BHP did warn that unit costs are tracking above full-year guidance due to the series of unwanted production problems described above.
But again, there’s no change to full-year guidance.
Strong as steel
Like Rafael Nadal playing with a bad back at the Australian Open, BHP believes it can muscle through these problems, play catch up in the June half, and recover lost ground.
It estimates the hit to productivity at $US600 million in the first half and and some decent catch-up will be needed. Macquarie estimates that BHP will need to deliver volume growth of between 10 per cent and 20 per cent in the second half of the 2019 financial year to hit the upper end of guidance ranges for most commodities.
This is the benefit of being the Big Australian of course – size helps you absorb problems.
But the maintenance of guidance also underlines the strength of the BHP model built by chief executive Andrew Mackenzie.
By slimming down BHP – casting off unwanted assets, focusing on those four key pillars and running the business as leanly as possible – the market has confidence that minor outages will be just that.
If BHP is pushing through the noise created by these production problems, it also appears to be sailing through the noise around its most important customer, China.
The chorus of concern around the world’s biggest economy seems to grow bigger by the day.
Trade war hurting China
On Monday night, after official GDP figures showed the economy grew at the slowest rate in a decade, official Chinese news agencies said President Xi Jinpinghad told top Communist Party officials that they needed to do moreto “to prevent and resolve major risks” politics, the economy and the environment.
“The party is facing long-term and complex tests in terms of maintaining long-term rule, reform and opening-up, a market-driven economy, and within the external environment,” Xi said, according to the news agency Xinhua.
“The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distance from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.”
In addition to that cheery little view from China’s top man, noted economist Ken Rogoff told London’sTelegraphthat China is “in a serious growth recession and the trade war is kicking them on the way down…There will have to be a de facto -nationalisation of large parts of the economy. I fear this really could be ‘it’ at last.”
And yet the BHP view of China remains relatively upbeat. The government is working to quietly stimulate the economy, iron ore demand remains strong and prices are firm, sitting safely above $US70 a tonne, having jumped almost 20 per cent since late November.
The high-level jitters are clearly there, and BHP is seeing that feed through in some ways, such as volatility in copper prices.
But for now, at least, the fundamentals remains firm, but BHP appears well positioned to keep sailing faster than its rivals even if conditions do eventually meaningfully deteriorate.
Speaking of sailing, it’s worth also setting the record straight about BHP’s decision to end contracts for two Australian-crewed ships that take iron ore from its Port Hedland operations in Western Australia over to BlueScope Steel’s plant in Newcastle.
The decision has beenloudly condemned by Labor leader Bill Shorten,who described it as outrageous and pledged to do more to protect Australian maritime workers.
“Why does corporate Australia, the big end of town, think that the next quarter’s profits are more important than our environment, more important than Australian jobs, and more important than Australian national security,” Shorten said last week.
But Shorten’s portrayal of this as a sudden decision driven by profit doesn’t quite gel with reality.
The reality is that BHP has been out of the freight business for the best part of two decades, and the arrangement with BlueScope was an anomaly, left over from the when the steel maker was spun out of BHP.
The end of BHP’s contract with Teekay Shipping Australia in June this year was a catalyst for the miner’s decision, rather than “next quarter’s profits”.