Boom time going West - Treasury

[kph]

Alex mate,
You're digging yourself into a deeper hole here...

I am no expert myself but I do know that iron ore prices are negotiated DIRECT between the buyer and seller.
There is no LME trading house or secondary market that trades and hedges and speculates on the supply here.
Unlike other commodities and metals, this one, as well as the natural gas contracts are negotiated direclty between the customer, be they chinese or japanese, and the supplier.

The previous boom as I recall it, was more related to metals such as gold and nickel, but this one is being led by iron ore and LNG.
With nickel, copper, and uranium following closely behind.

From my reading of the picture, its in the early phases of an upswing.
And because some of these supply contracts are for 20 yrs or more, I believe its a prolonged upswing.
Some are calling it a super cycle.....time will tell.

There may be parallels with post war Japan and emerging China, but the scale of the two countries can hardly be comparable.

And supposedly India is yet to emerge ....

kp

 

[stretchy]

I am no expert myself but I do know that iron ore prices are negotiated DIRECT between the buyer and seller.

I think the point Alex was trying to make is those prices (however they are negotiated) can change year-to-year. Its not locked-in for the duration of the 20 year contract. I have no idea whether thats true or not but I assume its the case.

 

[alexlee]

The way I was reading the weekend papers was that, in the absence of a contract for iron ore, buyers would have to get supplies from the spot market. i.e. the higher the spot price, naturally the higher the contract price. Also the contracts are renegotiated yearly, so if the spot price drops, then the contract price will drop as well, since buyers can just get ore from the spot market.

Don't know if that's correct or not. All very interesting, though: I just feel that in a lot of cases people just read some headline statements (contract prices soar! Huge profits!) without realising what might be behind the headlines.
Alex

 

[kph]

Stretch baby,
Alex has shown that he is quite capable of explaining his points, and I did not get the impression that what what he was suggesting.

In the end we are all ignorant of the exact mechanism for negotiating the prices, and whether there is a spot market for these commodities, especially iron ore so we are all guessing.

All I know is that I had a BIL who was with CRA ( before RIO absorbed them)who used to make an annual trip to Korea and Japan as part of the negotiating team to haggle over contract prices for the next year.

And the Japanese, after playing hardball for many yrs and keeping prices down as well as discounting the price for some yrs, finally had their noses put out of joint a few yrs ago when they had to compete with chinese buyers, which resulted in price increases of up to 75% for one year and then 50% the following year.
The miners viewed it as a 'catch up' and not some sort of blue sky unsustainable price.
The difference with the chinese, is that they also want an equity stake in the mine deposit itself. A different kind of hardball negotiation.

So there is no question that it is purely demand driven, and if the demand tapers off then the price will probably follow suit.

My interest is not in the mining itself, but the resultant effect on property demand and prices.
And not just in the mining town itself, but the flow on effect in Perth for example.

kp

Anyway, I have already agreed with Alex that circumstances could change which would affect the price, and one that has probably been overlooked is a potential oversupply.
There are mines planned for Koolyn Island, FMG out of Port Hedland , the mid west of WA, as well as around Ravensthorp. At some point in the future the supply side is going to catch up with the demand side and prices will stabilise or drop.

 

[alexlee]

Fundamentally, it seems that supply take a long time to create (in terms of opening up mines) and it's expensive (staff, equipment) presumably because a lot of companies are opening mines at the moment (those 20 year projects we keep hearing about).

On the demand side, part of it is fundamental (Chinese growth, which given the parallels I see with Japan back in its day, I'm suspicious about. Lots of structural issues there like poverty, bad loans, corruption, inflation and so on). Part of the spot price is due to hedge funds and speculators, which by definition can evaporate as we've seen this week. The spot price, and therefore the yearly contract prices of iron ore, say, can fluctuate.

My read is that this is what causes the mining cycle (supply being much more 'sticky' than demand, so prices overshoot when demand rises and at the end supply overtakes demand). In the same way property construction goes ballistic during a boom, and at the bust (demand adjusts very quickly to interest rates, etc) there is an overhang of supply which further depresses prices for years.

I'm also focused on how this will affect the property market. Comparing it to the Japanese experience, it's going to cause a lot of short-term pain. Where's that LOC on my Perth IP!!! (It's ridiculous, I saw maybe a dozen properties for sale in that suburb on www.realestate.com.au and Domain. Some are being advertised at 3% yields).

