4 April 2022 - Stanford Brown
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4 April 2022Global market snapshot
In March 2022 there were two main factors affecting investment markets. The first was Russia’s continued
invasion and bombing of Ukraine (which started on 24 February). Or, in Putin’s words, Russia’s ‘special military
operation’ to free Ukrainians from ‘Nazi rule’ (presumably by killing them!). The second factor was the long-awaited
start of US interest rate hikes. The Fed’s hike on 16th March was probably the most well-flagged and anticipated
rate hike in history. It was greeted with cheers by share markets, and ignored by bond and currency markets.
On the first factor, Russia, Putin was hoping for a quick victory, with Ukrainians cheering the Russian liberators,
and the west turning a blind eye as they did when Russia invaded and annexed Crimea in 2014. Putin had a ‘no
limits’ backing from Xi in China and support from Modi in India, but this time, the Russians were met with staunch
resistance in Ukraine, and a newly united US/NATO, which hit Russia with crippling sanctions. Russia appears to
be retreating and reducing its military aims and demands to the Donbas region in the east. One risk is that an
increasingly desperate and frustrated Putin resorts to chemical or nuclear attacks. The other risk is that if
US/NATO steps in directly, the Russian military is clearly stretched, so Putin’s only real option is nuclear. Biden has
made some potentially dangerous remarks, but his minders have been able to neutralise them on the run. (One can
only imagine the outcome if Biden or Trump were negotiating the Cuban missile crisis with Khrushchev in 1962!).
Global shares markets were up +2% overall in March, but most countries were lower. The big gainer was the US
market (accounting for more than half of global share market value). The US market rose +3.6%, lifted mainly by
‘big-tech’: Tesla +24% (erasing the falls since the start of the year), Apple and Amazon +6% each, Meta/Facebook
+5% (after falling -33% in February), Alphabet/Google +3%. Globally, fossil fuel producers were lifted by oil prices
rising another +6% in March, and miners were up strongly with higher commodities prices. At a country level,
Japanese shares were also stronger mainly due to big falls in the Yen lifting exporters. Also up in March were
commodities markets including Australia, Canada, Norway and most of Latin America. However, most European
markets were flat or down as Europe faces a severe energy crunch with Russia tightening the screws. Chinese
shares were down heavily again, with lockdowns slowing output and spending.
The local Australian share market was the star in March, with strong gains in the major banks, miners, fossil fuels
and tech.(AfterPay/Square/Block rose 19% in March, but is still some 40% below its pre take-over peak). Later in
this report we take a closer look at commodities, mining and BHP, which is once again the ‘Biggest Australian’.
Here is the share market picture for the March quarter 2022 compared to 2020 and 2021.
2020 – Covid recessions, stimulus 2021 – Ec rebounds, inflation fears 2022 – Inflation, Rate hikes, Russia
'Developed' 2020 'Developed' 2021 'Developed' 2022 YTD
Price Index returns Price Index returns Price Index returns
in Local Currencies-30% 0% 30% 60% in Local Currencies -30% 0% 30% 60% in Local Currencies -30% 0% 30% 60%
US (S&P500) 16.3% US (S&P500) 26.9% US (S&P500) -4.9%
US NASDAQ 43.6% US NASDAQ 21.4% US NASDAQ -9.1%
Japan 16.0% Japan 4.9% Japan -3.4%
UK -14.3% UK 14.3% UK 1.8%
Switzerland 0.8% Switzerland 20.3% Switzerland -5.5%
Germany 0.4% Germany 13.0% Germany -9.5%
France -7.1% France 28.9% France -6.9%
Italy -5.4% Italy 23.0% Italy -8.5%
Canada 2.0% Canada 24.4% Canada 2.8%
AUSTRALIA 0.7% OWEN AUSTRALIA 13.6% AUSTRALIA 0.1%
MONTHLY \ Glob Sh-4 OWEN OWEN
'Emerging' 2020 'Emerging' 2021 'Emerging' 2022 YTD
Price Index returns Price Index returns Price Index returns
in Local Currencies -30% 0% 30% 60% in Local Currencies -30% 0% 30% 60% in Local Currencies -30% 0% 30% 60%
China (domestic) 13.9% China (domestic) 4.8% China (domestic) -10.6%
China (foreign) 25.9% China (foreign) -22.7% China (foreign) -13.9%
Hong Kong -3.4% Hong Kong -14.1% Hong Kong -5.7%
Sth Korea 30.8% Sth Korea 3.6% Sth Korea -7.4%
Taiwan 22.8% Taiwan 23.7% Taiwan -2.9%
Singapore -12.4% Singapore 4.4% Singapore -1.5%
India 15.8% India 22.0% India 0.5%
Brazil 2.9% Brazil -11.9% Brazil 14.5%
Mexico 1.2% Mexico 20.9% Mexico 6.1%
Sth Africa 0.1% Sth Africa 16.9% Sth Africa 4.7%
Russia -10.4% Russia 15.0% Russia
Turkey 29.1% Turkey 25.8% Turkey 20.2%
Malaysia 2.4% Malaysia -3.7% Malaysia 1.3%
Thailand -8.3% Thailand 14.4% Thailand 1.7%
Philippines -8.6% Philippines -0.2% Philippines 1.1%
Indonesia -5.1% OWEN Indonesia 10.1% OWEN Indonesia 7.4% OWEN
Most markets are still negative in 2022. Commodities markets are mostly ahead, and Australia is dead flat.
