BHP cuts global GDP growth forecast on trade tensions

UK-Australian mining firm BHP has cut its forecast for global GDP growth in 2019 and 2020 because of growing concerns about an escalating US-Chinese trade dispute. But it highlighted that other nations, such as Australia, could benefit from increased trade.

An unresolved trade dispute between China and the US would be likely to cut GDP growth in both nations by 0.5-0.75 percentage points, BHP's chief commercial officer Arnoud Balhuizen told the Imarc mining and resources conference in Melbourne today. It would create a lose-lose outcome for both economies, but could provide opportunities for other trading nations, he said.

This sentiment was echoed by Paul Bloxham, chief economist at HSBC Bank Australia. The Chinese-US trade tensions may lead China to direct more capital to domestic growth, such as through major infrastructure projects, which consume large amounts of iron ore and coking coal. The tensions could also offer opportunities for non-US exporters of LNG to China, where imports have grown significantly year to date, he added.

China's economy will continue to grow strongly over the next 10 years, with growth rates moderating from the high-6pc/yr level to around 6.25-6.5pc/yr because of the effects of the trade dispute, according to Balhuizen. This is still a healthy growth rate from a large base, he said.

Balhuizen has been surprised by the speed at which the Chinese government has instigated change in its domestic steelmaking industry. He had thought it would take around 10 years for China to move to a Japanese model of large, high-tech blast furnaces nearer the coast, but now believes it has achieved 70pc of the transition within 2-3 years. "We will continue to see more, bigger, cleaner blast furnaces nearer to the coast and that is very positive for Australia and for BHP," he said.

These big coastal blast furnaces require high-quality iron ore and metallurgical coal, which gives imported coal and iron ore a competitive advantage against domestic supply.

BHP expects a structural change in Chinese demand for lower-polluting steel to sustain high price premiums for high-grade coking coal and iron ore, with the outlook for coking coal particularly strong.

Demand for coking coal will also be supported by the developing market in India, where GDP is expected to continue to grow at 7-7.5pc/yr as long as there is no major political uncertainty. India will not be a major buyer of BHP's iron ore because it has its own supplies and because BHP's supply chain constrains its ability to supply the country. BHP's rival iron ore producers in the Pilbara region of Western Australia, Fortescue Metals and Roy Hill, have each begun supplying iron ore to India this year.

BHP is developing its South Flank iron ore mine in the Pilbara, which will increase the average grade of its iron ore to 62pc Fe from 61pc Fe. It has limited ability to bolster its Fe beyond 62pc to benefit from the significant premiums enjoyed by 65pc Fe and higher grade ores. But the company has no plans to alter its blending operations to meet the change in customer expectations and prefers to leave the blending in the hands of customers who can best meet their individual needs.