Resource stock recovery BHP/RIO

[markrmau]

BHP and RIO seem to have made good recovery from open.

Last night metals were fairly strong in the face of US GDP panic.

I think I'll sit out till Monday though.

 

[Investor]

The world's biggest and third biggest diversified mining companies respectively.

Recent weakness in share price might have been due to 2 main factors:

1. Jittery global equity markets over the past few weeks, primarily arising out of Wall Street, with the reporting season, rising interest rates, renewed talks about trade barriers against China (this if it happens, might have adverse impact on demand for commodities).

2. Speculation that Rio might enter the bidding for WMR. If it happens, a bidding war between BHP and Rio could ensue. Markets do not like uncertainties like this. If Rio does not bid and BHP gets to buy, prices of both BHP and Rio would likely rise, other things being equal (other things are seldom equal but economists use this term for analytical purposes).

Once these two issues are settled, whether the prices of BHP and Rio resume the upward trajectory, hinges on whether the super mining boom continues.

For fundamental analysis, BHP (7 core divisions) is trading at P/E of 11.8 FY 05 and consensus P/E 9.6 FY 06. These are not demanding P/E's because firm contracts have been signed. BHP is a very strong cash generating 'machine' this financial year and next financial year. Beyond that, it is unclear. However, the management team appears to be very good. It recently made the decision to move the FX trading room from Australia to UK, to gain better FX rates and save money.

Even though it could not get the higher than already high, iron ore prices that it wanted, I have read that it might be selling some ore into the spot LME to gain better prices instead of supplying under contract prices. This way, it has a de facto chance of getting the higher price rise that it sought.

Rio (6 core divisions) is trading at P/E of 10.4 FY 05 and consensus P/E 9.8 FY 06. Rio has not risen as much as BHP over the past 2 years because it does not have a petroleum division.

These two are giants. I hold shares in both and see more upside than downside but then again, I would say that. Otherwise, I would not hold.

The last time Australia saw a super mining boom was when Japan industrialised. Now, the world is seeing a bigger giant, China, industrialise and become the world's factory. This process has some way to go, as China is moving up the chain towards elaborately manufactured goods. There will be many more factories, infrastructure, nuclear plants (20 new ones), office buildings, warehouses, shopping centres, etc. to be built. The massive Three Gorges Dam will take up to 2009 to complete at a huge cost.

China is likely to build as much as possible to put on a display for the 2008 Olympics as a showcase to the world.

Then there is India, which is becoming the world's back office supplier. The IT centre in Bangalore is growing rapidly. Not just call centres but software programming is now streamed over the internet from all over the world. ANZ has been outsourcing some IT functions to India for a few years. NAB is just starting to do so. Some book keeping and accounting work have started to be outsourced to India from Australia around 9 months ago. India is also building many more nuclear plants.

Then there is Brazil but that is another story.

I think that demand for commodities is likely to stay strong for many years to come. Time will tell.

 

[Investor]

...Then there is Brazil but that is another story.

...

The story continues......

In The Age newspaper today, on page 17, comes the following:

China will have an impact on Australia 10 times greater than that of Japan 40 years ago, the Future Summit in Melbourne was told.

Jonathan West, an Australian who is associate professor of Harvard University's Graduate School of Business Administration, said Australians believed China would buy Australia's products - food, commodities, energy, raw materials - and Australia would buy China's labour-intensive manufactures.

"I think that story is dangerously wrong," he said in a keynote address yesterday. "Yes, there are great opportunities to sell to China. But China is also emerging as a strong competitor in the things we want to sell to the world."

Professor West said China was transforming the dynamics of world trade. As the largest buyer of soy beans, for example, it had created a supply giant in Brazil.

In 1990, the US had been the leading cost producer in agriculture for 200 years. By 2000 the US had lost that position to South America.

Professor West said Brazil had 90 million hectares of unused fertile land - five times the production area of Australia. "This is scheduled to come on stream in the next few years," he said, complete with infrastructure of roads, railways and silos.

Brazil also had a structural cost advantage, with one hectare of agricultural land costing $500 compared with $3000 in Australia.