All in all, I'm expecting some great buying opportunities. Especially in Sydney: if commodities goes bust, confidence is going to tank, and NSW is already weak. I'm picturing a lot of people who get killed on margin loans, etc desperate to offload property.
Alex

 

[kph]

So the prices are currently tanking......lets see what happens next.
Is it a minor correction and a temporary breather or is this THE correction that has been predicted to be inevitable ?

I vote for temporary breather.
Would think for all those interested in the equities market, that it may almost be a good time to buy.

Just came across this report at work regarding the economic outlook for WA. Its specifically targetted toward regional WA.

"A bouyant WA economy resulting from the resources boom and increased tourism has seen mounting development activity in regional areas. This economic development is not expected to ease within regional areas, as sustained world demand for energy and minerals is likely to bring additional development, particularly within the Pilbara.

At the end of 2005 some $57 billion worth of resource projects were either underway or planned for the state over the next few years.
Of that amount some $43.7 billion will be spent within regional areas, $39.5 billion spent in the Pilbara, $2.4 billion in the Kimberley and $1.8 billion in the Esperance region. Approximately 20% of total resource projects are within the Pilbara iron ore industry and 43% are in the Pilbara gas/oil industry.

Additionally over the 2005/2006 year the Government has undetaken a significant round of investment in public infrastructure within regional regional areas with $45 million of expenditure in the Kimberley, $45 million in the Esperance region, $23 million in the Gascoyne and $45 million in the Pilbara."

I still don't think there is a bust on its way on the commodities front anytime soon.

Looks like those buying opportunities is Sudney might have to go on hold for awhile ?

kp

 

[Kennethkohsg]

Fundamentally, it seems that supply take a long time to create (in terms of opening up mines) and it's expensive (staff, equipment) presumably because a lot of companies are opening mines at the moment (those 20 year projects we keep hearing about).

On the demand side, part of it is fundamental (Chinese growth, which given the parallels I see with Japan back in its day, I'm suspicious about. Lots of structural issues there like poverty, bad loans, corruption, inflation and so on). Part of the spot price is due to hedge funds and speculators, which by definition can evaporate as we've seen this week. The spot price, and therefore the yearly contract prices of iron ore, say, can fluctuate.

My read is that this is what causes the mining cycle (supply being much more 'sticky' than demand, so prices overshoot when demand rises and at the end supply overtakes demand). In the same way property construction goes ballistic during a boom, and at the bust (demand adjusts very quickly to interest rates, etc) there is an overhang of supply which further depresses prices for years.

I'm also focused on how this will affect the property market. Comparing it to the Japanese experience, it's going to cause a lot of short-term pain. Where's that LOC on my Perth IP!!! (It's ridiculous, I saw maybe a dozen properties for sale in that suburb on www.realestate.com.au and Domain. Some are being advertised at 3% yields).

All in all, I'm expecting some great buying opportunities. Especially in Sydney: if commodities goes bust, confidence is going to tank, and NSW is already weak. I'm picturing a lot of people who get killed on margin loans, etc desperate to offload property.
Alex

*****************************************************

Dear Alex,

1. While I am quite agreeable to what you are saying here, I will like to ask you if you have effectively ruled out the scenario for Australia to have the "inevitable recession" in the near future since its last recession last occurred in 1991?

2. What would be your new investing thoughts then, if any?

3. I reckon that the time has come nearer when a major global financial crisis breakout will soon occur, probably either some time during April-October 2007 period or/and during after post 2008 ( i.e after Beijing-held Olympic Games) -2012 period.

4. I look forward to learning from you soon again, please.

5. Thank you.

regards,
Kenneth KOH

 

[Kennethkohsg]

I still don't think there is a bust on its way on the commodities front anytime soon.

kp

*********************************
Dear Kph,

1. Just do not say it too soon yet, lest you will be proven wrong in your own statement in due course.

2. The recent ASX market correction was in fact being triggered off by Dr Ben Bernanke's concerns about the American inflation data and rising oil prices, and having nothing to do with the WA resource boom at all.

3. Despite securing 19% increase in its supply contractual price with the Japanese buyers, the value of Rio Tinto shares was also not spared too during the recent market correction.