Stanford Brown, Investment Markets Report, 4 April 2022 2Coronavirus update
On the Coronavirus front, there were some morbid milestones (or tombstones) reached at the end of March.
Global coronavirus deaths passed 6 million, and the USA passed the 1 million mark. Next on the list is 660k in
Brazil, 520k in India, 360k in Russia, and 320k in Mexico. Australia passed 6,000 deaths (80th worst country in
world). But in per capita terms, Australia ranks 149th in the world (in the bottom – or ‘best’ - one third of countries).
Although these overall numbers are startling, the trends continue to head in the right direction:
3,500,000
Infections Coronavirus - key stats: World - 31 March 2022 70,000
per day 65,000
3,000,000 World infections per day (left scale) = 1,632,934 60,000
World Deaths per day (right scale) = 6,046 55,000
2,500,000 50,000
Omicron
45,000
Daily infection rate
2,000,000 (left scale) 40,000
35,000
1,500,000 30,000
Deaths
25,000
per day
1,000,000 Delta 20,000
Daily Death rate
(right scale) Daily Death rate 15,000
(right scale)
500,000 10,000
5,000
0 0
58%
56%
-5,000
52%
49%
43%
% Fully Vaccinated = 58.0%
39%
% of total Population
34%
-500,000 -10,000
27%
fully vaccinated
12%
-15,000
8%
6%
4%
Mar-2021 2%
1%
0%
Dec-2020 0%
-1,000,000 -20,000
Sep-2020
Sep-2021
Sep-2022
Dec-2019
Dec-2021
Mar-2020
Jun-2020
Jun-2021
Mar-2022
Global infection rates are falling – from a peak of 3 million new infections per day in January 2022 (the Omicron Jun-2022
peak), down to 2 million per day in February, and down further to 1.6 million new infections per day in March.
Global death rates are also falling – from 8,200 deaths per day in January, up to 9,200 per day in February (Omicron
peak), but down to 6,000 per day in March. This is the lowest daily death rate since October 2020.
Meanwhile, vaccination rates (green line) have been rising in almost a straight line globally. (Because vaccination
ages differ widely in different countries, and constantly change within each country, it is more useful to track
vaccination rates, double dosed, as a percentage of total populations). Australia is now up to 82% double dosed
after a slow start, and overtook the US, UK and Europe in October 2021. While vaccination rates in rich countries
are relatively high (albeit now plateauing), it is a very different story in poor countries with limited access to
vaccines and limited health infrastructure. Total world population is only 58% fully vaccinated, mainly because
Africa is still only at 15% (up from 13% in February).
Our base case since the start of the crisis has been that new strains are likely to appear until broader vaccines are
developed in the coming years and implemented universally. The world will not fully re-open until all countries are
on top of the problem, including low income countries. Almost all countries are now progressively allowing activity
to return to ‘normal’ – ie to ‘live with Covid’. The notable exception is China (which now includes Hong Kong),
retaining a policy of harsh lockdowns to try to eliminate infections.
For investors, the main issue is that we are relying on government fiscal support (deficit spending, hand-outs) and
monetary support (ultra-low interest rates) to boom household incomes, which flow through into company
revenues, profits, dividends, share prices, and to other asset markets like real estate (especially housing), and
commodities. All of this fiscal and monetary largess has fuelled inflation, which is now running at 40 year highs,
and central banks everywhere (except Australia) are finally raising interest rates. On top of that, Russia’s invasion
of Ukraine has accelerated inflation via surges in the prices of oil/gas/coal and agricultural produce. Higher
inflation heightens the risk of rate hikes, but it also threatens household spending, production and jobs.
Stanford Brown, Investment Markets Report, 4 April 2022 3Commodities prices
As we have pointed out in prior reports, military conflicts and build-ups have usually caused rises in commodities
prices, due to a combination of increases in demand and disruptions to supplies. The Russia-Ukraine war has been
no exception. This chart shows daily prices of key commodities from a common base at the start of 2022:
+250% Commodities prices - since start of 2022
Nickel
+225%
8 March
US sanctions
+200% on Russia
+175%
Coal
+150%
24 Feb Coal = +88%
+125% Russia Lithium = +76%
invades
+100% Nickel = +60%
Coal Nat Gas (NYMEX) = +51%
+75% Lithium Uranium = +39%
common Lithium Nickel
base at WTI Crude Oil = +34%
+50% start of OIL Nat Gas
2022 Uranium Iron Ore = +32%
OIL
+25% Iron Ore Gold (USD) = +7%
Gold Copper Copper = +7%
+0% Gold Aust shares (All Ords) = +0%
Bitcoin Bitcoin = -2%
-25% US Shares (S&P500) = -5%
Ruble
Russian Ruble (USD / RUB) = -10%
-50% Russian
Russian shares shares Russian Shares (RTS) = -37%
(closed 25 Feb - 23 Mar)
-75%
Apr-2022
May-2022
Feb-2022
Dec-2021
Jan-2022
Mar-2022
16 March
US Fed 1st
rate hike
OWEN
We also include Australian and US share market indexes (in green and red respectively) to illustrate how share
markets have been remarkably smooth by comparison. Alternatively, for people who think that share markets have
been ‘volatile’ this year, it shows how commodities markets have been far more volatile than share markets.
