rating than either could achieve individually.”
He adds that the firm (what shall we call it…BHPinto?) will have more leverage in annual iron ore price negotiations with China. And that, “Both companies have a large number of new projects. These will be high-graded and the best will go forward first. That greatly accelerates the long-term growth curve.”
That all sounds right to us. We still have creeping reservations that the China boom on which a merger appears to be premised is itself heading for a cyclical correction. But not everyone agrees that China’s clear over-investment in factory production will hurt China when the inevitable consolidation/recession comes:
“First I would like to say I am far from an expert in anything, but I have a thought about you article (see yesterday’s post). I have a Chinese guy working for me. He indicated that a large amount of the factories in china are actually British and American owned. Guess which ones will close down first? They encouraged the investment to make use of the cheap labour. Reading your article I don’t believe you are aware of this or gave it a thought. From the horse’s mouth so to speak.
“Enjoy reading your articles,
Hmm. Let’s go with it. China’s goal is political stability. Full employment is one way of keeping idle hands from doing the Devil’s work. Use American and British capital to occupy the workforce. Build a capital asset. And when economic reality dictates that some factories will have to close, kick the foreign owners out and subsidise the factories for as long as you can afford to keep people employed and off the streets, where they might protest again.
It’s possible. We hear from out little birdies that not many American firms make a profit selling in China. But do they make a profit making in China and selling in America? You have to go the balance sheets to figure that out. And then figure out who really benefits most from low-cost Chinese production…shareholders in foreign firms with China operations…Chinese workers…or American consumers.
Either way, we still wonder if there isn’t too much production in the world already, based on spending patterns that only cheap credit can sustain. Then again, the rise of consumer credit in the Far East and the acceptance of debt-based prosperity could keep an awful lot of Chinese factories busy for a long, long, long time.
Markets and Money