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Deciphering BHP CEO: Short Kumba, Exxarro, ARM as iron ore prices “mean revert”
BHPBilliton CEO Marius Kloppers had bad news for some base metal prices at his AGM this morning. He reckons the China-driven boom for iron ore and coal prices is over. After the inflation of the past decade, prices are reverting to a lower mean. I have cut away the verbiage to help make his message easier to understand. It’s clear: get out of shares like Kumba, Exxarro, ARM and even steel-maker Mittal.
Excerpts from the address to the BHPBilliton AGM in Melbourne this morning (Nov 29, 2012) by its CEO Marius Kloppers:
In the last six months, prices for iron ore, and to a lesser extent metallurgical coal, were impacted by destocking activity in China. This destocking, coupled with lower steel demand from Europe, India and the Middle East, led to a sharp decrease in the price of steelmaking raw materials. Subsequent to these events, restocking has commenced and is largely complete; as a result, we do not anticipate any material pricing upside in the near term.
As we look to the longer term, China’s recent slowdown is directionally in line with what was expected and what the Chinese Government had indicated would occur. It is aligned with the path taken by other major economies as they have developed, and is what we believe is required to support sustainable growth in China over the longer term.
Over the past decade we have experienced unsustainably high prices in some commodities such as iron ore and metallurgical coal, as growth in demand from China and other developing nations outweighed the pace of new low-cost supply additions.
At the same time, we have experienced very significant cost escalation in the industry, compounded by a strengthening in the currencies of key producing countries.
With the shortage of low-cost supply now well advanced towards being filled, prices for those commodities that experienced the greatest supply-demand shortage, and therefore the greatest price increases, are expected to ‘mean revert’ in the period ahead.
China’s growth over the past decade has been based on the need for new cities, buildings, roads, housing and so on to support the industrialisation and urbanisation. As has been witnessed in other major economies as they have developed, this build out of the capital stock in China will begin to plateau in due course. China’s future needs will change and the focus will gradually switch toward greater mechanisation to drive productivity growth and to the next level of consumer goods, such as white goods, heating and air-conditioning, cars, stoves, and other similar goods.
This progressive transition from an investment-led to a more consumption-led economy in China, and other developing economies, will naturally result in an eventual moderation of demand for commodities such as iron ore and coal, but sustained increases in demand for commodities such as copper and the suite of energy products.
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