Commodities prices soared on the invasion but fell back with the US sanctions on 8th March.
Fossil fuels
Oil, gas, and coal were already experiencing price rises during 2021 from rising demand in the post-Covid
rebounds, plus supply constraints due to a range of factors including lockdowns and weather. Aside from the price
spike at the start of the war, fossil fuel prices should remain elevated in the medium term as Europe scrambles to
reduce its reliance on Russia and shift to alternative sources. Uranium prices (+39% this year) have risen even
more than oil, as countries revive uranium as a power source, ending the global hiatus after Fukushima in 2011.
Industrial metals
Also on the chart are prices for some of the key metals required for electric vehicles and batteries - copper, lithium
and nickel. Lithium prices have shot up another electric vehicle-inspired speculative spike similar to the
speculative bubble in 2015-7, but even higher this time.
Nickel ‘short squeeze’
The nickel market was the first major market failure triggered by the war. The problem was that the world's largest
producer of nickel & stainless steel, Tsingshan Holdings (Chinese), had been betting on falling nickel prices and
had shorted 150,000 tonnes of nickel futures. Russia is the 3rd largest producer of nickel ores and largest producer
of refined nickel, so when the sanctions were announced (8th March), the nickel price shot up from $24k to $81k
per tonne as shorters scrambled to buy back their shorts to limit losses on margin calls.
The price spike triggered losses of $8b on Tsingshan’s short bets, and its main banker, Morgan Chase (US). During
8th March trading, the London Metals Exchange (which is owned by Honk Kong stock exchange) took the
extraordinary step of closing the market and cancelling the day’s trades, in order to make the crippling margin calls
magically disappear, rescuing Tsingshan and limiting losses to Morgan and other LME clearing house members.
Stanford Brown, Investment Markets Report, 4 April 2022 4The Tsingshan ‘short squeeze’ in nickel was far more important for global markets than the ‘GameStop’ short
squeeze in February 2021, as nickel is a key metal in global supply chains, not just for EVs (electric vehicles) and
batteries, but in stainless steel generally, and in a host of other industrial applications.
Iron ore
Iron ore is up +32% for 2022, but still some 28% below its July 2021 peak ($220/t) before the Evergrande crisis
revealed serious problems in China’s over-indebted residential construction sector, and the Chinese government’s
clumsy attempts to cool the lending boom. However, even at current levels ($158/t), iron ore prices (and profits for
BHP, RIO and FMG, as well as government tax revenues) are well ahead of anyone’s wildest expectations.
Gold
Gold rose a little at the start of war but has receded. It is up 7% for the year to date, but still 6% below its August
2020 peak. It has hardly been an inflation hedge. When the gold price peaked at $2,061 in August 2020, inflation
was running at zero or negative around the world, but the mere fear of future inflation sent gold bugs chasing the
price up to all-time highs. But now inflation has since soared to 40 year highs everywhere, the gold price has fallen.
Bitcoin
Bitcoin has also belied the hype as an ‘inflation hedge’, with crypto prices falling over the past year as inflation has
risen. On the other hand, the Russia-Ukraine war has actually advanced Bitcoin’s case as an ‘alternative currency’.
Before the war, Bitcoin was the ‘currency of choice’ for drug dealers, ransomware hackers, tax evaders and money-
launderers. However, during the war it has proven useful as a way for pro-Ukraine supporters to donate money to
the defence effort inside Ukraine, and also by Russians to get money out of Russia, and get around sanctions.
Despite this progress toward being a ‘medium of exchange’, Bitcoin is down -2% for the 2022 year, and down -33%
from its 2021 peak. It can hardly be a reliable currency for transactions with that kind of volatility (not to mention its
enormous carbon impact).
Longer term picture
To provide perspective, here is our updated chart of commodities prices since the start of the ‘China boom’:
3,000
Commodities prices - since 2001
2020-2
2,500
Lithium
spike
2022
Russia-
Ukrain+ nickel
short sqeeze
2,000
2021-2
Prices from energy
common 2007 crisis
base 100 at Uranium + 2014-5 2015-7
start of 2001 nickel Lithium
1,500 bubble Commodities bubble
price collapase in
2008-9 China hard
GFC landing scare Lithium Carbonate (CNY) = 3,823
2011
2003-7 Fukachima 2020 Thermal Coal (USD) = 933
1,000 China / credit Covid
boom Copper (USD) = 704
recession
Gold (USD) = 702
GOLD GOLD Uranium (USD) = 618
(common Nickel (USD) = 610
500 base 100) Copper
Iron Ore (USD) = 529
Oil - WTI (USD) = 507
Nat Gas (USD) = 234
Lithium
Natural Gas
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
MONTHLY \ Asset Classes OWEN
This is a reminder that, while demand growth is relatively steady and predictable (aside from sudden war shocks),
the prices of commodities (and mining shares) experience wild swings from bubble to bust - driven mainly by
speculative manias, temporary supply shocks, and long periods of over-supply and price falls when supply catches
up and over-takes demand. Investors need to resist the temptation to jump on the latest price spike in the hope
that “This time it’s different!”.
