BHP Billiton's outlook continues to look robust in light of high copper and gold prices

Given that the price of copper is above US$3.00 per pound and the price of oil is back over US$80 per barrel, both commodities are providing BHP Billiton’s (LSE, BLT) robust iron ore and coking coal operations with plenty of support.  Indeed, not withstanding a recession in China, the outlook for BHP and the other major miners continues to look robust.

Earlier this month, China’s Premier Wen Jiabao attempted to fire a shot across the bows of the major resource companies.

China has finished the annual meeting of the National People’s Congress where issues relating to China’s economy and other matters are discussed. After the Congress was over Premier Wen Jiabao warned of a double-dip recession because of ongoing financial problems in many countries, high jobless rates and unstable currencies.

For China to avoid a double dip recession, the Premier highlighted the challenge of striking a balance between maintaining stable growth and development against inflation while, at the same time, continuing structural reforms.

The Chinese Premier has been petitioned by more than 10 of the country’s steel producers for the Chinese Government to intervene in the iron ore pricing talks. The steel mills say they will have to pass higher ore prices on to their customers with higher steel prices will add to the 2.7% annual rate of inflation.   There are also fears that along with tightening of credit that the Chinese economy might slow dramatically.

We need to keep in mind that the iron ore prices have not been settled, so it was excellent timing for the issue to surface as a petition at the National People’s Congress.

China’s steel industry is crying out for reconstruction. The domestic steel industry is over supplied and domestic prices are low relative to the rest of the world.

High iron ore prices should accelerate rationalisation of China’s steel industry because steel producers have not been able to pass on higher input prices. Many steel producers are unprofitable and thus can no longer absorb a huge increase in the price of iron ore.

To the casual observer a 90% increase in the price of iron ore looks a simple case of gouging. But it is not that simple because demand is still extraordinarily strong and supply is limited.

When we look across a range of key Chinese economic statistics we see that expenditures are doubling every two to four years. This rate of growth can’t be sustained in the long term. At the end of last year, Chinese imports of iron ore were doubling every 12 months. The math is simple - demand is very strong and supply is restrained.

Beijing has to take further action to slow the economy; either that or the Chinese economy will slow because the supply of raw materials cannot keep pace with rising demand; in which case commodity prices will stay higher for longer than many pundits expect.

Unfortunately for steel mills around the world the spot price is the arbitrageur, and spot prices for iron ore and coking coal have risen strongly over recent months.  BHP Billiton is well placed to benefit from higher metal prices and from a rising oil price.

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