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COLUMN-BHP is sailing between China stimulus breeze and trade war storm: Russell

Clyde Russell

Russell@ (The opinions expressed here are those of the author, a columnist for Reuters.)

LAUNCESTON, Australia, Aug 20 (Reuters) - Spot the problem. The world's biggest mining company, BHP Group, reports its highest profits in five years even as its top customer is engaged in a now protracted trade dispute with the world's largest economy.

BHP on Tuesday posted an annual profit of $9.12 billion, a bumper figure built largely on selling iron ore, coal and copper to China, the world's largest importer of commodities.

BHP's results show it has so far managed steer a safe course, with its sails filled with the wind of Chinese stimulus spending, but the stormy seas of the trade war threaten to blow it off course.

The underlying profit was slightly below the $9.4 billion forecast by analysts, but was up from the $8.93 billion a year earlier.

The final dividend of 78 U.S. cents a share was also slightly below expectations, but could be taken as a sign that BHP is holding back some cash because of the uncertainties ahead.

BHP Chief Executive Andrew Mackenzie said the U.S.-China trade spat has yet to have a big impact on demand for the company's commodities, but he is mindful of the risks.

"There's obviously been a slight cooling in appetite based on some of the concerns we have seen in the short-term for the global economy. We are not without some consideration as to what might be around the corner," he said.

Given that BHP, as well as global mining peers such as Rio Tinto, Brazil's Vale and Anglo American , are heavily exposed to China's appetite for commodities, it may be possible to conclude that the trade war hasn't had that much of an impact.

However, the likelihood is that the effect on the Chinese, U.S. and global economies is taking longer to show up, and there are early recession warning lights flashing, from inverted bond yield curves to slowing freight growth and weakening manufacturing indexes.

STIMULUS VS TARIFFS

China's demand for commodities, especially iron ore and the coking coal used to make it into steel, has also been boosted by Beijing's stimulus efforts, aimed at keeping the country's economic growth above an annual 6% and offset the impact of weaker manufacturing exports.

BHP and the other commodity producers find themselves in a tug-of-war between the attempts to stimulate the Chinese economy through infrastructure and construction spending, and the damage being inflicted by the escalating tariff war between Washington and Beijing.

Beyond their limited lobbying abilities, the mining companies have no control over whether the trade dispute is resolved, or whether it morphs into a situation of effectively permanent trade barriers.

They also have no control over whether China can keep the stimulus taps open wide enough to prop up economic growth, but not so wide as cause other problems such as further deterioration in credit quality.

In some ways the trade dispute is coming down to a game of chicken between Beijing and Washington, with both seemingly currently betting that they can hold out longer than the other.

The problem for U.S. President Donald Trump is that, unlike his Chinese counterpart Xi Jinping, he is pushing for re-election in November next year and the last thing he needs is an economy entering a recession that his opponents will (mostly correctly) blame on his trade policies.

For commodity producers such as BHP the old adage of "hope for the best, prepare for the worst" seems the logical corporate strategy.

For investors this may mean a more cautious dividend policy, while for BHP and its peers, the chances are that the focus will once again return to cost-cutting and productivity improvements to ameliorate the potential impact of falling commodity prices.

(Editing by Joseph Radford)