BHP is embarked on putting almost all its eggs in the ‘China basket’. That must call into question the quality of both its management and its board of directors.
BHP, like its two fellow Pilbara iron ore producers Rio Tinto and Fortescue, has been riding a China-driven – an entirely China-driven – boom.
The full-extent of the billions of dollars it has poured into it coffers will be revealed in its 2020-21 profit report Tuesday.
When a month ago BHP released its production figures, I estimated that the super-high iron ore prices would have added around $US15bn to its 2020-21 revenue – a staggering $20bn.
Most of that would flow straight to the gross profit (EBITDA) bottom line; with the great bulk coming in the just completed June half.
In the first half BHP was getting $US103.78 an iron ore tonne, a big jump on the $US77.36 it got through 2019-20; but in the second half the price really exploded, to $US158.17 a tonne.
In the first half BHP got 55 per cent of its revenue and 70 per cent of its gross profit from iron ore.
For the full year BHP will have got over 60 per cent of its revenue from iron ore and 70-75 per cent of its EBITDA profit.
We’ve already seen this extraordinary profitability in the Fortescue and Rio numbers.
Fortescue is 100 per cent ‘long’ iron ore and China, it has nothing else; and Rio is not far behind at 76 per cent of its June half profit coming from iron ore.
BHP though was and, for the moment, remains different. Since it ‘tidied up’ its ill-considered merger with Billiton – and returned solely to the BHP name – it prided itself on being built on four ‘pillars’.
Yes, iron ore, but also petroleum (gas and oil), copper and coal.
And it’s gone through a lengthy process of adding a fifth, potash.
But not only has iron ore become utterly dominant, thanks to China, BHP is now committed to reducing itself to just three pillars, on the way to being just two.
It’s embarked on selling out of petroleum and coal will follow.
Yes, it’s going to add potash and maybe what it can find or more likely buy in what might be described as the ‘lithium space’.
But at best they will be really tiny, more like ‘stems’ than ‘pillars’.
BHP will be essentially iron ore and copper and overwhelmingly iron ore and overwhelmingly dependent on both the generosity and the simple industrial steel-producing success of China.
That’s a steel production in an industrial economy that depends on CO2-emitting coal-fired power and will continue to depend on that power decades into the future.
Monday BHP, probably at the urging of its erstwhile partner Woodside, owned up to a determination to quit petroleum - by selling its assets into Woodside in return for Woodside shares which it would distribute pro rata to BHP holders.
BHP described what it was doing as a “strategic review” of its petroleum business.
Let me substitute more basic words – we want out.
BHP wants out for a mix of conventional corporate reasons – it really has to get bigger in petroleum or get out – and climate change pandering.
If we get out of direct CO2-emitting businesses like petroleum – and energy coal – maybe the climate activists will overlook what happens to our iron ore and, really really hopefully, our met coal.
Uh-uh, they won’t. Met coal would be next; it’s still coal, when it’s used, it emits CO2; and then after that the iron ore that ‘facilitates’ the CO2 emissions directly and across the economy.
But even aside the fantasy that iron ore can somehow escape, is the stark, stunning, risk of it all being built on China: all the eggs in a very fragile basket.
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