"Brazil is building five new ports; Australia is having a debate whether to upgrade a couple of ports," he said.

Professor West said not only was China creating a competitor of Australia in Brazil but was itself an agricultural competitor.

In five years it had created a bigger area under grapevines than Australia has, with the help of Australian viticulture experts. "I have enjoyed drinking high-quality Chinese wine - at only $1 a bottle," he said.

Professor West said China's advantage was not in cheap, unskilled labour. "Its fundamental advantage is cheap, skilled labour," he said.

An American engineer was paid $150,000 a year, whereas a Chinese engineer was paid $120 a month. "China is graduating 500,000 engineers a year," he said. "They are not thinking about how to consume Australian products. They are thinking about how to make the products the US and Australia make, how to replace our products and sell them."

Professor West said China's advantages - labour-intensive industries with a much lower cost structure - were at work in skilled manufacturing. A Chinese battery maker BYD (Brings You Dollars) had gone from 3 per cent of the global market to 40 per cent in five years. They had blown their main competitor, Sanyo, "out of the water".

"Battery making (for mobile phones) is a classic example of what China shouldn't be able to do. It's capital-intensive and made with robots," he said. However, BYD bought a robot, pulled it apart to find out how it worked, and replaced it with labour.

"Six hundred people in a row wrap metal in metal and pass it on to others. They build with one-15th the capital cost of Sanyo - not the labour cost," he said. BYD only spent 1.5 per cent of sales on research and development compared with Sanyo's 8 per cent, but had 10 times as many engineers.

The Age.

 

[el_ninj0]

"Six hundred people in a row wrap metal in metal and pass it on to others. They build with one-15th the capital cost of Sanyo - not the labour cost," he said. BYD only spent 1.5 per cent of sales on research and development compared with Sanyo's 8 per cent, but had 10 times as many engineers.

Thats facinating stuff, however. We are talking resources, . Any China's pull for resources has only just begun, we are going to see 10's if not 100's of times the ammount of resources going out of this country and into china's hands. My only fear is that we are selling it too cheap. Even with the current prices on iron ore, we are still giving china a great deal compared to what they will get in 1 or 2 years time.

China is still very much in its infantsy, bigger it will grow, and more resources it will consume. A resource price dip was imminent, but recover it will with a avengence.

 

[dutchie]

I agree with you E.N. Australia cannot afford to sell its resouces cheaply - we must get the absolute maximum price that can be negotiated even if it means losing some sales.

Imo the only thing Australia will export in the near future are our resources in the ground and our interlect (brains, research, inventions etc).

There should be no great rush to sell if the price is not high enough as the value of our resouces will only increase whilst they stay in the ground.

BHP and RIO have the trading future of Australia in their hands - lets hope they are smart enough to outwit the Chinese, Indians and asian countries when negotiating prices.

 

[RichKid]

Unfortunately we have a resources boom on our hands but not the extensive vital infrastructure which we require to maximise returns- Investor mentions the articles which states we are still squabbling over upgrades when other countries are building at speed.

There is also the silly view in the West that just because workers aren't educated in the West that they aren't 'skilled'- if they are cheap and Asian they must be stupid. Not the case, and India has proven it and so will China, a country with a rich cultural history which dwarfes that of any one Western nation, just as India's does. Look at how China used reverse engineering techniques in that battery case (I don't know the specifics but they rip off western IP at trade shows and set up local businesses to produce the same thing).

If we spend our time at this end of the world thinking we can just dig up big chuncks of Aussie dirt and just get rid of it for tonnes of cold hard cash that easily we're kidding ourselves, it is getting more and more competetive and we need to wisen up. BHP has learnt the hardway that it can't just bully China into price rises, time to show some respect and fight brains with brains. It's hard to predict how long or how strong this 'supercycle' will go but history suggests it wont end so soon (average 17yrs from memory??). As the cycle slows mines will shut down and prices will even out so we have to make the most of it, infrastructure improvement should not be debated so late, we should be doing not arguing. Damn politics, Feds blaming the states and vice versa. And on top of that a skills and materials shortage.

