Australia’s Commodity Eulogy

It’s going to be an incredible boom. People will be amazed. But the fact that there are so many nervous people tells me we’re on the brink of amazing things.’

That was Phil Anderson last Wednesday. He was excited. I’m working with Phil on a project that applies his market cycle work to stocks. That’s where he started, actually. It’s just that Australians are crazy about property. The property cycle work was originally secondary, but has become extremely popular.

Phil is steadfast in his belief that the property cycle is coinciding some powerful developments in energy and technology. It’s a global boom. And if you scan the headlines, you certainly see some novel developments.

For example, earlier this month, US equity firm Blackstone offered investors the chance to buy a security backed by the rental income from foreclosed homes. Pretty amazing huh? Wall Street packages up subprime mortgages and sells them to investors, who proceed to lose their shirts. Then, later, they package up the rental income on foreclosed homes and sell that stream of income at a premium.

One thing is for sure: the financial industry is innovative. It keeps finding products to sell to investors. And when interest rates are low and investors can borrow cheaply, that means there’s always going to be some appetite for risk, no matter how crazy the idea seems.

Having just finished my monthly report, I have a different view. In my monthly reports, I try to think and write about what I believe is the most important investment idea. It’s the idea I’d want to know more about if I were buying a newsletter.

Last month, I concluded that there ARE practical limits to how big an asset bubble can be created by Quantitative Easing. You simply can’t continue to conjure up oodles of fake money and channel real productive resources into projects that don’t create wealth. QE works. But it works for Wall Street and not anyone else.

But of course, I could be wrong. Japan has chugged along in a low-interest rate environment for the better part of two decades. Who’s to say all the world’s interest rates won’t converge to zero and stay there for a time? It would be an epic boom…followed by a comprehensive bust that would mean a qualitative setback to your standard of living for years, if not decades. I’m planning for both scenarios.

BREE’s Commodity Eulogy

Here in Australia, there’s been a lot of focus on whether the rest of the economy can pick up where the resources boom left off. But last Wednesday, the Bureau of Resources and Energy Economics (BREE) seemed to put a stake in the heart of the Australian economy, drive it clean through, and then rub salt in it for good measure.

The value of committed resource investment projects has fallen 10% to $240 billion since BREE last surveyed the resources sector six months ago. Mind you, there are still 63 projects past the ‘feasibility’ stage that are now ‘committed’. And $240 billion is not a small amount of money.

But what you might find surprising is that BREE reckons by 2017, that number will fall to $70 billion, which would presumably include a lot fewer projects.

A lot of the projects planned during the boom will either be cancelled – 18 projects worth $150 billion were cancelled in a twelve-month period – or simply completed. For example, $30.3 billion worth of investment and construction was completed in the last six months.

In terms of national income, the boom from the investment spending has already peaked. From here on out, it’s production and commodity prices that count. And on that score, it’s probably not the quantity of projects that matters. It’s their quality. Take a look at the table below.


Source: Bureau of Resources and Energy Economics
Click to enlarge

The BREE report shows that there are 19 iron ore projects with a combined investment value as high as $55 billion in the pipeline. There are more projects planned for iron ore than any other commodity but coal (which is getting flogged right now).

And because of the high-grade quality of Australia’s iron ore, it remains one of the commodities where Australia has what Adam Smith called a ‘comparative advantage‘. It can always be produced more profitably here because the ore is high-grade and usually easy to extract.

Sayce’s Rebuttal

This, by the way, was precisely the tack Kris Sayce made in his maiden voyage as Investment Director for Port Phillip Publishing’s flagship publication, Diggers and Drillers. The first report produced by Kris and his team was titled ‘A New Era for Aussie Resource Investing‘. Kris himself wrote about what he describes as an ‘iron ore bonanza‘.

Speaking for myself, I have my doubts that you can separate China’s credit binge from Australia’s iron ore boom. If one goes, the other must follow. But what kind of outfit would it be if we all agreed with each other all the time?


Dan Denning+

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