BHP remains positive on China

BHP Billiton's (BHP) China president, Clinton Dines, held an analyst briefing in Sydney Monday, attended at least by Merrill Lynch and JP Morgan. It was a positive mood.

As metal prices have corrected recently, weight of argument has been that the US economic slowdown will impact not only on demand in that country, but on demand from China. Furthermore, China has been attempting to cool its own economic growth. This does not bode well for metal prices.

However, the US slowdown will have little impact on China, said Dines.

The export sector is not as significant as some seem to believe. BHP expects (as do other analysts) that China's GDP growth will slow from 10% in 2006 to 9-9.5% in 2007 and settle at 8-8.5% in the longer term.

As exports accounts for only 1.5% of GDP growth, there is little to be worried about. The US does absorb around 22% of these exports, but most of it is in consumer goods.

BHP said it is confident Chinese steel consumption will continue to grow, encouraging analysts to predict further increases in iron ore prices.

The miner expects growth rates for steel consumption to stay well above GDP.

With this year's round of iron ore contract price negotiations between miners and steel makers to begin soon, analysts are watching closely for signs from the major players on whether another price rise is likely.

Morgan Stanley analysts said that while BHP had not directly addressed the upcoming negotiations, the market outlook was encouraging.

"Its comments give us confidence that prices will rise and we forecast a 15% increase next year," they said in a client note.

Market watchers have noted the growth of domestic iron ore production in China and there is debate about how this may affect negotiations.

Dines told analysts the Chinese production was being driven by high spot prices and much of it would drop out if these prices eased.

JPMorgan analysts said BHP did not see Chinese iron ore production as a threat.

"BHP recognizes the growing internal supply growth of iron ore in China, but points out that it is all low grade and is encouraged by the high spot prices," they said in a client note.

"As they only have about 20 large steel customers who need high grade iron ore in large, reliable supply quantities, they have seen no market loss from this growing internal supply."

Dines told analysts BHP sees strong Chinese demand for copper and that it believes the TC/RC agreements it has made with several smelters should now become the benchmark.

The miner is positive about the outlook for coking coal imports to China and expects that over time the country will become a net importer of thermal coal for power generation.

Analysts were also told BHP is positive on aluminium and expects increasing alumina supply will be absorbed by the market without a major impact on aluminium prices.