BHP: Stimulus breeze or trade war storm?

BHP: Stimulus breeze or trade war storm?

Spot the problem: The world’s biggest mining company, BHP Group, reports its highest profits in five years even as its top customer is engaged in a now protracted trade dispute with the world’s largest economy.

BHP posted an annual profit of $9.12 billion, a figure built largely on selling iron ore, coal and copper to China, the world’s largest importer of commodities.

BHP’s results show it has so far managed steer a safe course, its sails filled with the wind of Chinese stimulus spending, but the stormy seas of the trade war loom.

The underlying profit was slightly below the $9.4 billion forecast by analysts, but was up from the $8.93 billion a year earlier.

The final dividend of 78 US cents a share was also slightly below expectations, but could be taken as a sign that BHP is holding cash because of uncertainties ahead.

BHP Chief Executive Andrew Mackenzie said the US-China trade spat has yet to have a big impact on demand for the company’s commodities, but he is mindful of the risks.

Given that BHP, as well as global mining peers such as Rio Tinto, Brazil’s Vale and Anglo American , are heavily exposed to China’s appetite, perhaps the trade war hasn’t had that much of an impact.

However, the likelihood is that the effect on the Chinese, US and global economies is taking longer to show up, and there are early recession warning lights flashing, from inverted bond yield curves to slowing freight growth and weakening manufacturing indexes.

China’s demand for commodities, especially iron ore and the coking coal used to make steel, has also been boosted by Beijing’s stimulus efforts, aimed at keeping the country’s economic growth above an annual 6 percent and offset weaker manufacturing exports.

BHP and the other commodity producers find themselves in a tug-of-war between Chinese economic stimulus spending, and the damage being inflicted by the tariff war between Washington and Beijing.

Beyond their limited lobbying abilities, the mining companies have no control over whether the trade dispute is resolved, or morphs into trade barriers.

They also have no control over whether China can keep the stimulating enough to prop up economic growth, but not cause deterioration in credit quality.

In some ways the trade dispute is coming down to a game of chicken between Beijing and Washington, with both seemingly betting that they can outlast the other.

The problem for US President Donald Trump is that, unlike his Chinese counterpart Xi Jinping, he is heading for re-election in November next year and the last thing he needs is an economy entering a recession that his opponents will (mostly correctly) blame on his trade policies.

For commodity producers such as BHP the old adage of “hope for the best, prepare for the worst” seems the logical corporate strategy.

For investors this may mean a more cautious dividend policy, while for BHP and its peers, the chances are that the focus will once again return to cost-cutting and productivity improvements to ameliorate the potential impact of falling commodity prices.

• Clyde Russell is a Reuters columnist

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