Terry McCrann: BHP’s multi-billion dollar China pay-off
BHP’s results have been shaped completely by the forces unleashed by the coronavirus and the mandatory government-ordered lockdowns, writes Terry McCrann.
Terry McCrann
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BHP is a very big company. It is Australia’s most globally significant company.
But this year it’s been like a mere cork bobbing on the surface of a raging sea.
The results it unveiled Tuesday were totally hostage – across the board – to the forces unleashed by the coronavirus and the mandatory government-ordered lockdowns that sent the entire global economy plunging in the June quarter into the worst recession in nearly 100 years.
Yes, BHP had control of its costs – and thanks to the work done under former CEO Andrew Mackenzie – they were at world’s best practice levels across all the divisions and most especially in iron ore.
Thank heavens – or Gaia, so far as Mackenzie and his successor Mike Henry are concerned – BHP had also well and truly completed its exit from its disastrous play into US shale oil, well before the virus plus recession hit and drove oil prices to numbing lows.
The numbers for the 2019-20 year would have ‘survived’ continued ownership of shale, but BHP would now be facing a much lower sale price – and so a very much bigger loss – on having to exit shale now or in the future.
Yes, BHP had control of its costs, but everything else – volumes sold and prices paid across its product range – were in the hands either of specific buyers, in a broadly buyers’ market, or the bigger and broader forces sweeping over economies and the world.
Once again, in a semi-replay of 2012, China came to the party and came to the party big time – with BHP (and its fellow Pilbara miners Rio Tinto and Fortescue) getting sustained higher prices for iron ore on bigger volumes.
The combination was due to the continued problems of Vale – the only other major global iron-ore exporter in Brazil, starting the fiscal year with its structural production problems and ending with the virus disaster in that country.
BHP group gross profit (EBITDA) fell just over $1bn to $22.1bn.
But iron ore was up more than $3 billion to $14.5 billion. Everything else was down $4.5bn or 37 per cent to $7.6bn.
Iron ore contributed 64 per cent of group profit. Without it and without its profit growth, the rest was quite frankly ordinary.
Copper profit went sideways – a good result in a global recession; petroleum not surprisingly halved, with BHP’s weighting to normally lower-margin LPG holding up rather well against plunging oil prices; but met coal got no benefit from its sibling iron ore’s booming numbers, with prices and profit going into the basement.
Now the Fin Review hailed the numbers as “Growth is back at Mike Henry’s BHP”. Frankly I can’t see it.
In the short term everything turns on iron ore; everything else is petty cash.
I doubt that the dynamics of 2019-20 – China buying all the Pilbara ore it could get its hands on, with Vale in its own special hell – can be relied on continuing through 2020-21, even with the ‘best-case’ outcome of a sustained global recovery.
Copper would pick up in that global recovery, but volume constraints and the brutal reality of iron ore dominance means it can only make a small impact on group results.
Yes, petroleum no longer has the great dead weight of shale, but the division now faces the structural challenge of a sustained low oil price – whatever happened to Peak Oil? – and continually declining liquids share of the portfolio.
Yes, it will get growth in gas but that’s increasingly high cost, long lead time and low margin.
There’s nothing in that future like $US100 oil, a gusher and even mid-tier extraction costs.
Then there’s Olympic Dam – a trillion dollar turkey. It’s been promising, promising, promising; and it’ll still be promising when the Christopher Pyne’s submarines finally start chugging out into the deep blue yonder.
WESTPAC DIVIDEND NO SURPRISE
The surprising feature of Westpac not paying a delayed interim dividend was that anyone – including assorted breathless journalists – would have been in the slightest surprised.
The surprise, the huge surprise – and breathtaking irresponsibility by the board – would have been such a dividend payment. It could only have been contemplated on proof that the virus was over and it was happy days all round again. That is all also before looking at the actual Westpac numbers for the June quarter – which of course exactly matched the destruction of job s and businesses. They were not pretty.
As I wrote at the time of the interims, the four big banks all made their combined dividend and capital-raising beds that they were going to lie in through the June quarter and pretty much the rest of 2020.
The CBA and its shareholders were the lucky ones. As the only December balancer it got away pre-virus with an unchanged interim dividend and no capital raising.
Then its superb franchise kicked in and it’s been able to go through the June quarter to finish of the year with a further (reduced) dividend and still no need for fresh capital.
Of the other three only the NAB paid a (reduced) dividend. It had to raise fresh capital anyway, so it paid the dividend and raised somewhat more capital.
As they didn’t need capital then, both ANZ and WBC ‘deferred consideration of a dividend’ – but they were never realistically going to pay one later. WBC has now abandoned, I assume ANZ will follow. Sensible.
That kicks dividend/capital to the end of the September year for the three of them.
Originally published as Terry McCrann: BHP’s multi-billion dollar China pay-off