Stanford Brown, Investment Markets Report, 4 April 2022 5Australia’s bounty – is it just diversified luck?
Aside from fuelling global inflation, rising commodities prices are particularly good for commodities exporters like
Australia. Last week’s Federal Budget was little more than a vote-buying cash splash, funded by unexpected
windfall mining royalties and taxes.
The rise in commodities prices over the past two years has been a combination of increasing global demand as the
world recovers from covid lockdown recessions, and also favourable supply restrictions, especially in the case of
our two largest export earners – iron ore and coal, and now gas with the Russia-Ukraine war. China has been
extending its restrictions on its imports from Australia since the trade war began in 2018 and especially over the
past year, but these have mostly been picked up by other buyers across Asia.
Post-settlement Australia has always relied on raw commodities exports to raise the foreign exchange needed to
import everything we need for our daily lives. Unlike most ‘banana republics’, Australia has been blessed with a
host of different types of commodities – from the land, the earth beneath the land, and the sea. Here is our updated
chart of Australia’s export mix over the past two centuries. It is a remarkable story of dramatic shifts in our export
mix over time – starting with oil (from whales and seals!), to crops, wool, then gold and base metals in the 19th
century, back to pastoral, wool and crops for most of the 20th century, then the rise of East Asia built with our coal,
iron ore and base metals after WW2, and back to oil & gas. This illustrates not only our vast diversity of resources,
but also the ability to adapt and prosper from changing global economic and political conditions.
Australia's Exports Mix - since 1825
100%
Oil
90%
Other
Other mining
80% Other Exports = 16%
oil/gas
70%
Oil & Gas = 17%
Gold
Pastoral & Ag
ex-Wool
60%
Coal Coal = 18%
Pastoral & Ag ex-Wool
50%
Iron Ore = 27%
Other mining
40%
Iron ore Other mining = 7%
30%
Gold = 5%
20%
Wool Pastoral & Ag ex. Wool = 9%
10%
Wool = 1%
0%
1825 1835 1845 1855 1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015 2025
AHS-Exports by Type / exports by type OWEN
Rural -v- Mining
100%
Other
80%
Rural = 11%
60% Rural
40%
Mining (incl oil/gas) = 73%
20%
Mining
0%
1825 1835 1845 1855 1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015 2025 OWEN
The lower section of the above chart shows the changing mix between rural and mining exports. Rural has
dominated for most of the whole period, with the notable exception being the 1850s gold rush. The turning point
was 1960. At the time, wool made up 50% of total export revenues, but the lifting of the iron export embargo in
1960 diversified the export base and dramatically reduced Australia’s vulnerability to the vagaries of the weather.
Mining finally over-took rural in the mid-1980s and has dominated ever since. Australia may have got rich riding the
sheep’s back, but it is a far more diversified and robust export mix now.
Stanford Brown, Investment Markets Report, 4 April 2022 6Australia’s commodities export revenues
The next chart shows monthly export revenues from the three ‘big ones’ (iron ore, coal and oil/gas) since 2000.
Iron ore prices and revenues had an extraordinary spike after the Vale mine closures at the start of 2019. The covid
restrictions catapulted Australia to overtake Brazil as the world’s largest iron ore exporter, and also overtake South
Africa as the world’s largest exporter of coal. While China’s restrictions have hit coal and agricultural exports, and
now iron ore, it has not all been bad news. Despite rising Canberra-Beijing tensions, China has now overtaken
Japan as our largest LNG buyer.
Monthly Monthly export revenues since 2000
Export
Revenue Coal Oil & gas Iron Ore
A$m
↓
$20,000 2020-1 Iron
Covid
stimulus
Ore China import
$18,000 restrictions
steel cuts,
lockdowns,
$16,000 property
2011 2020 sowdown
$14,000 commodities virus
peak after Jan 2019 recessions
2013-5 China Vale mine
$12,000 2008 pre- GFC stimulus slowdown + disaster
GFC peak commodities
price collapse
$10,000 GFC 2016
China
stimulus
$8,000 re-boot
start of Coal 2021-2
China energy
$6,000 China boom trade crisis +
war Russia
$4,000
$2,000 Oil & Gas
$0
Dec-2000
Dec-2001
Dec-2002
Dec-2003
Dec-2004
Dec-2005
Dec-2006
Dec-2007
Dec-2008
Dec-2009
Dec-2010
Dec-2011
Dec-2012
Dec-2013
Dec-2014
Dec-2015
Dec-2016
Dec-2017
Dec-2018
Dec-2019
Dec-2020
Dec-2021
Dec-2022
5368 table 12a - Jun 2021
OWEN
How long will the commodities boom last?
In the case of most commodities, the current price spikes are probably temporary. Most of the spikes are due
mainly to supply constraints with a range of causes, from Covid lockdowns, unrelated disasters (like mine tailings
dam collapses), trade war restrictions, a host of unrelated weather events, and now the Russia-Ukraine war. In time
these supply constraints will ease.
Global shift to renewables has also led to elevated prices of old fossil fuels for probably longer than anticipated.