 

[mime]

Ah I forgot about the Olympics as one of the major reasons for China's huge consumption of metals. Don't forget as their economy grows their consumption in oil will too. Anyone sensing a major supply and demand problem?

Anyone else think China will grow to the size of America? I personally don't but the guy from Rich Dad, Poor Dad does. Anyone else imagine the tentions that would build if they did?

 

[el_ninj0]

Ah I forgot about the Olympics as one of the major reasons for China's huge consumption of metals. Don't forget as their economy grows their consumption in oil will too. Anyone sensing a major supply and demand problem?

Anyone else think China will grow to the size of America? I personally don't but the guy from Rich Dad, Poor Dad does. Anyone else imagine the tentions that would build if they did?

China has already surpassed America by far, and will continue to to expand. The Olympics is of minor impact on the consumption of such commodities. Very small in comparison to what the industrial growth of the region is going through now and will go through for decades to come.

China is still heavily underdevelopped, its a giant that has just been awoken, and doesn't intend to go back to sleep for quite some time. It will consume materials and energy from all over the world, they will not make the mistakes the western world made when they first entered their industrial revolution, and this will occur as America continues its decline as the dominant super power of the 21st century. China is the future, mostly because of its numbers, but it also has alot of natural resources it self. I feel however that is does need to change its political stance on a few things before they will be accepted by the western nations. Such as its policy on tibet...

 

[mime]

As if China has surpassed the US.

I remember seeing a number of years ago something like 50% of the worlds money belonged to the US and their is no way China will catch up to that anytime soon. Their dominance would have faded in recent years but they are still the major global superpower.

 

[KaneX]

I have thought for some time now that China was going to be the new up and coming force both politically and militarily. What this means for both trade and world markets we are obviously witnessing right now, and for some time no doubt. Where and how far can this go, who knows. But as long as there are no significant speed humps (the Tawainese issue and the denuclearisation of North Korea), I think this world is about to change more than anyone could of imagined.

Sit back and enjoy the ride (and make some dollars too).

 

[KaneX]

Mime, I dont think China has passed the US yet, but the question here is;
Would the US allow China to gain dominance?????

 

[el_ninj0]

As if China has surpassed the US.

I remember seeing a number of years ago something like 50% of the worlds money belonged to the US and their is no way China will catch up to that anytime soon. Their dominance would have faded in recent years but they are still the major global superpower.

Economically speaking, China surpassed the US a few years ago. However, technically speaking, companies of the US own many Chinese companies and have huge stakes in them. This does not mean that the US economy is more powerful than the Chinese economy, it merely means that those particular companies will benefit from their investments, thats all, and in turn the US economy will receive some up draft because of these companies investments. But the majority of companies in china are chinese owned, therefore china will benefit far more than any other country.

Mime, I dont think China has passed the US yet, but the question here is;
Would the US allow China to gain dominance?????

I dont think the US has the power economically or militarily to stop China from gaining dominance. Only time will tell, for the people in the game it will be very interesting over the next few years.

 

[Aussiejeff]

Lots of assumptions needed!

This link is interesting...

http://www.freeworldacademy.com/globalleader/trends.htm

Australia might become a bit player for the "Centre Of The World" ... if our pollies play OUR cards right... ;o)

Cheers,

AJ

 

[el_ninj0]

Lots of assumptions needed!

This link is interesting...

http://www.freeworldacademy.com/globalleader/trends.htm

Australia might become a bit player for the "Centre Of The World" ... if our pollies play OUR cards right... ;o)

Cheers,

AJ

, Funny little peice of speculation there Aussiejeff. Most of it is quite interesting, but I do find this bit total rubbish:

-European unity may not be able to resist such tensions for very long. There is a danger that England and other European countries will break off from the European Union to move closer to North America.
-------------------------------------------------------------------------

If anything, I think that england will become closer to the european union and adopt the euro dollar within the next 10 years(once it gains a bit more value in overseas markets).

Other than that, an interesting read.