4. One thing which I have learnt is that both the ASX and resource stocks are not as "resilient" as many of us want to believe, given all these positive news about the resource boom continuing.

5. For your kind update, please.

6. Thank you.

regards,
Kenneth KOH

 

[kph]

For my sake Kenneth, I hope you are wrong.

As was mentioned earlier in this thread ( or another one?) what happens on the ground bears no resemblance to what happens on the share market as far as RIO is concerned.
Or for that matter, to any of the other bigger miners and oilers. ( BHPB, WPL, etc)

I agree that if the market shakeout is sustained and ongoing, the companies might take the decision to cut back investment on the ground, and put some of the expansion projects on hold.
But projects that take years to plan and implement are unlikely ot come to a grinding halt just because of some share market gyration.

Like I said before I am not the slightest bit concerned with what the market is doing, its whats going on at ground (mine) level that counts, and specifically with how it relates to property demand and prices.

And on this front, I remain bullish for the forseeable ......

kp

 

[alexlee]

*****************************************************

Dear Alex,

1. While I am quite agreeable to what you are saying here, I will like to ask you if you have effectively ruled out the scenario for Australia to have the "inevitable recession" in the near future since its last recession last occurred in 1991?

2. What would be your new investing thoughts then, if any?

3. I reckon that the time has come nearer when a major global financial crisis breakout will soon occur, probably either some time during April-October 2007 period or/and during after post 2008 Beijing-held Plympic Games period.

4. I look forward to learning from you soon again, please.

5. Thank you.

regards,
Kenneth KOH

I still think there’s a recession coming. Don’t know about the timing but I think it will hit soon.

My prediction is that Chinese growth is going to stall. It might be the US going into recession because of high interest rates or geopolitical factors. Generally the economy is very precarious: a bit part of China’s growth is due to foreign funds and demand for Chinese exports. This demand for Chinese exports results in greater growth which then results in more foreign investment in China. If any part of that cycle takes a hit…..

China may have no choice but to let the yuan appreciate. That’s what happened to Japan at the back end of the bubble: yen appreciated, export industries were hurt, and the BOJ dropped interest rates too fast, creating an asset bubble that made the bust worse. China is already in an asset bubble. If growth stalls, all those structural issues (bad loans, corruption, inefficient government enterprises, etc) are going to tie down the economy. Japan didn’t manage to get out for over 10 years.

As for my investment strategy, it’s still the same. Get some LOCs in place, lighten up on shares and hold more cash. Keeping an eye on the markets that I’m interested in (Sydney property, especially) for signs.
Alex

 

[gooram]

Alex,

I'm just curious as to why you think Sydney property prices are going to rise in the near future... or are you prepared to buy low and just wait it out.

I would expect wages and demand to increase quite substantially before the prices begin to move again, and this is a slow process without major drivers.

Cheers,
Gooram

 

[alexlee]

Alex,

I'm just curious as to why you think Sydney property prices are going to rise in the near future... or are you prepared to buy low and just wait it out.

I would expect wages and demand to increase quite substantially before the prices begin to move again, and this is a slow process without major drivers.

Cheers,
Gooram

I don't, I think Sydney is going to fall in the near future (20%, at least). The salaries don't support the prices, and when a recession hits, those highly geared first time investors who bought into the boom are going to get killed. I'm starting to see falls in some of those high-class inner-city apartments, and those investors are going to feel the pain soon. A few job losses and you'll see just how financially weak most of those people are.

My plan is to find the desperate sellers. People who, because of bad investments elsewhere, have to sell their properties, preferrably at terms that are good for me (vendor finance at low rates, high rent leasebacks, etc) I DO believe that eventually Sydney will rise again (though you can't convince me to buy those houses at 3, 3.5% yields now) so as long as I buy at neutral cashflow (sounds crazy now, but I figure if I'm pounding the pavement all the time, I'll find those deals) I can't lose in Sydney. I'm happy to buy into the crash, at the boom and keep buying as the market comes back up.

