At BHP Billiton we provide resources for a growing world. Products, based on our commodities are used by billions every day.
So we’re focused on learning how people’s lives are changing around the world.
We have people on the ground, talking to customers, and people back at the office, tracking usage and monitoring trends. Where commodities are concerned we're always learning and discovering.
This rich blend of information gives us a distinctive view of the world and its Prospects.
We will use Prospects to highlight the major economic and commodity market trends that we’re watching.
We’ll look at whether China has too much debt and if its demand for steel has peaked. We’ll investigate trends in renewables and what this means for long run energy supply. We will assess the impact of electric vehicles on future demand for oil. We will consider what could make or break the Indian growth story; we’ll assess which regions are most vulnerable to the commodity downturn; and we will delve into the technological forces behind the bullish thesis for copper.
But first let us take you through how we form our views…
Analysing demand from the ground up
Our Marketing team is responsible for our economic and commodity market views, and the proprietary analysis they conduct will be the basis of our initial posts.
To understand how our markets might evolve, we conduct detailed studies into the way our commodities are used from the mine gate to the high street.
Ores are smelted into metal; oil is refined into gasoline; potash ore is converted into fertiliser; metallurgical coal is consumed in steel making; thermal coal, uranium and gas are used in electricity generation. These products in turn are used to create our houses, cars, computers and even food.
We build granular models of every step of commodity use. The analysis is broken down by country and region, sector and sub-sector. These models are combined with macro-economic analysis to predict how developments outside the immediate world of commodities will influence our markets.
This detailed analysis helps us monitor how consumer demand evolves over time; to focus our research on what’s most important; and recalibrate swiftly when circumstances shift.
We examine how building techniques might change, and estimate what this will mean for copper and steel. We anticipate the trajectory of fuel efficiency standards for new cars, and assess how this will affect the oil market. We research the potential for substitution away from and between commodities, whether that’s switching gas for coal, or aluminium for copper, or plastics for metals.
Having teams on the ground, talking to customers every day, helps us deepen our analysis. We observe property developers in China; air conditioning manufacturers in India; petrochemical plants on the US Gulf Coast; machinery makers in Japan; auto makers in Germany and shipbuilders in Korea; to assess how global demand might grow and who will contribute the most to it.
Detailed supply modelling
Modelling demand trends is only half the battle. We also need to understand the direction of supply.
Our models of commodity supply are based on our proprietary long run cost curves for each of our products. These are based on a detailed assessment of the costs faced by the industry across major production centres and an assessment of the future path of macro-economic factors – like exchange rates, labour supply and inflation.
Depending on where we are in the commodity cycle, prices are either set by the cost of bringing on new production or the scale and duration of losses high cost producers must make that would see them exit the market. Our world class operational knowledge is critical to our assessment of industry dynamics. While the demand forecasting team splits much of their time between the office and the airport, our supply forecasters sit with our assets and are accordingly issued hard hats and reflector vests.
For example, in copper we model the costs and expansion opportunities of the hundreds of mines making up global supply, examining how water and power constraints, permitting issues and other regulatory challenges may affect future production. Our analysis includes an assessment of the global geological endowment of resources and the ways in which new technology may make formerly marginal deposits viable. We also account for how scrap and recycled material can help meet demand in competition with primary supply.
Given all the variables at play, we also use scenario analysis to understand how demand and supply might be affected by potential changes to technology, economic, political and governance trends.
By identifying critical signposts, like the signing of a global climate change accord, or the passage of a key reform bill in India, we are able to continuously validate or challenge our central view. This enables us to quickly adapt our models, which are built with agility in mind. We constantly test our assumptions to drive improved capital allocation and to anticipate and pre-empt potential opportunities and threats.
In addition to this blog and other communications, you can see the product of our thinking on scenarios in our Climate Change: Portfolio Analysis report, which details our thinking on ways in which the world may evolve, our actions to address climate change and potential impacts on our commodity portfolio.
Building a commodity market view
Commodity markets can be hugely volatile on a month to month, year to year basis, reflecting seasonal, cyclical and speculative forces. Long term prices, by contrast, are set by the rhythms of demand and supply fundamentals. These can be projected with more confidence than short run fluctuations.
History shows that the mix of resources a country needs changes as its economy develops. In the early stages of economic development, rising productivity in agriculture allows people to move from the countryside to new cities. New housing and infrastructure are built and the growing urban populations support the growth of light and then heavy industry. The demand for steel (and its ingredients iron ore and metallurgical coal) increases significantly through these early and middle phases of the development process.
As living standards progress further, rising wealth lifts demand for consumer goods, while also lifting energy requirements. This supports longer term demand for metals like copper and all forms of energy. However, wealthier societies also tend to become more efficient in their resource use over time, and the overall mix of spending shifts towards services like health, education, entertainment and travel. This combination of efficiency and structural change results in a plateau in demand for products like oil and copper. But the demand for higher quality food continues to rise over the very long term, supporting demand for fertilisers, like potash.
While every country follows a similar path over the very long run, the speed of development varies and each has its unique characteristics. Culture, technology, geography, public policy and the availability of domestic resources all help shape the commodity demand profile for individual countries.
Our curiosity on all these matters helps us gain a deeper understanding of the many aspects that influence our markets. This helps ensure we continue to be a reliable and competitive global supplier meeting the resource demands of a growing and changing world.