Outlook for BHP End Markets
I got into reading BHPs most recent economic and commodity outlook today and a few things stood out.
As we have discussed in previous post, the amount of nonferrous metals produced will probably need to increase substantially over the coming decades if decarbonization continues. So BHPs copper and nickel assets could be more valuable in the coming years. But what about the iron ore assets? Its the largest cash generator creating $20B in revenues while the next largest asset class, copper produces $10B.
They do have a competitive advantage with the iron ore assets, being high grade and close in proximity to the largest consumer. The risk in the short term for this asset is higher interest rates, but we want to look at larger structural risk. The large risk here is if Simandou starts producing. Which could happen in a couple years time. Simandou is located in the forest region of Guinea and is considered one of the best iron ore deposits in the world. But the project has been delayed several times due to political instability. With the country under new leadership will this project get underway? Looks like it, with a recent agreement to start building the 400 mile railway needed to transport the ore to port. The new government has only been in control for a short while so we really don’t know. But something to keep an eye out for. Even if this project does come online, it is possible iron ore prices could be supported by the demand needs of China.
Below is another exert from BHPs recent post that caught my eye:
“Turning to the long term, we firmly believe that, by mid–century, China will almost double its accumulated stock of steel in use, which is currently 7–8 tonnes per capita, on its way to an urbanisation rate of around 80% and living standards around two–thirds of those in the United States. China’s current stock is well below the current US level of around 12 tonnes per capita. Germany, South Korea, and Japan, which all share important points of commonality with China in terms of development strategy, industry structure, economic geography, and demography, have even higher stocks than the US.”
So the demand for steel and iron ore does look good. It just wont be as bullish for BHP when Simandou comes online.
BHP has a very attractive dividend with some of the largest and low cost mines in the world. So although its not a pureplay base metal company like Freeport, BHP’s high ROTA, cash flows, efficient and best in class operations makes it an attractive investment.