The bigger picture is that price rises always trigger increased investment in new sources of supply and in
alternatives. New developments always take time, stretching from a few months to many years in some cases. The
history of commodities prices is riddled with price rises (for whatever reason) followed by surplus supply causing
price collapses when new supply and/or alternatives catch up to, and then overtake demand. The price collapse
leads to bankruptcy of some producers (which reduces supply), and a hiatus in new development. Meanwhile
rising demand (from rising populations and rising living standards) slowly but surely catches up to, and over-takes
supply, causing prices to rise once again. This kicks off the whole cycle in an endless cycle of booms and busts
fuelled by these supply time lags.
The key to success with investing in commodities markets (and producers) is understanding these commodities
prices cycles and getting the timing right. We shall see a practical example of this in a moment.
Stanford Brown, Investment Markets Report, 4 April 2022 7BHP – ‘Biggest Australian’ once again
One major milestone for the Australian share market has been the return of BHP as our largest listed company.
The aggregate market value of BHP’s ASX-listed shares suddenly doubled, catapulting it ahead of CBA and CSL to
be the largest ASX stock again. But BHP’s share price hardly moved on the day it occurred, so what happened?
BHP started out as a silver-lead miner in the 1880s, and was Australia’s largest listed company for much of the 20th
Century, but not as a miner, but as a government-protected monopoly steel maker. When protection barriers came
down in the 1980s, BHP ditched steel making (spinning off OneSteel, the since bankrupt Arrium, in 2000) and
BlueScope in 2002. BHP’s hasty return to mining in the 1990s was what got it into trouble, and into the merger with
Billiton. That is what was unwound in 2022. BHP has also made two other major changes – exiting oil/gas and also
exiting thermal coal mining, effectively getting BHP out of fossil fuels. We deal with this aspect first.
Exiting fossil fuels
BHP had been mining coking (metallic) coal since the early 1900s for its smelters and steel mills, but got into
thermal coal mines in Queensland with the acquisition of Utah International in 1984. Given concerns about global
warming from fossil fuels, BHP has announced the sale of its thermal coal mines. In the case of oil & gas, BHP had
also been Australia’s largest oil producer from its Bass Strait oil wells developed in the 1960s with Esso (now
Exxon-Mobil), and expanded into gas in the North West Shelf. BHP is now selling its oil & gas interests to Woodside
(which pioneered offshore gas in WA) in an all-scrip deal in which BHP shareholders will receive free shares in
Woodside. This is due to be completed in the next few months, and BHP shareholders will end up owning nearly
half of the expanded Woodside. They can sell the Woodside shares if they want to avoid fossil fuels. Or they might
wish to retain their WPL shares and milk the current oil/gas boom while it lasts, profiting from warming the planet!
Ending the Billiton merger/dual listing
In its haste to exit from steel making and expand beyond mining into processing, BHP took on a string of disastrous
acquisitions and failed expansion projects in the 1990s (including Magma copper smelter in the US, Boodarie Hot
Briquette iron plant in the Pilbara, Venezuela HBI plant, Hartley platinum mine in Zimbabwe, and Beenup mineral
sands venture in WA). As a result of massive losses and write-offs on these projects, BHP posted big losses in 1998
and 1999 that wiped out half the company’s shareholder capital. BHP’s then Chairman was Don Argus (the former
NAB CEO was a banker, not a miner, and he was the architect of NAB’s disastrous expansion into the UK). Argus
rushed BHP into a bad marriage with the London-listed Billiton to get hold of its cashflows. Argus was BHP’s last
Australian-born chairman, and John Prescott (CEO during the disastrous 1990s decade) was BHPs last Australian-
born CEO. Ever since then, BHP has had foreign-born Chairmen and CEOs (a revolving door of six CEOs since 1998
– two Americans, a South African, a Scott and two Canadians). A rapid succession of CEOs is never a good sign.
The Billiton merger in 2001 resulted in a ‘dual-listed’ structure that gave 42% of combined group to the London-
listed shareholders, but by 2021 the Billiton side contributed just 5% of the combined group’s profits. The dual-
listing was unwound this year and the London shares were transferred to the ASX, so the market value of BHP on
the ASX now includes all the shares, not just the Australian end. The total value of the ASX-listed shares nearly
doubled overnight, resulting in BHP leap-frogging CBA and CSL. Today (end of March, 2022) the market value of
BHP is A$260b, some 45% more than A$180b for CBA, putting BHP back in front again.
ASX Largest 10 - end 2021 (A$b) ASX Largest 10 - March 2022 (A$b)
$0 $100 $200 $300 $0 $100 $200 $300
1 = CBA $172 1 = BHP $262
2 = CSL $139 2 = CBA $180
3 = BHP $122 3 = CSL $129
4 = NAB $94 4 = NAB $104
5 = MQG $79 5 = WBC $85
6 = WBC $78 6 = MQG $78
7 = ANZ $77 7 = ANZ $77
8 = WES $67 8 = FMG $64
9 = FMG $59 9 = WES $57
10 = GMG $50 10 = TLS $47
Stanford Brown, Investment Markets Report, 4 April 2022 8BHP – no such thing as a ‘Blue chip’
The incredible story of BHP has filled dozens of books and many thousands of articles, so we will not repeat that
here. However, as BHP has one of the longest reputations as a so-called ‘blue-chip’ stock, it is worth pausing to
consider what is a ‘blue-chip’ stock, and whether BHP might be one of them.
