It’s not only the falling terms of trade that’s making Australia poorer by the day. It’s the fact half the country has the day off! It’s a public holiday in four Australian states and the ACT today. No wonder there’s a productivity crisis in the economy. C’mon Australia. Do you think anybody has the day off at the Foxconn factory in China?
Alas, here in Victoria (and, we’re assuming, Tasmania) we’ve turned up for another week’s reckoning. And oh what a week it could be. The official hand-wringing has begun about the end of the mining boom. Smart investors have known it was coming for a while now, and have already prepared.
Do yourself a favour and remove pages 16 and 17 from today’s Australian Financial Review (AFR). The ‘Fin’ is a pretty useful newspaper. But those two pages in today’s paper contain the results of a survey from Australia’s major banks, brokerages, and economists. As the old joke goes, you could lie all of Australia’s economists from end to end and they still wouldn’t reach a conclusion.
The conventional wisdom is that the Reserve Bank of Australia will probably cut the cash rate at least once before the end of the year; if not tomorrow, then definitely on Melbourne Cup Day (November 6th). In the unimaginative and banal world of big bank economists, this rate cut will be enough to keep the Aussie economy growing at 3% while China ‘slows’.
Is it possible that the same profession that completely missed the global financial crisis would completely underestimate the severity of China’s pull-back? Well, past performance is no guarantee of future results. But when it comes to underestimating severe shocks to the economy, economists are as reliable as the sun. You can bet their sunny disposition will be inclined to view 2013 in the best possible light.
The best-case scenario is that the investment boom reaches its climax in the next year. Big spending by the miners and energy companies will support GDP. Then, once the investment pipeline tapers off, increased production of commodities (even at lower prices) will lead to steady growth in national income. Everything will be fine. China’s new leaders will spend to the heavens and the iron ore price will rise. Nothing to see here. Move along.
But China itself isn’t exactly moving along. The volume of cargo moved by rail fell 9.2% in August, year-over-year, according to data from China’s National Bureau of Statistics. The decline in the volume of stuff moving on China’s railroads matches the size of the decline in 2008 and 2009.
Back then, China reignited the mining boom by spending nearly $600 billion on ‘shovel-ready’ infrastructure projects. Will a similar spending boom bail Australia out again? No! The mining boom is dead. That’s the view we articulated in our most recent report, ‘How To Make Money from the End of the Mining Boom’.
Based on our picture in that report, you might conclude that the mining boom ended because we ate it. But that is not the case. The mining boom ended because the Chinese growth model of the last 30-years isn’t working anymore.
PIMCO analyst Ramin Touloi says it this way in today’s Age: ‘Our view for the last year has been that many analysts were underestimating the extent of the impending slowdown in China…policymakers [in China] are grappling with a major change in the economic growth model.’
If, by ‘a major change in’, he means ‘the death of’, then he’s dead right. Most major economists won’t/don’t see this coming. They can only perceive the world through the Keynesian senses of debt, GDP growth, government spending, and aggregate demand. They don’t understand or believe in sound money (real money).
If you think we’re exaggerating, you should have a look at why Michael Pettis has gone out on a limb to show why, ‘By 2015, hard commodity prices will have collapsed.’ Pettis reckons there are four reasons. First, the initial gap between supply and demand at the beginning of the boom has been closed by increased commodity production. Second, the gap was driven by China’s ‘unbalanced’ growth model, now in disrepair. Third, the rebalancing of Chinese growth will be less commodity-intensive. Fourth, Chinese commodity inventories are bulging and more destocking is needed.
It’s all persuasive. And absent some economic sleight of hand by the new communists in charge, it seems like a plausible scenario. But economic facts aside, if it’s the end of the mining boom, what are you to do with a company like BHP? This is where 2013 could get really interesting for investors.
BHP is not only a hard rock miner. It’s an oil and energy company as well. That could pay off in 2013. It may not be enough to compensate for falling iron ore and coal prices. But it’s better than having nothing to fall back on (see Rio Tinto).
Bloomberg had an interesting story over the weekend about the US shale industry. The story was actually about Australian-listed companies with shale assets in America. In turns out many of those companies are trading at a discount to their US peers. Bloomberg reports:
‘Australian companies exploring for oil and natural gas that’s trapped in shale rock in the U.S. and Canada are valued at a median of 11 times their reserves, a 23 percent discount to their counterparts that are listed on stock exchanges in North America, according to data compiled by Bloomberg. The valuation gap driven by Australian investors who are more than 8,000 miles (12,800 kilometres) from the companies’ wells in Texas and Oklahoma may lure acquirers, said RBS Morgans Ltd.’
It’s true that Aussie companies with US shale assets may be undervalued because Australian investors know less about them, or are unsure how to value them. The US shale gas industry is more mature. And if the companies have an actual reserve number — an idea of how much (and what kind) of gas they could extract at a profit — then the discount really could be Aussie investors not paying attention.
But the bigger story in 2013 is not going to be Aussie companies with US shale assets. It’s going to be Aussie companies with Aussie shale assets. For its part, BHP is already turning its focus back to off-shore LNG in Western Australia. Check out the maps below.
BHP made special note of the Tallanganda discovery in the annual report. Tap Oil has a 20% stake in that project, and has previously claimed the field could hold as much as 1.3 trillion cubic feet of gas. BHP didn’t confirm that in its report. But it certainly highlighted the project.
All of this is part of the global boom in off-shore and on-shore natural gas production. This article highlights how the gas boom is changing the world’s geopolitical picture. Russia is worried that shale gas could lessen its influence over energy consumers in Europe (a point Kris Sayce made earlier this year and turned into an investment idea). The shale revolution is certainly shaking things up everywhere.
For Aussie investors, the biggest gains may not come from BHP or Aussie firms with US assets. They may come from Aussie companies developing Aussie shale assets. That’s our position anyway. And we’re sticking with it.
By the way, did you notice that BHP highlighted its off-shore gas assets in the South China Sea? Hmm. Is it possible the territorial disputes in the South China Sea and the East China Sea aren’t about fishing rights or American influence? Are they about oil and gas and which country gets to sell the permits to extract them and collect the royalties from them? Hmm.
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From the Archives…
28-09-2012 – Greg Canavan
Banks versus the Farms
27-09-2012 – Greg Canavan
A Familiar Sequence: Print, Spend, Crash
26-09-2012 – Bill Bonner
The Hamburglar’s Budget
25-09-2012 – Dan Denning
The Cheeseburger Police
24-09-2012 – Dan Denning