Looking at trading yesterday, one of CMC’s senior dealers remarked:

“It’s not often we get a 65 point rise (in the Australia 200 index) when BHP falls.”

Why is BHP going down as the market goes up? The latest round of selling relates to concerns that attempts to cool property activity in China will led to significantly lower commodity prices. However, as this is now the third market prediction of cooling growth

in China in two years, and the previous two scares did not eventuate, some investors and traders may see this as a buying opportunity.

It’s possible there is some misunderstanding in the broader community about the end of a mining boom. The traditional mining cycle starts with increased demand, spurred by increased growth. Metals prices rise, and miners respond by increasing investment in production. Eventually, investment reaches a point where anticipated production means that commodity prices peak, and fall.

This is where we are now, and it represents the first of three peaks as the boom plays out. The second peak is in investment – anticipated to come late this year or in early 2013. The third peak occurs in volumes, and this last peak may be two to four years away. In other words, major global miners are in broad terms looking at a further two to four years of increasing production that offsets the fall in prices.

For companies like BHP, who already have huge free cash flows, this introduces a top quality problem – what to do with all the money? As the balance sheet becomes bloated with cash, and investment is curtailed, the possibility of a return to shareholders increases. This could take the form of a special dividend, a share buy-back, a capital return, or a spin-off of assets into another vehicle. Any of these moves are likely to garner share price support.

Importantly, China is to report industrial production, retail sales and inflation data at the end of this week. Market consensus is that growth in industrial production will accelerate to 10.5% pa. This could serve as a reminder to the market that the overall growth picture is intact, and in turn lead to higher commodity and resource company share prices.

BHP – Daily

20130306 bhp

Interestingly, the chart illustrates a possible scenario that lines up with the fundamental view.  A pull back to previous resistance, now support, around $35 may be of interest to traders, offering a long entry with clearly defined stop loss position. Note the RSI below 40%. Although past behaviour may not necessarily provide a guide to the future, since the beginning of the bull run in June BHP has bounce every time the RSI has reached this level (green arrows).

The case may be stronger for investors. Buying the worlds’ largest listed mining company on a pull-back is a dream scenario for those building a portfolio for the long term. If fears of slowing growth in China prove unfounded again, the share price reaction may be dramatic. And data from China this Friday/Saturday may be the catalyst.