Go on, throw those China bears some bones

RED herrings, bears, wolves and sheep. All that’s missing is smoke and mirrors. By Michael Pascoe
Go on, throw those China bears some bones Go on, throw those China bears some bones Go on, throw those China bears some bones Go on, throw those China bears some bones Go on, throw those China bears some bones

Published in the September 2012 Australia's Mining Monthly

It's been a bad few weeks for dubious corporate prognostications, dopey market reactions and whacky headlines - situation normal, I suppose. Along the way, mining investors have suffered a little collateral damage but that happens.

First things first: the big BHP bleat.

If you relied on the more excitable media headlines and market reaction, you could be forgiven for thinking the BHP Billiton chairman and chief executive officer ran a tag-team effort in May to announce the end of China's ascension and the demise of the Australian mining industry.

My suspicion is that Jac Nasser and Marius Kloppers were doing a number of things in their speeches, ranging from dragging a red herring across their trail of takeover blunders to simply running off at the mouth with a little political groupthink, never mind some possible production signalling to the other members of the iron ore troika.

After the WMC acquisition, BHP's takeover record has ranged from bad to failed. It has failed with the big targets that might well have been fun and unfortunately succeeded in buying US shale gas at the top of the market, which means bad. Nice work, Jac and Marius.

With the pressure coming on from shareholders concerned about their inability to manage the fortune rolling in, they could have fessed up to blowing it and just promised to be more careful in future but no, that's not the way of corporate egos.

Instead, they had to run a domestic political diversion and throw the China bears a few bones, stating the obvious that growth in China's appetite for iron ore is not open ended as its economy matures. Was this something that had only just occurred to the BHP board and management? As a BHP shareholder, I would hope not but you never know.

Jac Nasser has put himself in the same class as Myer CEO Bernie Brookes by bleating about Australia's sovereign risk. (In case you missed it, Brookes trotted out a line about foreigners not wanting to invest in Australia because of tax uncertainty - that's the Bernie Brookes who partnered with private equiteers TPG in giving Myer a lick-and-flick. TPG then skedaddled without paying any tax on a profit of more than $1.4 million, leaving local investors with a dog. Nice one, Bernie.)

It would be foolish to underestimate the effect of the Qantas chairman's lounge groupthink - the alleged corporate leaders looking for excuses for their own performance start telling each other stories they then start believing. In BHP's case, given the swifty it helped pull on the Australian government and people in negotiating the weak-as resources rent tax, to whine about Australian tax uncertainties now simply paints itself as an ingrate.

Jac, if you can find a country with a more stable government, richer natural resources, lower taxes, better rule of law, less sovereign risk and a more productive workforce, go there.

You might well find many that tick one or even two of the above criteria but for the whole package, please stop shouting wolf. You're scaring the sheep.

China not faltering

Meanwhile, back at the circus, barely a day goes by without one headline or another about China faltering and the danger of a hard landing that will crash commodity prices, send Australia into depression and wipe out what remains of capitalism.

On the other hand, the latest OECD economic outlook reckons China will overtake the US as the world's biggest economy in 2017 on a purchasing power parity basis.

There is a serious disbelief in large parts of the US that this could be so. There's a whole culture/politic/religion based on the concept of American exceptionalism, the idea that the US has a god-given destiny to be the biggest and best forever. A century ago, British gentlemen puffing their cigars in London clubs enjoyed ideas equally as quaint and mistaken. God Himself surely was an Englishman.

As I've opined in a number of places many times, it's a healthy and absolutely necessary thing that China's growth rate slows. The way I put it to the dummies is that 7 per cent of 200 is 40 per cent more than 10 per cent of 100. (That tends to at least make them quiet for half an hour or so while they consider the maths.)

China will have its ups and downs, but the fundamentals of its growth remain strong. And it has one particular strength that is lacking in much of the world: for all its faults, Beijing wants, intends and plans for its people to be richer and stronger in the years ahead. That's more than can be said for much of the old world right now.

Blame Indian democracy

There is one very large downside though to the BHP forecast of commodity demand going flat in 2025 or thereabouts: by implication, the world's biggest mining company thinks India is not going to do a China, it's not going to industrialise and lift hundreds of millions of people out of dire poverty.

The Goldilocks view of Australian mining is that India picks up the slack as the Chinese economy matures. As Chinese growth becomes less steel intensive, India is supposed to take its turn on the traditional growth path as it presently lags China by 15 or 17 years or so.

Except that it apparently won't. I have an unpleasant theory that India has too much democracy to successfully manage the revolution required for mass industrialisation - no other country was really a democracy when it went through the change.

If you see Marius or Jac hanging around conferences bagging Australia, you might ask them about their Indian assumptions just to change the subject. It actually matters much more to the global resources industry than which party is sitting on Canberra's treasury benches or how much power is enjoyed by the CFMEU.

Which provokes a final thought about current industrial relations troubles and the failings of Labor's Fair Work laws - who was responsible for management not taking control of mines when it had Work Practices to work with?

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