No one was really surprised. But the Reserve Bank of Australia went ahead and raised the cash rate yesterday to 4%. Stocks shrugged it off, but mostly in indifferent fashion. How will it affect the first home buyers? Hmmn.
Speaking of housing, the ABS reports that building approvals fell 7% in January from December. “Experts” were expecting a one percent increase. It was the first time approvals have fallen in five months. But with the expiration of the first home buyer’s grant and rising interest rates, it shouldn’t be that much of a surprise.
Yesterday’s news came from the world’s most akwardly named bureaucracy, the Australian Bureau of Agricultrual and Resource Economics, henceforth to be called ABARE. The group published its quarterly commodity outlook. It tells you how much Australia can expect to make from selling the family: silver, iron ore, and coal. Its conclusions were kind of surprising.
The main conclusion was that Australia would see rising export earnings on higher volumes but moderating commodity prices. In other words, the China boom will drive export volumes for the next five years. But you won’t see any more mammoth increases in commodity prices.
Before we dive into the data, a warning: these kind of forecasts are usually worthless. Not that they aren’t carefully prepared. But you just don’t know what’s going to happen in the world. You can be motoring along during a big boom and whammo! A credit depression hits and reveals a 25-year misallocation of resources in the consumer economy.
But for the sake of determining if Australian resource stocks are cheap or expensive to projected earnings, let’s see what ABARE thinks earnings will be like. As you’ll see, the big growth will come fromm mineral and energy commodities, with base metals giving a big kicker in the next year especially.
ABARE reports that “The value of Australia’s commodity exports is forecast to be around $186.8 billion in 2010-11, which is an increase of 15 per cent from a forecast $162.5 billion in 2009-10. The value of Australian commodity exports in real terms is projected to rise over the outlook period. By 2014-15, Australian commodity exports are projected to be around $211.4 billion (in 2009-10 dollars), which is 30.1 per cent higher than forecast for 2009-10.”
You’re looking, then, at about 7.5% annual growth in the value of Australia’s agricultural and mineral exports. That’s slightly less than China’s annual GDP growth rate (also a suspect number). But it’s certainly a lot healthier than growth rates in the rest of the Western world.
ABARE says that in the next 12 months, export earnings will be driven by 19.8% increase in energy commodities (oil and coal, but not including uranium). Metals and bull commodity export earnings will rise by 17.6% to $87.9 billion. Iron ore and coal are the big winners here. For this year, higher prices will account for the increase.
But ABARE’s rather muted conclusion is that increased volumes are going to drive earnings growth, and not just underlying gains in commodity prices (which will begin to be weighed down by increasing global production). For stock pickers that means you can’t just find stock that you think are leveraged to higher prices. You’re also going to have to find low-cost producers. And you are going to have to find projects with the best economics.
Good thing we’ve got Alex on the case at Diggers and Drillers. He’s been on baby duty at home with his newborn. But he continues to check in with reports and is back on the case full time next week. We’ll keep you posted.
We’re taking the projections somewhat seriously. That could be a mistake. For example, take ABARE’s estimates of crude steel consumption and production. Both are predicated at average annual growth rates in the Chinese economy of just under 10%. And both assume China’s resource-intensive industrialisation has years to run, rather than having already run its race.
It’s quite possible we’re much closer to the end of the China-driven steel boom than a next higher phase. But ABARE’s numbers are astonishing. It predicts that global steel production will have grown by 30% between 2008 to 2015, from 1.347 billion tonnes consumed in 2008 to 1.774 billion tonnes in 2015.
ABARE is projecting a 79% growth in Chinese crude steel production during that same period. In fact, by 2015, according to these figures, China will consume 812 million tonnes of crude steel per year. That’s more than the U.S., Brazil, Russia, the 27 nations of the European Union, India, Japan, and Korea combined.
This either shows how cataclysmic things are going to get in the industrial West (and Far East). Or it shows how wildly unsustainable projections of Chinese steel consumption are. How many more empty cities can you build? How long can you sustain fixed asset investment at 30%+ of GDP, especially when much of it is in commercial and residential real estate?
On the production side – and this is the part that has the most to do with Australia’s iron ore and coking coal industries – ABARE estimates Chinese steel production will be 880mt in 2015. The rest of the world combined will be 712mt. This means China will be a net steel exporter, if ABARE’s production and consumption figures for crude steel turn out to be right.
Our guess is that they will be sensationally wrong. China has its own credit boom malinvestments that are bound to blow up in the next few years. Precisely when doesn’t really matter. And don’t forget the fact that the Global Financial Crisis has smoothly shifted into a sovereign debt crisis. This too has the potential to knock out the legs from under the world economy and hugely reduce resource demand.
“‘Prepare for a very difficult economic time, which you will not be able to escape,'” said Hans Hoogervorst, the Netherlands Authority for Financial Markets chairman. He was speaking at an ASIC sponsored gig in Melbourne that sounded pretty interesting.
He said that “‘Even for a country that has been so soundly managed as Australia, this will have consequences…The problem is that there is now too much on the shoulders of government. They have basically taken on all the problems caused by the financial crisis, with the effect that most of them are in really, truly horrible budgetary shape.”
Large government deficits usually mean slower growth. For one, government borrowing robs the private sector of the capital it needs to resume growing. Australia doesn’t have a lot of surplus domestic capital to begin with. But really the problem is what it always is: a world built on too much debt. It’s gotta give.
Yesterday we promised to tell you about how some Australian savers/investors are being locked out of their money for as much as four years. Look for that tomorrow. We’re runing out of time and space today.
The next few days should be busy but insightful. We’re meeting with all the gathered editors from Agora Financial, a sister company here in Baltimore. And later in the week, the investment board of the Bonner Family Office meets. We’re on the board there and are eager to here what other investors from all over the world are looking to buy or sell right now.
In the meantime, it’s amazing how cheap things are in America. Coffee…haircuts…food. The dollar really is cheap right now. If we didn’t know intimately how screwed up America’s finances were, we’d think it was a buy.
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