Onwards and seemingly inexorably upwards for mega-miner BHP Billiton, still glowing from Monday’s announcement of yet another year of record profits and a further audacious push by chief executive Marius Kloppers for the company’s proposed takeover of Rio Tinto.
Ah, but to some informed commentators, BHP’s continued interest in Rio is looking more defensive as the months pass and the commodities outlook softens.
For now, BHP has defied all the “commodities Cassandras” who warned of impending oversupply and dwindling demand. The world’s biggest miner reported a 22 per cent rise in pre-tax profits for the year to June 30 from $19.2bn to $23.5bn – the seventh consecutive year of record profits – citing strong Chinese demand, operational cost cuts and a focus on high-margin growth projects as factors.
Oh and there was also the little matter of the eye-watering price hikes that BHP and its rivals screwed out of Chinese steelmakers and other customers for iron ore contracts in July – though the company didn’t quite put it like that.
As for the outlook: as any astute business executive knows, it’s always wise to lower expectations, and Kloppers acknowledged concerns about weaker global economic growth in the short term and the possibility that the boom could be coming to an end.
The proposed takeover of Rio, valued at about $127bn, made “more sense than ever”, he noted.
Rio nearly a year ago rejected the initial offer of three BHP shares to each Rio share, and then spurned BHP’s improved offer in February of 3.4 shares for each Rio share.
For now, the hoops are mainly regulatory. BHP’s proposed takeover of Rio Tinto is being examined by the European Commission, among others, which has noted that the combined group would have a dominant position in the seaborne iron ore market. European regulators are not expected to give their view before November.
But where does the miner’s record profit growth and slightly nervous outlook for markets leave the takeover proposal?
Any analysis of BHP’s future is all about commodity prices because the ability to increase production volumes is even more constrained now than it was in 2003, notes Alan Kohler on businessspectator – and, as Kloppers made clear on Monday, it is “getting worse all the time”.
Obviously constrained supply will help prices, but not if there is a global recession, and in the past few weeks, commodity markets have begun to factor that likelihood in, he notes. Oil, copper, nickel and gold are all down sharply, and even iron ore is looking soft.
So, says Kohler, BHP is “a proxy for the Great Australian Question of 2008: will Chinese industrialisation and urbanisation offset the coming global slowdown caused by the bursting of the credit bubble?”
In that context, the takeover of Rio Tinto can be seen as insurance — as a defensive play, rather than an aggressive one.
Tell that to Rio.