James Gerrish - Morning Note - Monday 23rd August

Hung Parliament with both parties wooing the independent's. The market has actually taken it in its stride with miners finding most support on some hope that the mining tax may be off the table if the Libs form Government. As it stands, CenterBet is giving Abbot $1.65 with Gillard at $2.40 to take the top job and form Government however its important to keep in mind that all betting agencies had Gillard at short odds to win the election in the lead up.

Currently, Coalition has 71 with labor 70 however the Green is going to side with Labor evening up the score. The Independent's are tight lipped but 2 out of the 3 appose the mining tax but it appears they support the NBN. 

The blame game has started within the labor party and one person that has avoided scrutiny is Mark Latham. As I recall, in a recent Sixty Minutes story Latham called for the "ultimate protest vote". He advocated that voters should get  there name marked off but put a blank piece of paper in the ballot box.  More than 600,000 voters took this on board and recorded no-votes. 

Why has BHP bid for Potash Corp? 

BHP invests for the long term (20 years +) and there is compelling evidence to support BHP in its play into Potash. Potash is primarily used in agriculture to increase water retention in soil and ultimately the yield of agricultural land. If we take a step back and consider the population dynamics that will drive increasing demand for food (and ultimately Potash), China is our first point of call. 

Currently, China has GDP of $4.9 trillion - US has GDP of $14 trillion however China has 22% of the worlds population at 1.3 billion and given its projected rate of growth will over take the US as the worlds largest economy somewhere between 2020-2030. 

30 years ago, the average Chinese person was consuming 500g of Beef per year. This has jumped to 5kg last year and the trend is set to continue with a rising middle class that will drive China's growth in the coming years. 

Potash Corp  (listed on the NYSE) is the worlds largest largest producer of the commodity and is in a strong position to negotiate with BHP. The first offer of $US130 a share ($53 Billion) has been snubbed as inadequate and the market is now tipping a bid of $US150. I think the market will take it as a positive if BHP can secure the deal for less than $US155 a share. This would increase BHP's debt gearing levels from 15.6% to 50% which is still acceptable. 

Management & Board resistance from Potash remains the biggest hurdle for the deal however we do expect BHP to keep plugging away and are likely to launch a revised bid for the miner.