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Lower A$? Check. BHP? Check.

For every 1 cent change in the A$ against the US dollar, BHP Billiton’s net profit changes by US$115 million. So, if the average exchange rate drops towards the now consensus 90 cent level, BHP could enjoy a currency bonanza in FY14.

It’s just one more reason why adding to your BHP holding now, with a 2-3 year view, is a good move.

Have a think about these points for a moment:

  • A$ decline is BHP’s most sensitive profit factor, alongside the iron ore price
  • New CEO Andrew Mackenzie has tightened the focus on four key pillars: iron ore, coal, copper, petroleum
  • Capital expenditure has peaked and will decline more quickly as fewer projects are approved (see our separate note on BHP’s coal sector presentation today)
  • Asset sales are removing temptation and adding to cash
  • Cost cutting is adding to efficiency
  • BHP has huge reserves in its tier one assets

Commodity price demand and supply is not easy to predict but:

  • Chinese steel demand is robust requiring more seaborne iron ore, metallurgical coal, manganese.
  • Predicted over-supply of iron ore emanates from RIO, BHP, Vale but all three produce at very low cost.
  • Copper demand and supply sustains the world leaders’ positions

Across the world, economic growth varies but momentum in the two critical markets looks positive:

  • China’s new leadership team has espoused 7.5% GDP growth and has allowed settings to shift to accommodate this (less export reliance, more domestic consumption)
  • The US economy is out of intensive care (thank you Federal Reserve QE 1,2 and 3) and in rehabilitation phase (thank you Shale Gas revolution)

Pondering what the economic and political settings might look like post-September is worth putting your coffee down for a moment:

  • Assuming accurate polling, a Coalition government would present a new direction for the economy
  • No Carbon Tax impost
  • No Mining Tax impost
  • A business-friendly government – whatever that might mean
  • A tax review aimed at less business red tape
  • Less likelihood of damaging regulation
  • A gradual review of industrial relations settings
  • Assuming a majority Coalition government, no pandering or pork-barrelling to minority political interests (independent MPs)
  • Low interest rates (for a while), inflation within the RBA target range, robust employment

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