The Big (Global) Australian

Looking at trading yesterday, one of CMC’s senior dealers remarked:

“It’s not often we get a 65 point rise (in the Australia 200 index) when BHP falls.”

Why is BHP going down as the market goes up? The latest round of selling relates to concerns that attempts to cool property activity in China will led to significantly lower commodity prices. However, as this is now the third market prediction of cooling growth

in China in two years, and the previous two scares did not eventuate, some investors and traders may see this as a buying opportunity.

It’s possible there is some misunderstanding in the broader community about the end of a mining boom. The traditional mining cycle starts with increased demand, spurred by increased growth. Metals prices rise, and miners respond by increasing investment in production. Eventually, investment reaches a point where anticipated production means that commodity prices peak, and fall.

This is where we are now, and it represents the first of three peaks as the boom plays out. The second peak is in investment – anticipated to come late this year or in early 2013. The third peak occurs in volumes, and this last peak may be two to four years away. In other words, major global miners are in broad terms looking at a further two to four years of increasing production that offsets the fall in prices.

For companies like BHP, who already have huge free cash flows, this introduces a top quality problem – what to do with all the money? As the balance sheet becomes bloated with cash, and investment is curtailed, the possibility of a return to shareholders increases. This could take the form of a special dividend, a share buy-back, a capital return, or a spin-off of assets into another vehicle. Any of these moves are likely to garner share price support.

Importantly, China is to report industrial production, retail sales and inflation data at the end of this week. Market consensus is that growth in industrial production will accelerate to 10.5% pa. This could serve as a reminder to the market that the overall growth picture is intact, and in turn lead to higher commodity and resource company share prices.

BHP – Daily

20130306 bhp

Interestingly, the chart illustrates a possible scenario that lines up with the fundamental view.  A pull back to previous resistance, now support, around $35 may be of interest to traders, offering a long entry with clearly defined stop loss position. Note the RSI below 40%. Although past behaviour may not necessarily provide a guide to the future, since the beginning of the bull run in June BHP has bounce every time the RSI has reached this level (green arrows).

The case may be stronger for investors. Buying the worlds’ largest listed mining company on a pull-back is a dream scenario for those building a portfolio for the long term. If fears of slowing growth in China prove unfounded again, the share price reaction may be dramatic. And data from China this Friday/Saturday may be the catalyst.

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
This entry was posted in Market, Shares, Stocks, Trading and tagged , , , . Bookmark the permalink.

4 Responses to The Big (Global) Australian

  1. dealar says:

    Great article as always Michael.

    Today though I am more focussed on sulking – the US hits a record high with lower forward PE’s than Australia – makes me wonder if we zigged when we should have zagged.

    Do you think that if BHP stops buying things and keeps costs low that they may become the biggest income generating utility ever??

    Thanks again for the article.

    • Hi dealer – yes, Australian earnings need to catch up before we can consider all time highs at 6,852.

      I laughed out loud when I read BHP…”may become the biggest income generating utility ever??”
      Think BHP management might choke on that one, but in terms of their potential earning profile its a reasonable comparison

  2. dv34 says:

    Dow punching to new highs other indices not following in line, yahoo headlines stating “The Dow Jones industrial average soared to a record closing high on Tuesday, breaking through levels last seen in 2007 and as investors rushed in to join the party in anticipation of more gains”. For me this is a journalist talking, not a trader – if you weren’t in long already you’re getting in late (unless your short term)… could be the start of the ‘throw over’ I have been waiting for… SP500, Nasdaq are likely to challenge highs as well.. just to get everybody excited… then all we need is the catalyst for change..!

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