Also, If fusion reactors are developed, the resources sector will be unaffected, where as the oil industry will lose value substantially, but will retain a fair ammount of value due to the production of plastics around the world.

Interesting.....

 

[Mofra]

Also, If fusion reactors are developed, the resources sector will be unaffected, where as the oil industry will lose value substantially, but will retain a fair ammount of value due to the production of plastics around the world.

I have to disagree about the oil industry (with respect to China) because I believe China has had a far greater influence on world oil prices than many suspect. China is now a net importer of oil, only a few years ago it was a net exporter, and as the Chinese economy grows this increasing thirst for oil will continue to put prices under pressure.

For those with a longer term view regarding global warming reducing oil consumption, consider that due to oceanic currents, a rise of a few degrees in temperature will actually decrease the average temperature in Europe due to melting polar ice drifting further into the North Sea. This will obviously support higher prices for heating oil.

 

[el_ninj0]

I have to disagree about the oil industry (with respect to China) because I believe China has had a far greater influence on world oil prices than many suspect. China is now a net importer of oil, only a few years ago it was a net exporter, and as the Chinese economy grows this increasing thirst for oil will continue to put prices under pressure.

I agree with you Mofra, , but if you take a closer look at what I said, you'll see that I was saying it would drop substantially "if"! fusion reactor were developed, . Im talking fusion reactors in the form of an internal combustion type engine. Speculative response to a speculative article, , thats all.

 

[mime]

Fusion reactor??

What made you think of that?

We are probably more then 20 years away from creating a fusion reactor and by then oil supplys would be stretched.

 

[el_ninj0]

Fusion reactor??

What made you think of that?

We are probably more then 20 years away from creating a fusion reactor and by then oil supplys would be stretched.

Read up mime!, ,
http://www.freeworldacademy.com/globalleader/trends.htm

As I said, speculation.

 

[Investor]

The price recovery in both stocks had a lift from the announcement by Rio Tinto this morning, that it has completed the off market buyback for a billion dollars.

This gave the market a reminder of the amount of cash that the operations generate, as happened with BSL last week.

On fundamentals, both stocks could have been oversold recently. I took the opportunity to buy more shares in both companies last week.

 

[Investor]

....Then there is India, which is becoming the world's back office supplier. The IT centre in Bangalore is growing rapidly. Not just call centres but software programming is now streamed over the internet from all over the world. .....

In today's The Australian newspaper:

"INDIA would become a wealthier and more stable country than China because of its advantages in language and the openness of its society and economic system.

Marvin Cetron, president of Forecasting International and adviser to every White House since the Nixon administration, said India's advantages would eventually see it overtake China.

He said Australia's trade with China still dwarfed that with India, but at a growth rate of more than 30 per cent a year trade with India was growing much faster.

"Despite the economic might and growing diplomatic power that China wields today, India will come out ahead," Dr Cetron told the Australian Institute of Company Directors conference in Perth.

Chief among India's advantages were the number of people who spoke English and its democratic system, which produced a relatively transparent economy and bureaucracy. By 2010, India would have the biggest population of English speakers in the world.

The country had more science and engineering graduates who spoke English than the rest of the world combined, Dr Cetron said.

Because it spoke the world's dominant language, it was also more heavily involved in the internet and the services sector, which resulted in a more rapidly growing middle class than China's. Services were half of India's economy compared with a third in China.

India's democratic system also made it a more open economy than China, although it still had a problem with corruption and graft. But unlike China, India had addressed the problem seriously and established "vigilance commissions" to root out corruption in government.

India's biggest problem was overpopulation, Dr Cetron said.

It also had to overcome social and religious divisions -- such as the caste system -- which China had suppressed under communist rule.

Delegates to the conference agreed that India was not regarded highly enough by Australian business.

"I think we underestimate the potential of India," Orica chairman Don Mercer said. "You'd have to say we are coming late to the party."

The former managing director of BankWest, Terry Budge, said China was a bigger deal for Australian companies because of its demand for Australian raw materials to feed its manufacturing sector, whereas India was dominant in services."

The Australian.