Turning Down The Wick On Australia's Resources Boom

Sydney Morning Herald

Saturday September 20, 2008

IAN VERRENDER

And now for the good news.

Forget the flames licking Wall Street's foundations. Ignore the inferno raging across European money markets. Who cares if AIG never writes another insurance policy?

We're safe (as houses) down here in our little corner of the globe because we've got oodles of dirt laced with every mineral known to man that a resource hungry world is just gagging to grab.

We've got a resources boom under way, damn it, the biggest, longest resources boom in history and we're going to ride it all the way to glory while the rest of the world is left wallowing in our dust.

That's right isn't it? The resources boom is going to save us for sure, yes?

It pains your columnist to have to reveal this but, unfortunately, it looks as though the resources boom has begun to run out of puff.

It hasn't exactly ended and there is every reason to believe we will still reap windfall profits for quite some time. It's just that they won't be as generous as the past few years. And where we once had only blue skies in front of us, now the outlook is patchy with possible storms.

While all those high-flying fancy-pants investment bankers have stolen the limelight in recent weeks, crying poor as their companies collapse, Australia's resource stocks - the engine room of our export earnings - quietly have been taking a hammering.

Remember the good old days back in May when iron ore magnates ruled the rich list?

It would now appear that the country's richest man, Andrew Forrest, has now become the man who, for a brief time, was Australia's richest man.

Fortescue Metals, the self-proclaimed Third Force in Iron Ore, has seen its share price smashed in the past few months, and is now less than half its $13 peak of just a few months ago.

The company has only just begun exporting its iron-rich red dirt from the Pilbara to China after years of battling the majors Rio Tinto and BHP Billiton and tricky financing negotiations with Chinese buyers and partners.

Forrest and his Fortescue are in good company. His two big rivals are off almost as much - BHP down close to 40 per cent and Rio a little more than that.

Nearly every major mining house in the country has been left reeling from massive sell-offs in their stock price since June.

And in case you haven't noticed, that turning point to the resources boom has been flagged in the value of our currency, the Little Aussie Battler.

A few weeks ago it was ready to punch through parity with the US dollar. This week it settled below US80c.

Currency markets are known for their wild gyrations. But 20 per cent falls in the space of a few weeks indicates a fairly serious re-rating.

So what has gone wrong? It's fairly simple really. The price of metals, particularly base metals, has fallen hard and fast.

The reason for the falls relate to the health of economies in the developed world, particularly Europe. For a long time, everyone thought America was the only country with health problems.

But it has become pretty obvious of late that most economies in the developed world will contract. That means less demand for raw materials. That flows through to lower prices. And that means reduced export earnings and profits for our big miners.

There are a couple of other forces at play as well. Speculators switched to trading in commodities markets when global sharemarkets went into a tailspin in January. They pushed the price of oil through $US144 a barrel as they began punting on long-term growth in energy use.

That is a fairly reasonable proposition but the speed of the rise was overdone. Oil has now slipped below $US100 a barrel.

Then there are complicating factors that relate to currency movements. The US dollar fell to historic lows against the currencies of many of its trading partners this year as the Wall Street inspired financial crisis gripped the world. Now it no longer is alone and, given it is sharing the pain, the greenback has recovered lost ground. As many commodities are priced in US dollars, a stronger American currency lowers prices.

In the past three to six months, the price of many base metals like nickel, lead and zinc has fallen by 30 to 40 per cent. Copper is one of the few metals that has held up, but only because there are supply constraints. And some of the more exotic minerals like zircon and rutile have maintained their strength.

But what of China, I hear you say. The Chinese economy knows no limits, its strength is driven by internal growth. All those infrastructure projects and high-rise buildings require raw materials.

That's true. But the Chinese have been ropeable in recent years at the exorbitant price rises extracted by our big miners, particularly for iron ore and coal, the key ingredients in steel manufacturing.

Iron and coal are known as bulk materials, for fairly obvious reasons. They're pretty bulky. And bulk material prices tend to lag other base metal prices.

Mostly that's because the prices are negotiated annually over a few drinks with drawn daggers. So even though Rio and BHP managed to extract massive price rises this year, they are unlikely to repeat the result next year if raw material prices continue the trend of the past few months.

The slowdown in Europe and America is likely to result in less demand for steel and the Chinese will seize on that to get some price relief.

It's not a bust. It's just no longer an endless boom.

© 2008 Sydney Morning Herald

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