The word “record” is a recurring theme in any presentation by Australia’s resources titan BHP Billiton.
And it’s a theme that appears destined to continue. Yesterday’s record $17.7 billion (that’s a company PB and a gold medal in the national championships) is likely to be dwarfed by next year’s projected record, estimated to be about $27 billion.
This year’s record was given a kick along from record oil prices, although the record iron ore prices and record coal prices certainly didn’t hurt.
And next year’s record profit looks pretty much locked in because during recent price negotiations, iron ore prices were struck at twice last year’s record and three times last year’s record coking coal prices.
But for how long? For several years now, we’ve heard the “stronger for longer” argument; that this resources boom was unlike any other in recent history.
If you believe Marius Kloppers, the youthful South African-born chief executive of the Big Multinational, there is still a lot left in this boom.
For despite the meltdown in the US economy, problems emerging in Europe, the contagion that has swept global markets and the crisis in the world’s biggest financial institutions, China and India just keep growing.
The developing nations’ early rapid growth was based on cheap exports to the developed world and they amassed huge trade surpluses in the process.
But now, that growth is being fuelled internally by the rapid urbanisation of China and the huge demands resulting from massive infrastructure investment. Exports are still important. But China no longer is beholden to a wealthy West for capital inflows to sustain its growth. It has an enormous population demanding a first world lifestyle and living conditions. And it is that internal demand for goods and services that is driving its economy.
The rapid growth in the emerging economies caught most resource companies on the hop. Major resource projects take years and billions of dollars to develop. That doesn’t include the enormous outlay required to simply find the stuff. It’s not just a matter of flicking a switch and suddenly meeting the demand. And then there are the problems of transporting the extra material on rail, through ports and onto ships.
That’s why prices are so high: the inability of major resource companies to expand production quickly enough to meet surging demand.
Kloppers referred to this in his presentation yesterday. A great many analysts overestimated the supply response. Few took account of the shortages of manpower and machinery to dig the new mines, to build the new rail links and ports and the ships required to transport the material to a rapidly industrialising economy with a near insatiable appetite for commodities. Almost none figured a mining boom would also result in huge cost increases for manpower and machinery.
The resulting demand/supply imbalance, particularly for bulk goods such as coal and iron ore, will ensure record prices for the medium to longer term.
BHP and its takeover target, Rio Tinto, agree on this and both have pulled out all stops in their quest to expand production. That $170 billion takeover bid is still on ice. It has been given the green light by US competition regulators but their European counterparts are still poring over the details and a decision now is not expected until some time “this year”.
In addition to the earnings records, yesterday’s presentation included plenty of references to record production in iron ore, copper and coal.
One of the major differences between Rio and its nemesis is that BHP has a large oil division. Rio Tinto has no oil division at all.
Rio’s American boss, Tom Albanese, has mounted a courageous, but slightly curious, argument that somehow this gives his company an advantage, primarily because it is a “pure” mining company.
This didn’t hinder BHP from pointing out yesterday that earnings from its oil division rose to a record $5.49 billion, 82 per cent higher than the year before as it boosted production levels to a new record.
This made it the second biggest earner for the group.
Oil prices have fallen. But new supplies are becoming increasingly difficult to reach and global demand for energy is likely to remain high. Possibly even at a record.