First: what is a ‘blue-chip’ stock? It would be one we could ‘buy and hold’, ‘set & forget’, that may be counted on to
generate reliable profits, dividends, and share price growth at or above the inflation rate, for our intended
investment time horizon, say 30-40 years. We accept some ups and downs with economic cycles every few years,
but we don’t want it to lag the overall market or, worse still, go backwards after inflation for decades at a time.
Alas, there has never been any such ‘blue chips’ in Australia, not even BHP. It has been listed since 1885, so it has
certainly been a survivor, but it does not qualify as a ‘blue-chip’ because it has had several episodes of lagging the
broad market for decades at a time, suffering declining real share prices for decades at a time, and has also posted
big losses and cancelled dividends several times. It has succumbed to the all-too-familiar pattern of pursuing over-
priced acquisitions, usually foreign with little research, and with too much debt, at the tops of markets when
commodities prices were high, and blindly assuming they will keep on rising ever-higher.
This is a chart of BHP’s share price since listing in 1885, with the upper section highlighting the main phases of its
operations over the years. The share prices (black line) have been adjusted for changes in capital structure (splits,
bonus issues, spin-offs, etc) and for inflation. The grey line is the broad market index (‘All Ords’ and predecessors).
BHP - since 1885
(adjusted for changes in capital structure)
International base metals
Iron ore (for smelting & steel) WW2 - Iron ore (for export)
Silver-lead manu-
mining Lead-Zinc smelting Steel facture for Steel + steel products Billiton dual listing 2001-22 BHP
war effort
Coal (for steel) Coal (export)
$70 10,000
Oil / gas
All Ords index
2011 mining 9,000
(inflation -adj.)
BHP Adjusted Price (nominal $)
peak
$60 1998 & 1999 2003-7
losses China / credit
BHP - Adjusted price + Inflation-Adjusted boom
2012-15 commod
8,000
All Ords - inflation-adjusted Bass Strait oil
1960 - starts exploring 1984
collapse
$50 1964 - strikes commercial BHP buys Utah
quantities International
7,000
1969 - starts production 1970-1 mining
collapse Oct 1987 crash
6 Jan 1890 Late 1960s
BHP peaks at 1935 mining
£101 BHP buys AIS - boom
2001-2 6,000
$40 after 10 for 1 for steel late 1970s tech wreck
split monopoly 1951-2 mining boom
Koreean War
inflation spike
1973-4 5,000
late 1880s
silver-lead crash
1890s silver 1990-1
boom 1981-3 recession
$30 price
collapse recession
1929-31 crash 4,000
Feb 1888 1915 1920s All Ords index 2020
OneSteel + 2008-9 virus
peaks at £413 BHP starts boom (inflation -adjusted) BlueScope spin- GFC
per share 1890s property / 1906 seelmaking in offs
banking crash + commcdities Newcastle 3,000
$20 global boom, then 1921 BHP
depression 1907-8 collapse strikes &
closures + loss
13 Aug 1885
BHP IPO 2,000 2,000
sh at £9 per BHP-Esso 2015
share Bass Strait oil South32
$10 strikes spun off
WW-2
1,000
WW-1 2001
BHP-Billiton
merger
$0 0
1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
OWEN
Rolling 10y annualised difference: BHP -v- Broad Market
+20%
+0%
-20%
1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
OWEN
The Broken Hill Proprietary Company (‘BHP’) was formed in 1883 by seven locals who chipped in £100 each, with
hopes of finding silver in a black, rocky outcrop on a sheep farm in a remote outback area of Western NSW. They
listed the company on the stock exchange in Adelaide (the nearest large city) in 1885, selling 2,000 shares at A£9
per share to raise A£18,000 in cash. It turned out they didn’t need the cash. By the time of the float, the mine was
so profitable the money raised in the float was never spent. By 1891 it was making more than A£1 million in profits
and paying more than A£1 million in cash dividends. (In the boom years it paid dividends monthly!)
The share price peaked on 6 January 1890 at £101 per share (after a 10 for 1 split), which is the equivalent of
$29.27 in today’s dollars, after adjusting for changes in capital structure and for inflation. The problem is that it
Stanford Brown, Investment Markets Report, 4 April 2022 9took another 113 years until 2005 for the share price to finally claw its way back up to exceed its 1892 peak (after
adjusting for changes in capital structure and inflation).
While most mining companies peter out when the initial mine is exhausted, BHP was able to find other profitable
ventures at each turn. That has been its greatest strength, and also the source of some big mis-steps along the
way, chasing over-priced foreign acquisitions. After the silver price collapsed in the 1890s (when the US ditched
the dual silver-gold standard and returned to gold), BHP turned to smelting lead and zinc from the mine. When that
was depleted it turned into a steel manufacturer from 1915, mining iron ore and coking coal for its steel mills. It
spent most of the 20th century as a government-protected monopoly manufacturer of steel and steel products
(including making ships, planes and trucks for the government in WW2), operating behind high protection barriers.
