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BHP CEO confident miner will thrive amid trade war and rising nationalism

BHP Group CEO Andrew Mackenzie believes the company will "survive and prosper" through the U.S.-China trade war, which will eventually affect its products, and amid what he sees as a rising tide of nationalism and governments interfering in global trade flows.

Mackenzie told Australian reporters in an Aug. 20 conference call that while the mining giant continues to enjoy strong sales to China, there is "no doubt" that the U.S.-China relationship continues to put a dampener on the prospects for world economic growth, and "ultimately will impact the demand for our products."

While he said this impact is yet to be seen, more generally BHP is observing increased nationalism, and an "increasing assertion by governments to interfere in global trade flows and supply chains, and indeed just the good business of capitalism, free enterprise and free competition."

Yet even in all of those outlooks, which he sees as more short-term issues, Mackenzie believes BHP will "survive and prosper," especially given the strong fundamental reality that China "really wants" BHP's iron ore and metallurgical coal in particular.

China's boosted infrastructure spend partly in response to trade concerns and a "strong agenda" to improve the environmental performance of its industrial operations, particularly steelmaking which requires the sourcing of Australia's "very high quality of iron ore and metallurgical coal," plays into BHP's favor.

BHP's same-day fiscal 2019 report reiterated its expectation that China's economic growth will slow modestly in 2019 to around 6.25%, with easier monetary and fiscal policy to partially offset the negative impact of weaker exports.

The company said that while the global economy grew by around 3.75% in 2018, with a notable pickup in the U.S. economy and resilient growth in China, it expects global growth to register near the lower end of a range of 3.25% to 3.75% in 2019.

BHP expects China's economic growth rate to decelerate as the working age population falls and the capital stock matures.

"Any further escalation in trade protection or loss of business confidence is a downside risk for consensus views of the world economy, commodity demand and energy and metals prices in the 2020 financial year," BHP said.

While Mackenzie worries about the U.S.-China relationship's impact overall on the world and the aforementioned broader issues like increasing nationalization, he believes the trade war's impact on Chinese demand for Australian product will be "more muted" in the short to medium term.

Cost pressures

While Mackenzie noted BHP has become the lowest-cost iron ore producer in the world, which helps the company withstand macro headwinds, he said it has also made significant progress in battling a more local challenge — rising costs in Australia.

He said the internal contracting organization, Operations Services, which BHP established in 2018 for the whole of Australia, had allowed BHP to substantially reduce staff turnover, improve safety by 50% and reduce costs by 20% for fiscal 2019, to help "quench" the cost inflation.

The company is also working on workforce culture and capability improvements, with new processes and ways of working, some of which embrace new technologies like automation, and other areas where BHP sees the potential to drive costs down, Mackenzie said.

BHP's Aug. 20 statement said underlying improvements in operational performance over fiscal 2019 were offset by the impacts of weather, "resource headwinds" and unplanned outages in the first half of the year.