Something of interest from mineweb.com.
The graph everyone’s talking about
By: Barry Sergeant
Posted: '25-AUG-05 11:00' GMT © Mineweb 1997-2004
JOHANNESBURG (Mineweb.com) -- “We will not bet this company,” said BHP Billiton CEO Chip Goodyear this week, while presenting record group results for the year to June 30, 2005. The world’s biggest diversified resources company posted a bottom line profit of $6.5 billion for the year, a growth of nearly 90% on the previous year’s figure.
On the question of betting, Goodyear was referring to a graph which shows that despite the monster profits delivered by BHP Billiton, commodity prices are barely out of the starting blocks from 200-year lows.
Goodyear’s amazing graph was compiled from a variety of sources, including the US All Commodities Producer Price Index, US Consumer Price Inflation, US Bureau of the Census, Historical Statistics of the United States, and the Colonial Times, to 1970.
Goodyear stressed that the graph needed to be looked at “quite carefully.” A small move on the graph, Goodyear explained, “is actually several decades.” According to the graph, “today we find ourselves at a period of time which is, or rather close to it anyway, 2001/2002 when real commodity prices were the lowest they’ve been in the last 200 years which essentially puts them at the lowest price they’ve been in known history.”
Despite the apparent evidence, Goodyear is not going to bet BHP Billiton. He insisted that despite the apparent opportunities, the group will instead continue to benefit from “a tier one set of assets, large low-cost long-reserve-life assets. We benefit from the technical skills that come with having operated these businesses in an industry that has shrunk over the last 30 years in terms of the number of companies as well as the number of individuals participating in our industry.”
The BHP Billiton strategy has been – at least in part – to use its “tentacles into the marketplace to understand where our customers want to take their business.” The group, explained Goodyear, has used its global footprint to identify opportunities, “not just from the market point of view, but from where products are produced.”
As an example of that strategy and also of the kind of growth that has already started up, Goodyear cited BHP Billiton’s Pilbara operation in Western Australia, where, in 2001, production was 65 million tons of iron ore. Today, production is running at about 110 million tons on an annual basis.
Looking at the big picture, the most recent decline in commodity prices set in about thirty years ago, around the time of Vietnam and the Cold War. Price declines were aggravated by the growth of the services economy, which required little in the way of raw materials, in the developed nations.
Everyone familiar with the resources story knows the big question going forward. As Goodyear put it: “Is China and is India and are the developed economies of the world going to represent the next secular change in raw material demand and therefore raw material prices? Now as you know, we can’t answer that question in foresight.”
But, added Goodyear, “we do think there is a reasonable probability that that is going to occur. At least we have to build that into our scenarios. So what we do is consider what options we can create to participate in that market circumstance if indeed it does occur.”
Goodyear also did the decent thing by directly asking “Where are prices going to go?” He argued that we’re all familiar with the two, three and four year business cycles – “most of us have had most of our working life in those kind of cycles; the decades of the 70s, 80s and 90s are characteristic of those.”
What Goodyear talks about “from time to time is that there is another set of cycles that take place. These are secular changes that do take place from time to time.” The graph shows that after World War I, and the Great Depression, there was a period of several decades of above-trend growth in commodity prices, driven by an intensity of demand. Watch this space.
You can view the graph on:
http://www.mineweb.net/sections/mining_finance/476223.htm