The lower section of the above chart shows the rolling 10 year difference between BHP and the broad share
market index. This is the main acid test of a ‘blue-chip’ – how often, and for how long, the company’s shares beat
(upward-sloping arrows), or lag (downward-sloping arrows) the overall market. We are willing to accept a few years
of ups and downs, but it is not a ‘blue-chip’ if it lags the market for more than a decade at a time. For me, ten years
is too long to wait to get back to square with the market, which I could buy cheaply with an index fund. The chart
shows that every 20-30 years BHP swings from out-performance to under-performance, with several decade-long
periods of lagging the market. BHP’s long periods of out-performance make it a ‘grey-chip’, but not a ‘blue chip’.
We can also see from the main section of the above chart that the share price (black line) actually went backwards
after inflation for very long periods at a time – 14 years from 1890 to 1904, 24 years 1907 to 1931, 20 years from
1937 to 1957, 10 years from 1968 to 1978. A stock that goes backwards after inflation for multi-decade periods at a
time cannot be a ‘blue-chip’ part of a long term portfolio that needs to exceed inflation.
BHP has also been prone to bubbles and busts, with the share price collapsing by more than half on several
occasions – in the 1890s, 1907-8, 1937-57, 1968-78, and 2008-2016. Mining companies are essentially leveraged
bets on commodities prices (operational leverage in their fixed cost base, and financial leverage from debt), and
this makes mining share prices even more volatile than commodities prices.
Profits and dividends
The reason BHP’s share price took more than a century to recover its initial boom time peak is that it took that long
for profits and dividends to recover. The next chart shows profits and dividends per share adjusted for capital
structure changes and for inflation.
BHP - Earnings & Divs per share since 1885 2011
peak
$4.00
EPS adjusted, Real 2008 EPS finally
2021 DPS still
exceeds 1892
after 116 years lower than 1892
DPS adjusted, Real
$3.00 Late 1880s
silver 1890s
boom Silver
price
collapse 2003-8
No Divs 1984 Utah China
$2.00 in 1909 No Divs in mine
1930, 1931, 1933 boom
(miners' No Divs in acquisition
strike) 1923, 1924 (Depression) early
(steel strike) Bass 1980s
Strait oil recession
$1.00 WW-2
WW-1
$0.00
1998 & 99 2016 loss - US
1923 loss - steel losses on shale oil write-
strikes + closures Magma, HBI, etc offs + Samarco
($1.00) dam disaster
1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2015 2025
OWEN
Converted to AUD, the 2021 profit (US$11.3b) was only a marginally higher than its 1892 peak, on a per share
basis, adjusted for inflation. The bumper 2021 dividend was actually still lower than the 1892 peak, on a per-share
basis after inflation.
Stanford Brown, Investment Markets Report, 4 April 2022 10Where are we now?
The purpose of this story is not to provide advice on whether to buy, sell or hold BHP, but readers probably cannot
resist looking at the right-hand end of the lower section of the above chart to see where we are now. We can see
that BHP has lagged the market (downward sloping arrow) since it hit $50 in 2008 (pre-GFC commodities peak) (it
barely above $50 14 years later), and has been below the market on a rolling 10 year basis since 2016 (the China
stimulus re-boot that revived commodities prices). Is it time for the next phase of out-performance from BHP?
It comes down to two things: commodities prices and management skill. On the commodities front, our base case
is that commodities are going to be supported by rising military spending and also infrastructure spending in Asia,
US and Europe. In addition we have the rising role of renewables (and the industrial metals required for EVs and
batteries), as well as the problems created by the shift away from fossil fuels. However most commodities are
clearly in temporary price spikes at present, and prices are likely to return to earth as supply problems are cleared
and as new supply sources come on stream.
On the management skill front, this is where BHP has a patchy record. The profit and dividend chart shows the
result of the past two over-eager overseas expansion ventures at boom-time prices, with over-ambitious
assumptions – under-estimating costs and over-optimistic assumptions that commodities prices would keep on
rising. For BHP, the big ones were: the Magma copper smelter in the US in 1995 at the top of a copper price
bubble; and Chesapeake and Petrohawk shale oil in the US in 2011, at the top of the oil price spike. Both episodes
were followed by massive write-offs, losses, dividend cuts, and the CEO being fired.
In the recent announcements about the unwinding of the dual-listing, and exit from fossil fuels, BHP also outlined
its ‘next big thing’ – Canadian potash (used in fertilisers). This has been a pet project for current BHP CEO Mike
Henry (Canadian) and current chair Ken MacKenzie (also Canadian). Like copper smelting and shale oil, potash is
outside BHP’s core area of expertise. The project is also very expensive and has taken a long time to develop. It is
not expected to start production until 2027, after some 20 years of development, and is running over-budget and
behind schedule. BHP has already spent $4b sinking shafts that were the wrong size, so it wrote off $3b.
Like all commodities, potash also has a nasty habit of going through temporary price bubbles and busts. It is now
into another price spike, so the potential for management to over-spend, under-estimate costs and over-estimate
future commodities prices is a real risk:
Potassium Chloride (Muriate of Potash) (USD/t)
$800
Wheat (USD/t)
$700
$600
$500
$400
$300
$200
$100
$0
Dec-1990
Dec-1995
Dec-2000
Dec-2005
Dec-2010
Dec-2015
Dec-2020
BHP may get it right this time, but who knows?
