BHP Billiton investment bonanza

The vicissitudes of the BHP Billiton share price during the past two weeks shows how serious money can be made by a modest investor in little time, even if under Lm10,000 are employed.

Malta must develop a money trading class, even is it takes it 25 years to do so. Successful money trading is by no means new to this country. Once it was the province of banks and the very rich, but now the magic circle can be widened considerably because of the prodigious development of the mass media in recent years.

One had to pay thousands, a little more than 15 years ago, for all the information now available for free on the Bloomberg and CNBC TV screen.

The small man can now play the great game of capitalism if only he gains a financial education in his young years. He can learn to do wonders with his pension money. He should not let others take away from him the fruit of a laborious life. This has happened once too often to many of our friends.

The commodities boom

The Maltese who are now literate in economics and accounts can be numbered in their thousands, and if our country can keep up its successful economic record they will soon number tens of thousands. The gentler sex is fast developing a taste for investing money on the stock exchange, a reflection of its proved ability to contribute substantially to our country's GNP both on the shop floor and in the office.

Who has failed in Malta to notice the commodities boom? Who has not discussed the price of oil? How many engaged couples are seeing the price of their highly desired gold marriage ring rise? How many industrialists using copper in their business have watched with awe its spectacular rise over the past year?

The question is how many have realised that there is an intimate relationship between the price of oil, gold, and copper, and that fortunes were being made by those who diligently study their price movements over a number of years.

This is not to say that each investor in Malta must become a Wall Street analyst. But an investor needs some financial education if he wants to profit from the opportunities that a stock exchange, and a stockbroker's office, offers.

A bonanza explained

BHP Billiton last year produced a total three-year return of over 90%. For some time now, articles have been appearing in the international financial press predicting that commodity prices, which had slumped for many years, were about to stage a massive comeback.

The key point in this surge in commodity prices was not to be found in the mainstream Keynesian economic cycle, but in understanding how the globalisation of the world economy is resulting in its massive restructuring through the capitalist affluent West welcoming the Chinese economic colossus as a competitor and also as a supporter.

The American economy is being supported by China's purchase of US Treasury Bills. The commodities boom and in particular the BHP Billiton's share price bonanza has been underpinned by China's demand for copper, gold and, last but not least, uranium.

The long-term prospects for a rise in the valuation of mining companies were excellent. When demand is greater than supply, the rise in price can only be upwards, especially when the supply position can be adjusted in the short run. In the case of copper, the supply position cannot be adjusted either in the short or in the long run.

Demand for copper in China will remain strong, new mines are not to be had so easily or so quickly. Since last year there was a massive movement out of this investment area, with a consequent massive drop in the share price of BHP, from which some clever investors in Malta profited.

Some might have sought to repurchase their BHP shares all too quickly after having sold at the top of the market, but no one should be sorry for making gains of almost 100 per cent in a period of months and not years.

In the long run, which will probably not be so long, the fundamentals of a chronic world copper scarcity will turn in an upward direction the metals market.

The BHP bloodbath of recent last days, which saw such a dramatic fall in its share price, was not due to any of the fundamentals of that mining company but to a just concern of the councils of high finance in the US at spiralling commodity derivatives prices, not least those of BHP.

These had got ahead of the bounds of reason. This concern was expressed by John Dizard in the Financial Times earlier this month. He was nothing but the surrogate voice of Wall Street advising the oligopolistic financial organisations to sell in the commodities market to avoid an ugly stock exchange meltdown that could trigger an unjustified world economic contraction.

World finance is moved primarily by oligopoly and not by perfect competition. A contraction can be triggered not by the real side of the world economy, which is in the healthiest state ever, but by monetary excess. Money has the power to act on its own, whether for good or bad. The voice of Wall Street speaking through Dizard might have saved the world from an ugly economic contraction, by encouraging a sell-off in world equities before complete madness had seized the market.

Stock exchanges cannot rise forever. There must be profit-taking. Unfortunately those able to sell on the high of the market and buy on the low are few. The BHP share price was fixed the day Dizard's article appeared; since then it has fallen steadily and now it seems to have stabilised.

Dizard (or Wall Street) advised us to forget commodities for two months, and to turn to volatile Russian stocks. He may be right. There seems to be no massive meltdown of BHP or of Rio Tinto shares, but stock exchanges always exaggerate their falls as they mark records on the upturn.

An investment opportunity

Many assiduous followers of the BHP share price have taken their profits before the company's shares started to slide heavily. It is impossible to say with precision how far the price will be artificially driven down by oligopolistic financial action.

One must keep in mind the disproportionately large share of the world mining market owned by Rio Tinto and BHP. Such a situation makes for volatility and not for a stable share price. Research amply suggests that an investment opportunity is again being built up in commodities.

China can provide only 30 per cent of its copper needs. Only a company like BHP can supply it with the copper and uranium required for industry. China dreams of world conquest through economic expansion.

London bankers used to talk loudly in their private clubs 30 years ago how one day Hong Kong would take over China. It is obvious that this prophecy has come true.

The whole of China is on its way to becoming a Hong Kong and, as long as this process lasts, there is every prospect of China needing BHP. This will continue to provide a bonanza for its shareholders, whatever might be the temporary price setbacks to be experienced in the present or in the future.

Latest development

The past week has been one of confusion and battles in the world stock markets. The greatest struggles took place on the BHP share price. A bottom price seemed to have been reached and at 10.30 a.m. on Friday it was at 1,082, about the same price of the beginning of the week when the big fall from 1,200 had already happened.

The greatest development, however, did not regard BHP but China, which is revealing itself to be a very respectable player of the capitalist game. Up to now the world has been mesmerised by China, oscillating between greed for its market and fear of its might.

A more sober perspective is needed, for it now appears that China has had a beneficial effect in stabilising mining shares volatility as it is in its interest to maintain well managed world economic growth.

This article is not intended as investment advice, but aims to help produce a money trading culture. John Azzopardi Vella has promoted the Malta Development Fund and advised S&P. He is currently research economist with DBR Investments Ltd. E-mail: johnazzopardivella@hotmail.com.