PetroChina Hits US$1 Trillion, China Chases Nufarm

There’s a horse race in Melbourne today, so it’s kind of quiet around the Old Hat Factory. It’s kind of quiet on St. Kilda Road too. The whole place has an empty feel this morning.

How about those Chinese, though? They aren’t idle. The directors of agricultural chemicals business Nufarm say they’ll give the nod to a bid by a state-owned company from China. The Chinese are the biggest buyers of publicly listed stocks these days-and no we’re not talking about PetroChina becoming the largest company in the world by market cap after its IPO yesterday in Shanghai.

PetroChina’s (NYSE: PTR) US$1 trillion market cap was fuelled by huge demand from Chinese investors on Chinese markets. But China’s growing presence in the world economy is boosting demand for a lot of things. And cashed up with dollars, many state-owned Chinese firms are looking to meet China’s needs by buying up foreign assets, preferably tangible.

You have to admire the strategy. You could buy a trophy asset like a soccer team or some famous piece of real estate to flatter your vanity and show the world how rich and powerful you’ve become. But the China-backed private-equity consortium going after Nufarm (ASX: NUF) has a more practical concern-feeding China’s millions.

By all accounts the offer for Nufarm’s global agricultural chemicals business is generous. The China bid values Nufarm at $17.75, which the company itself reckons is a 27% premium to the share’s closing price on October 30th. The stock was up 11% yesterday to close at $17.34. But our friend at Fat Prophets Greg Canavan summed it up well saying, “It’s obviously a really good price. It represents the strategic value of Nufarm, and the Chinese are loaded with cash.”

Members of the Reserve Bank will meet later today to decide whether to raise interest rates again right before the election. Everything points to a rate rise-which is why our top tip today is that the Bank will do nothing.

Gold tacked on a couple of increasingly worthless U.S. dollars to trade above US$810 in New York. It was a mixed day yesterday in Australia, with Newcrest Mining (ASX: NCM) up two percent and seventy cents to close at $33.40 while Lihir (ASX: LGL) closed down a penny to $4.17.

Meanwhile, Credit Suisse analyst David Davis at Credit Suisse is predicting a “quantum upward change in the gold price.”

A quantum change? What does that even mean?

Davis says, “Our studies indicate that the dynamics surrounding the gold supply and demand has begun to change inexorably towards a diminishing supply of gold and increasing investment demand, which will ultimately impact the gold price.”

Got it?

He continues, “Our studies indicate in the long term global gold production will begin to decline as the diminishing number of new reserves fail to compensate for dying mines…The decline in global gold production will likely be accelerated, should the gold mining industry continue to incur significant year-on-year inflation rates which are not offset by similar or significantly higher gold price increases year-on-year.”

Well, that’s good news and bad news for investors. The good news is the higher gold price (especially for bullion investors or coin collectors.) For gold stock investors, the Credit Suisse report suggests gold producers will have trouble containing rising costs. In that event, it doesn’t hurt to look for the lowest-cost producers.

Copper prices fell to a seven-week low, closing at US$7,419 a tonne in London. Zinc touched a 19-month low and aluminium hit a three month low. What’s going on? Stocks are up at the London Metal Exchange. That, plus the fear of a real recession in America is taking a little wind out of the bull market in base metals.

The Dow recovered late in the day to erase most of its losses, but it still shed 50 points in New York trading. The financial stocks continue to get beaten like Wall Street’s red-headed step-children. All is not well in the credit market.

“Credit-market losses dragged financial companies to their worst quarterly earnings decline since Bloomberg began tracking the data in 1997,” reports Bloomberg. “Members of the S&P 500 Financials Index that have released third-quarter results so far have reported an average profit drop of 22 percent, the biggest among 10 industries, and analysts expect a 4 percent decrease this quarter.”

How can you have a bear market in credit and a bull market in stocks? We asked this question a few months back and the only good answer was that “stuff”-tangible assets-would do better than “paper”-financial assets whose value went up when credit was cheap. That still seems right to us. And the bear market in credit has a long way to go.

“Never in American history have people been able to buy a house with no money down,” Bill’s old friend Jim Rogers said in a recent interview in New York. “We have the worst credit bubble, and it’s going to take a long time to work its way out. You don’t cure a bubble in five or six months. It takes five or six years.”

Does that mean Australia’s resource bull market has another five or six years to run? Maybe. But we do know that while U.S. financial assets deflate, the Chinese and other cashed up investors will be looking for tangible assets to buy, wherever they can find them.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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