The lesson is that even the mighty BHP is not a ‘blue-chip’ company one can rely on to deliver relatively reliable,
steady-ish rises in profits, dividends and share prices. Although not a long-term ‘buy & hold’ blue-chip, there is
certainly the potential to make gains from time to time. Investors must at all times keep a close eye on
commodities price cycles, on what management is doing, and, as always – timing is everything!
Stanford Brown, Investment Markets Report, 4 April 2022 11What Lies Ahead? For investment markets the most important factor remains interest rates. The US Fed is likely to continue to raise rates – probably up to 2% by the end of this year. Much will depend on how inflation affects spending behaviour and wages. The risk of sudden, unexpected moves from the Fed remains a very low risk. In Australia, the RBA has already ditched its promise to not raise rates until mid-2024. The recent Federal budget cash splash will only add to inflation pressures, and that may bring forward the RBA’s rate hikes a little closer. As in the US, the market is well ahead of the central bankers, meaning rate hikes are already factored in well in advance. This should mean less negative reaction when the hikes arrive. Our portfolios are positioned for a scenario involving (a) declining but continued highly supportive monetary and fiscal support; (b) resulting in relatively strong incomes, employment, spending, commodities prices and corporate profits; which in turn lead to (c) rising inflation and interest rates. On share markets, we expect the speculative tech/online sector to continue to come under pressure from rising interest rates, but miners benefiting from higher commodities prices. On the Russia-Ukraine front – it seems every week there are new theories about what direction the war will take and what the possible outcomes might look like. Whatever happens, Putin will look to save face for his internal domestic audience, and for his main allies, China and India (which relies heavily on Russia for defence). In the short term, one key issue will be if Putin makes good on his promise to cut off gas to Europe if they don’t pay in Roubles. Either way, there is a mad scramble going on to find alternative suppliers of gas, as well as alternatives to gas including coal, nuclear and renewables. The big risk is China for a couple of reasons. The first is the domestic economic slowdown, as a result of Covid lockdowns and the continued unravelling of the property construction/lending bubble. This slowdown is reducing demand for raw materials. China has already cut off most imports from Australia, but iron ore is still holding up, gas is increasing, and there are even signs of a re-opening of the coal trade – all of which are because China has very little other options available. The second main risk from China is how Xi deals with Putin. Xi has already extended their ‘no limits’ pact into offering to import more from Russia to help it out, presumably paying for them in RMB or gold instead of US dollars. There are two interesting aspects with longer term implications. The first is how it will affect Australia’s export markets, but we have already noted how Australian exporters have been having much success in finding other willing buyers, especially in Asia. The second aspect of the China-Russia relationship is what it means for the global monetary system. The Russia-Ukraine war, and the US sanctions in particular, demonstrated starkly the power of the US dollar, and the power of the US government to cause serious economic damage to a country by unilaterally cutting off access to US dollar reserves. More than fifty years after the end of the USD-gold standard, the US dollar still accounts for 80% of global trade, 60% of global foreign exchange reserves, and it anchors some 65% of the global economy. Meanwhile China has grown from nowhere to be the second largest economy (or largest, depending on the measure), and largest buyer of most commodities, but the RMB accounts for less than 3% of global reserves. There are many reasons for this, including the fact that the RMB is not freely exchangeable, and China has a closed capital account. Xi likes to maintain tight control on these and is unlikely to relinquish control to market forces. However, the US-Russian sanctions have certainly strengthened China’s resolve to reduce global reliance on the US dollar as the prime currency for foreign currency reserves and for trade. Xi is moving quickly now to arrange for payments in RMB and/or gold – for example wheat from Russia, and oil from Saudi Arabia. The end of the US dollar’s dominance is probably decades away yet, but it may lead to the emergence of a rival Chinese RMB bloc, with China and its main trading partners and allies. One outcome may also be China selling down its $3 trillion hoard of US treasuries (it has already reduced from $4t in the past 3 years). This would have two negative outcomes – the first being lower bond prices, and even more losses in bond markets, and the second would be a gradual loss of standing of US debt as a ‘risk-free’ asset. These developments take many years but we need to monitor them as medium term risks to investment portfolios. As always, we remain vigilant and willing to make further adjustments to portfolios to protect capital and capitalise on opportunities where warranted. Our regular quarterly review is now underway, and we will report on our thinking, and on any changes, in our next report. Ashley Owen, CFA Chief Investment Officer Stanford Brown, Investment Markets Report, 4 April 2022 12
Ashley Owen Chief Investment Officer CFA, LLM, BA, Grad. Dip Applied Finance Ashley is one of Australia’s leading portfolio managers of diversified investment funds for long term investors. His mission is to manage portfolios that provide investors with confidence that their investments will generate the wealth they need to live the life they wish to lead for the rest of their lives – for themselves, their families and as a legacy for future generations. His primary focus is protecting investors from losses and risks, rather than chasing high returns from the latest hot funds or fads. Disclaimer Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. This report is current when written. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Stanford Brown is a Corporate Authorised Representative of The Lunar Group Pty Limited. The Lunar Group and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products. Stanford Brown, Investment Markets Report, 4 April 2022 13
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