How does the world's biggest miner, and the possible acquire of Potash for $39 billion, see the global outlook?
They're pretty nervous. The following comments come from the company's mid-year report.
First on the economy:
BHP Billiton remains cautious on the short term outlook for the global economy. After a period of rapid recovery in the developing world, economies such as Brazil and India have returned to full output and the focus has now shifted away from supporting growth, towards controlling inflation. In China, the government has implemented meaningful measures aimed at controlling rapid economic expansion and asset inflation. Fiscal policy has been adjusted with renewed focus on the economy’s inevitable transition away from a dependence on investment, towards more balanced, consumption led growth. With this recent policy tightening, property sales volumes and prices have started to decline in Tier 1 cities over the last quarter. While BHP Billiton sees these measures as the normal continuation of China’s economic management, we do expect Chinese Gross Domestic Product (GDP) growth to slow towards the more sustainable level of circa eight per cent in the first half of fiscal year 2011.
Uncertainty continues to surround the developed world as governments adjust fiscal policies following a period of significant stimulus and subsequent increase in sovereign debt levels. Significant public spending cuts and higher taxes have been announced in Europe, however are yet to be fully implemented, implying the inevitable negative impact on growth from fiscal consolidation remains ahead. Industrial output, a core measure of economic activity, remains well below previous peaks despite the positive impact attributable to re-stocking that now appears largely complete. In the absence of any additional inventory adjustment, improvement in end demand is essential to drive overall economic growth. Some positive signs have emerged, with strong private investment in equipment and software seen in some parts of the United States economy, although ongoing de-leveraging and weak confidence are hampering efforts to revive demand.
And on commodities:
Following a broad recovery in prices for the majority of BHP Billiton’s products, the short term outlook for commodities is mixed. There is strong physical demand for some commodities, such as copper, where consumers are restocking and premiums continue to rise. Elsewhere, there is weaker demand for those commodities where short term demand is likely to be satisfied by inventory rather than primary supply.
With global steel production running ahead of real demand in the quarter ended June 2010, we expect output to soften from the record highs achieved in April this year. This will impact near term demand for steel making raw materials, however the fundamentals remain strong in those commodities, particularly iron ore, where there is a lack of low cost supply response expected over the next one to two years.
In the medium term, we expect commodity demand to remain heavily dependent on emerging market demand as the gradual withdrawal of government stimulus is expected to constrain growth in the developed world. While China’s rapid growth is expected to slow from recent highs, domestic consumption is expected to remain strong and investment spending is likely to remain commodity intensive.
There is no change to our expectation of strong growth in demand for our commodities in the longer term. With long run prices determined by the marginal cost of supply, our position at the lower end of the cost curve is expected to underpin strong margins and investment returns.
The CEO of the company will be on CNBC during the 7:00 AM ET hour. Should be worth watching.
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