Why BHP’s future is Australia’s future

BHP’s profit and its outlook tells us as much about Australia and its prospects as it does about the company - and the outlook for the next year and rest of the decade looks challenging.

BHP is Australia’s biggest and most globally significant company.

It is also a proxy both for Australia and for the national interest. Quite literally, what is good for BHP is good for Australia. And also, what is bad.

Its profit and its outlook, therefore, tells us as much about Australia and its prospects as it does about the company. In the 2022-23 financial year, the BHP profit outcome was all about prices.

On the revenue side, it was all about China. Falling commodity prices slashed its revenue – and operating profit - by a thumping $US9.2bn ($14.4bn). On the cost side, it was all about the global post-Covid inflation that erupted in the early months of 2022. Higher operating costs hit BHP for just on $US3bn. Put the two together and that sliced an all-but unstoppable $US12bn off operating profit – which actually fell by just shy of $US13bn. So ‘everything else’ was petty cash.

Thus, the two big questions, throwing forward for BHP – and so, very precisely also for Australia – is what happens in China, and what happens to inflation? And so, crucially, interest rates?

There are great similarities between this coming out of Covid – and even more, the panicked policy responses – and what happened coming out of the GFC in 2008.

With one almost certainly huge difference: China.

Operations at the Caval Ridge coking coal mine in Queensland, owned by the BHP Mitsubishi Alliance (BMA).

After both we got global zero interest rates (albeit, thank you Governor Stevens, not in Australia). But back then we also got the mother-of-all spending programs out of China that quite literally saved the global economy. And Australia. And gave BHP truly humungous profits. In one year, a profit greater than the four big banks combined.

The combination set up a decade of low global goods and services inflation and surging if not indeed rocketing asset prices – shares and property.

The rich got richer; combined with the tech revolution – Apple, Google, Amazon and the rest – the super-rich got grotesquely geometrically richer.

And the poor and even the not-so rich? Boring. Fast forward to 2023 and I suggest we are in a very different reality.

China is not going to replay its 2012 globally significant surge. Indeed, even the more basic China success story might now be over.

And if so, that introduces a whole new set of uncertainties. How does ‘over’ play out? Over, say, 2-5 years? Over 10 years and beyond?

We are very clearly not going back to a decade of asset-enriching zero interest rates.

Global inflation might prove stubbornly resistant to falling back to around 2 per cent. As inflation is now more services based, China desperately flooding the world with cheap product won’t suffice to get it down.

For BHP commodity prices were actually higher in the June half than in the December half. Inflation also subsided somewhat, except of course the higher level of costs from 2022 was baked in. As it is for everyone.

Narrowly then, BHP exited the latest June half with better revenue and cost metrics than it entered. But both the new year and the rest of the decade are going to play out, at best, ‘challengingly’.

Yes, for BHP. But so also for Australia.

Originally published as Why BHP’s future is Australia’s future