The resource giants are taking a much longer term view, one that extends beyond the end of this decade and beyond the worst-case scenarios. Photo: Christian Sprogoe
Rio Tinto and BHP Billiton are shrugging off the doom and gloom and looking to long term expansion plans.
IT’S NOT often the opportunity presents itself for a ringside seat in a winner-takes-all contest between Australia’s resource giants and the guardians of global finance. In the past week, however, the World Bank and the International Monetary fund have locked horns with the world’s two biggest mining operators, Australian-domiciled BHP Billiton and Rio Tinto, about the direction of the global economy.
On the surface, the increasingly shrill cries of financial Armageddon from the World Bank last week and the IMF this week sit strangely at odds with the actions and attitudes of the globe’s two biggest resource houses, which have committed themselves to massive expansions involving vast amounts of cash.
In the past few days, BHP Billiton has edged closer to pumping more than $22 billion into an expansion of Port Hedland’s outer harbour as part of its quest to more than double iron ore exports from current levels of 159 million tonnes from Western Australia by the end of the decade. The project involves building a four-kilometre jetty, wharves and new ship loaders. And that is before you are immersed in the calculations about the cost of expanding the mines.
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Yesterday, Rio Tinto confirmed that it had snared control of Ivanhoe Mines, the company founded and run by the pugnacious and highly litigious American (Canadian) and one-time Sydney resident Robert Friedland.
After years of legal skirmishes, Rio outlaid a further $302 million for a smallish stake that took its total investment above 51 per cent, delivering control of the huge Oyu Tolgoi gold and copper mine in Mongolia.
Which group is right? It all depends on the timing and, specifically, how long the expected global downturn lasts.
Even if some kind of resolution to the European debt crisis can be negotiated that avoids the possibility of an implosion in international banking, there is now almost universal agreement that we are headed for a period of prolonged pain.
But the resource giants are taking a much longer term view, one that extends beyond the end of this decade and beyond the worst-case scenarios being dished up as the most likely outcome by the World Bank and IMF.
Late to the party, both global financial organisations suddenly have abandoned their previously upbeat projections, issuing dire warnings about the immediate future of the developed world and emerging economies of the Asian region. After more than a year of head-in-the-sand denials, both organisations are warning of 1930s Depression-era conditions, if the current impasse results in a meltdown of the global banking system.
To a certain degree, perhaps it is the notion that, as creations of the developed world in the post-war era, they suddenly have been forced to confront their paternalistic view that debt problems only ever occur in Third World nations with ”tin pot” dictators.
But only a fool would dismiss their concerns as damaged pride.
The IMF’s rescue money, for decades reserved to bailout South American or African dictators, now has been earmarked for deployment to members of Europe’s former elite, with Greece in the immediate firing line, but a line that may include Italy, Spain and Portugal.
For months now, it has been obvious to anyone who has cared to look, that the IMF has nowhere near enough in the kitty to bailout even Greece, let alone the other debt-laden stalwarts of the euro zone, and it now is hinting that a further $1 billion should be extended by donating countries, including Australia.
That sudden bout of panic seems strangely at odds with the intentions of our big resource companies, both of which have committed themselves to massive expansions in their export capability backed up by what they see as a long-term realignment in global economic power.
The World Bank and the IMF are making a call that a European recession will affect global trade and growth, that will hit the developed world hard.
The resource giants, in contrast, are banking on a decline in the importance of the West and continued growth in the emerging markets of Asia, led by China, even if there is a temporary slowdown in the next three to five years.
To some extent, their views have been forged by the events of the recent past. Round one of the global financial crisis, rather than nobble China’s growth ambitions, delivered it greater political clout and a sudden lift in economic legitimacy, as it poured money into shoring up Western banks and turbocharged its economy in an attempt to stimulate global demand.
During that period, the resource groups acted swiftly to rein in costs, shutting down non-core and marginal operations and shedding staff, only to experience a relatively rapid recovery – by resource company standards.
Major resource developments, particularly tier one operations such as those coveted by BHP and Rio, take years to plan, develop and bring to fruition.
A snap decision to can a development can take years to recover.
Rio, in particular, understands this. It came uncomfortably close to perishing in 2008 after years of bad calls, first by assuming way too much debt to fund acquisitions which left it vulnerable to takeover, but again has a handle on how to manage its future by focusing on core mining operations.
The share prices of both companies have been priced for recession for the best part of six months.
Neither has let that deter their longer term goals as they’ve focused far beyond the current global economic malaise and towards the new Beijing-based power dynamic.