06/09/2005 - 22:00

Tim Treadgold: Briefcase-Filling in the gaps on BHP Billiton

06/09/2005 - 22:00

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It's a brave or foolish man prepared to criticise, however mildly, a company that has just reported the biggest profit in Australian business history. However, someone needs to point out a few of the gaps opening in the seemingly impregnable reputation of the modern-day version of the Broken Hill Proprietary Company Ltd – now known as BHP Billiton.

For a few days in late August, the financial news media could not get enough of BHP Billiton after it reported a whopping 85.5 per cent profit increase to a stellar $US6.5 billion.

Predictions of better to come maintained the media enthusiasm, with analysts forecasting a profit this year of $US8.78 billion, rising again to $US9 billion in 2007 – before a slide in 2008 to $US7.67 billion as commodity prices decline.

In theory, these spectacular profits are the result of better management, astute investment decisions, carefully planned expansion projects.

In reality just about everything relies on factors external to BHP Billiton management. No matter what the company does it is a ‘price taker’ for all of its products, with iron ore a rare example of the company exerting production power to screw massive price rises from its customers – and earn their eternal enmity.

Beneath the sky-high prices for oil, iron, coal, copper, nickel and aluminium, a few cracks can be seen. And it’s these cracks that Briefcase believes throw light on the old BHP, and the way in which it used to promote itself as Australia’s top corporate dog, led by managers who believed they were eligible for membership of a club called the infallibles.

The first piece of evidence that the BHP Billiton team is sowing the seeds of a future crisis came with the Chinese iron ore negotiations. While arch-rival Rio Tinto was prepared to accept an obscene 71.5 per cent price rise, BHP Billiton wanted an more obscene 100 per cent increase in what can only be seen as an astonishing exhibition of greed and a complete failure to understand that the customer is hurting – and that even if times are good for suppliers today, it is always the customer who is king.

Second, there is the first whiff of a new project slipping into the cost blowout category, which so dogged the old BHP. The Ravensthorpe laterite nickel plant is widely rumoured to be above budget – not that anyone is being told, yet. Under persistent questioning the BHP of old has come to the fore, with management saying it will make a statement on September 26 at a stainless steel group presentation scheduled to be held simultaneously in London, Sydney and Johannesburg.

Thirdly, there is the peaceful burial of the Boodarie hot briquetted iron (HBI) plant. A monument to management past, this wheezing black monster south of Port Hedland ate $3 billion of BHP shareholder funds – and let’s keep a focus on that category of people, also known as ‘the owners’.

Of the three factors, treating customers in a cavalier fashion is the most serious. But, the one that will grab the headlines is Ravensthorpe – if the cost blow rumours are confirmed later this month.

No-one can blame BHP Billiton for the price of steel rising, along with just about everything else, though it is ironic that it is BHP Billiton itself helping to force up the steel price up courtesy of its big win with the price of iron ore.

Where there might be a little bit of finger pointing is in the way BHP Billiton is returning to its old ways of trying to control financial market information. By this, Briefcase means that September 26 is a day that suits BHP Billiton management to talk about costs at Ravensthorpe – but right now there are shareholders being kept in the dark while rumours swirl around.

All BHP Billiton has to do is confirm one way or the other that costs are up (or not) and everyone would be happy to wait for the detail. It is fatuous to argue that everything waits for a set piece, fully-controlled, stainless steel group presentation on a date convenient for management in September – when management almost certainly already knows the answer and is keeping it from the owners of the company.

As Briefcase said earlier, none of this affects the immediate financial performance of the company. But it is an indication that not much has changed, especially when it comes to understanding that everyone at BHP Billiton, including the chief executive Chip Goodyear, falls into the category of ‘hired help’ who have a duty to tell the shareholders everything about the business – even if it doesn’t suit a corporate timetable.

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And while Briefcase is tilting at windmills, why not have a crack at a real home-town hero, which also won widespread approval for its latest deal – the plan by Home Building Society to merge with StateWest Credit Society.

From the publicity that followed this announcement on August 26, a few investors might have been led to believe that this was a truly momentous event in Australia’s financial affairs, when it was really nothing more than footnote.

What caught the eye of Briefcase was the claim that the merged business, with its 36 branches, 400 staff and $3.5 billion in funds under management, would "become a regional force to take on second-tier and major banks".

Oh please. Pull the other leg with an even sillier piece of PR spin. Let’s have a look at a few facts, before losing the plot completely.

Market capitalisation, or what the business is worth, is a good starting point. Well, here we have Home valued on the stock market at $163 million – weighing in against National Australia Bank’s $48.8 billion, Commonwealth’s $48.3 billion, Westpac’s $37.4 billion, St George’s $14 billion, and even Bendigo at $1.5 billion.

And what about share of the banking market? The merged Home/StateWest will have 5 per cent of the WA market, which sounds good, until you say 5 per cent of a market which is 10 per cent of the national market, which is, oh, you mean 0.5 per cent of Australia’s banking business.

And then we shift to the critical measurement of all financial institutions – its efficiency ratio, also known as the cost-to-income ratio. Home, in its latest year, cut its cost/ratio from 76.5 per cent to 72.2 per cent. Well done.

But in terms of keeping costs under control it is a country mile behind the leaders such as Commonwealth with an efficiency ratio of 45 per cent, and heading for 40 per cent, and the mid-tier leader St George, which has cut its efficiency ratio from 48.1 per cent to 44.9 per cent.

To put it bluntly, Home/StateWest is a good little deal, and the business will probably perform well in its backyard of Perth. But to talk about taking on the national banks with a business that has such a high cost structure is silly.

Unless, of course, really massive cost savings are planned, such as sacking a pile of workers, just like the nationals.

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"Judge: A law student who marks his own papers." HL Mencken.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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