Jeremy Warner's Outlook: Commodity boom fuels profits bonanza for BHP - so how come it's being so mean?

Blacks: yet another profits warning; NPSS: still a charging matter
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The Independent Online

Chip Goodyear, chief executive of BHP Billiton, didn't mean it that way of course, but to announce a $3bn capital return at a time when the company's Chilean miners are striking for more pay seems a touch insensitive. The juxtaposition of circumstance - a payout bonanza for investors but a kick in the teeth for the workers - could hardly look more unfortunate.

Not that the pay deal being offered to 2,000 miners at the Escondida copper mine could in any way be regarded as outright exploitation. The latest offer is for 4 per cent on top of inflation and a $32,000 per worker one off bonus, which for many will double this year's pay.

Unions counter that it is still not enough to take account of the present, once in a generation boom in copper prices. Not unreasonably, they want a greater share of the spoils from what has become one of the world's most profitable mines.

Scratch the surface of yesterday's annual results, however, and we find that it is not just with the pay of its workers that BHP is watching the pennies. The world's largest mining finance house is being parsimonious all round. The buy-back could have been much bigger and still barely dented the fabulous cash flows BHP is earning from today's record commodity prices. Dividend cover is rising, not falling.

Nor is it as if the company wants to save money so as more fully to invest in the mines of the future. Mr Goodyear is significantly increasing next year's capital spending, taking his investment pipeline to 25 projects worth a total of $14.4bn. But again, the increase doesn't anywhere near reflect the boom in profits.

As far as Mr Goodyear is concerned, the present spike in prices is set to continue, spurred on by surging demand for metals and exacerbated by limited expansion of supply side capacity and extremely tight inventories. The business cycle might cause the odd dip, but the medium term outlook is for continued strong demand. In any case, he doesn't believe the doomsters who insist the world economy is about to go to hell in a handcart. The US is slowing, but Europe is reviving, and the juggernaut of fast growing Chinese and Indian demand shows no sign of letting up.

So why doesn't he invest more? Part of the answer lies with the same reason the oil companies are being so slow to respond to sky high oil prices with more investment in new production. The natural resources industry is likely to make a great deal more money by constraining supply than by satisfying demand, especially when it is already investing more than creaking infrastructure and a limited skills pool has the capacity to cope with.

The low hanging fruit of natural resource supply has already largely been found and harvested. The next phase of development comes in a lot more expensive, forcing oil and mining companies to prospect in ever more difficult and environmentally sensitive areas. For obvious reasons, companies such as BHP Billiton are not keen to destroy their windfall profits by expensively providing the market with a margin of spare capacity that would bring down prices.

On the other hand, nor do they have much of an interest in prices so high that it damages demand. If prices get too high, it encourages new entrants and substitution. What Mr Goodyear is after is sustainably high prices. History teaches that in the long term he's unlikely to get them.

Yet commodity prices do occasionally enter a super cycle of demand, that transcends the usual pattern of boom and bust. One such period was the rebuilding of Europe after the Second World War. Another is the one we are in right now, with the rapid development of China and India.There will come a time when both these countries are fully industrialised and demand will return to more normal levels. The extra capacity created in the meantime to satisfy the industrialisation process will then cause prices to plummet. On a 200 year view, the trend in commodity prices is relentlessly down.

There is no reason to believe this trend has been bucked for good. Even with oil, where the easily accessible, cheaply extracted sources of supply are fast running out, technological substitution will eventually cause the price to fall even if the process of getting from here to there is likely to prove a painful one.

So it is no wonder Mr Goodyear is being so parsimonious. He knows that the boom cannot last even though it will in all likelihood outlive his particular tenure as chief executive. Nor, given the relatively low rating still assigned to mining stocks, do investors think it is here to stay either.

BHP was criticised for paying too much for WMC Resources last year, but as Mr Goodyear has worked out, it is a good deal cheaper to buy existing capacity in the extractive industries than to develop entirely new sources of supply. He'll be buying more before the boom is out.

Blacks: yet another profits warning

If camping is the new leisure, how come Blacks Leisure Group, which owns Millets as well as the eponymous Blacks outdoor equipment and clothing chain, is doing so badly? Excuses, excuses.

First it was the absence this year of Glastonbury, then it was the World Cup, which apparently encouraged men to stay indoors rather than seek the fresh air.

Still, no matter, surely the blistering heat of July would have caused sales to perk up a bit. Ah, now that's where you are wrong, you see, because in very hot weather, people don't like to go shopping at all and they certainly don't want to sit in the stuffy heat of a tent. Sales of big family tents took a particular beating. The warm weather was also bad for the sale of kagouls and other waterproofs.

Then, of course, there is the washout of August. At least that must have been good for shifting all those stock piled anoraks. Not a bit of it. People don't like to camp when it is raining. Finally, there is the wider consumer downturn to fall back on. When consumers are in belt tightening mode, discretionary spending on things like outdoor clothing gets shelved.

And so it goes on. Yet I think we can forget the excuses, valid though some of them might be. The underlying truth is that Blacks is a retail franchise that has largely lost the plot. It's nothing to do with Glastonbury. The reason we've now had a second profits and revenue warning in as many months is much more a case of management failure than freakish weather. That, and the ever onwards and upwards march of the supermarkets, recently joined in the "everything for the outdoors" market by Halfords and others.

Even so, as far as I can see there has been no attempt properly to integrate the online and physical retailing proposition at Blacks, an absolute must for specialist retailers in an age of growing broadband use. If he doesn't buy the product online to begin with, the modern hearty at least expects to find his favourite brand of walking boots stocked in his size if he ventures out to the high street. All too frequently with Blacks this is not the case, making a visit to its shops a complete waste of time.

Just as worrying, however, is that the company seems to have completely lost control of its costs, with the result that it will make no money at all in the first half, against £7m last time.

After yesterday's 18 per cent plunge in the shares, they may again be cheap enough to attract a private equity bid. In any case, investors can only hope so. Someone needs to put this company out of its misery.

NPSS: still a charging matter

The Government promises a "technical paper" on how the new National Pensions Savings Scheme will work in practice in November. Insurers already sense a partial victory over Lord Turner's recommendations for a state administered scheme, believing they have convinced ministers that it cannot be done for the 0.35 per cent annual charge Lord Turner suggests. Yet to secure the prize, they must agree a price cap a lot lower than the 0.6 per cent ball park so far floated.