BHP’s annual report is out and pulls no punches in its assessment of the emerging environment. Jac Nasser begins:
Over the last decade, industrialisation and urbanisation in emerging economies underpinned strong commodities consumption. We maintain a positive outlook over the long term as the fundamentals of wealth creation, demographics and urbanisation continue to create demand for commodities across Asia and other markets.
Increased supply has, however, exerted downward pressure on many commodity markets more recently and we expect this trend to continue over the short term. While lower rates of investment across the industry will ultimately lead to more balanced markets, all resources companies will need to improve productivity and be flexible enough to adapt to change in this more challenging environment.
And the report goes on:
Looking ahead, we expect more balanced global growth over the long term as China restructures its economy and large developed economies, such as the united States, continue to grow despite fiscal challenges. We expect rebalancing in the Chinese economy to be significant in terms of the nature of domestic demand as well as the types of goods and services the economy will produce. However, we expect these changes to impact only gradually, particularly as it relates to savings behaviour and levels of fixed asset investment in the economy.
Over the long term, we maintain a positive outlook on commodity demand as the fundamentals of demographics and economic development assert themselves across Asia. economic rebalancing in China will bring opportunities to a more diverse range of commodities, and development in South Asia will provide a degree of support to long-term demand for steelmaking raw materials. Overall, the long-term outlook for commodity markets is fundamentally linked to the scarcity of low-cost, expandable and high-quality development opportunities. When combined with attractive demand fundamentals for industrial metals, potash and energy, conditions are supportive of BHP Billiton’s low-cost, upstreamand diversified strategy.
BHP is in a good position to be honest. It’s diversification protects it more than the other majors and it can even talk up the downside in the hope of suppressing sentiment around potential competitive new developments.
All very sensible and if I were at all interested in investing in commodities at this point in the cycle, BHP would be my pick. But I still think it’s better to wait until blood flows through the gullies of the Pilbara.