Same with most of the other major cities if you buy neutral cashflow, but I want to spread out to the other states for land tax and diversification purposes. Melbourne is also on my list.
Alex

 

[Kennethkohsg]

I agree that if the market shakeout is sustained and ongoing, the companies might take the decision to cut back investment on the ground, and put some of the expansion projects on hold.
But projects that take years to plan and implement are unlikely ot come to a grinding halt just because of some share market gyration.

kp

*********************************
Dear KPH,

1. Honestly speaking, I sincerely wish that I was wrong for your ( and/or other investors) sake!

2. So far, what we have disagreed, is on our own views on an impending/potential global melt-down, which I believe, can happen either as early as April-October 2007 period or as late as post-2008 (after the Beijing Olympics Games) - 2012 time period.

3. On the other hand, you seem to have totally rule out this potential global meltdown very confidently.

4. What is the real basis for your continued optimism on the world outlook?

5. Do you not agree/share my personal observation of a major financial crisis occuring once very decade?

6. I look forward to learning from you further, please.

7. Thank you.


regards,
Kenneth KOH

 

[Kennethkohsg]

As for my investment strategy, it’s still the same. Get some LOCs in place, lighten up on shares and hold more cash. Keeping an eye on the markets that I’m interested in (Sydney property, especially) for signs.
Alex

**********************************************
Dear Alex,

Care to further elaborate on the "signs" which you are presently looking out for, please.

Thank you.

regards,
Kenneth KOH

 

[alexlee]

**********************************************
Dear Alex,

Care to further elaborate on the "signs" which you are presently looking out for, please.

Thank you.

regards,
Kenneth KOH

Hi, Kenneth,
It’s just getting a general feel for the market. It’s not very scientific: checking if list prices are going down, the language used in the ads (desperate seller, etc – I even see some ads for blocks stating that the vendor is willing to finance at below market rates), seeing if people are giving up deposits for off the plan units (implying market values have gone down, so people who own those units may be strapped), layoffs, stories from my friends who have a PPOR mortgage or are looking for a place, etc.

All anecdotal stuff, but I think it’s important to look at those as well as opinions by economists and ‘experts’ (I was re-reading an old newsletter from some agent in Qld that said ‘We think interest rates will remain at 5.5% for the foreseeable future’).
Alex

 

[kph]

Ken,
Confusius say...."man who put words in other man's mouth, likely to have them spat out back at him..."

I have never ruled out a potential global meltdown....
If you read earlier, my reply to Alex was that it is possible and hence should not be ignored.

The question for me is whether it is 'likely' as opposed to what you are saying in that it is definitely going to happen.
And your view is that it is due 'soon'.

All I am saying, is that on the ground, at the minesite, and within the communities and towns that support the mines, the opposite is true.
There are so many opportunities to capitalise on the current and ongoing boom.
Now is not the time to be sitting on the sidelines waiting for the global meltdown.
Now is the time to be taking advantage of the opportunity being presented.

My outlook is also short.....its only 12 to 18 months, 24 at max.
In that time I expect to make enough out of this boom to ...well, retire I guess, at least from the day job.

So if the globe decides to melt down thereafter, I really don't care.

We are expecting to be pretty well cashed up by the end of 2006 anyway...

This article was interesting...

http://finance.news.com.au/story/0,10166,19140671-521,00.html

( Hope the link worked )

kp

 

[kph]

My plan is to find the desperate sellers. People who, because of bad investments elsewhere, have to sell their properties, preferrably at terms that are good for me (vendor finance at low rates, high rent leasebacks, etc) I DO believe that eventually Sydney will rise again (though you can't convince me to buy those houses at 3, 3.5% yields now) so as long as I buy at neutral cashflow (sounds crazy now, but I figure if I'm pounding the pavement all the time, I'll find those deals) I can't lose in Sydney. I'm happy to buy into the crash, at the boom and keep buying as the market comes back up.
Alex

Thats a pretty aggressive play !!

"Showing at a movie house near you soon...PREDATOR II ...starring A LEE"

Neutral cashflow on a Sydney IP...market would have to take a hefty hit to achieve that ???

kp

 

[alexlee]

Alex's Plan for World Domination

Thats a pretty aggressive play !!

"Showing at a movie house near you soon...PREDATOR II ...starring A LEE"

Neutral cashflow on a Sydney IP...market would have to take a hefty hit to achieve that ???

kp

That’s the aim, of course. Whether I achieve it….. we’ll see. I figure interest only at around 7.5% IO. Use existing equity for deposits so 100% LVR. The sort of deal I’m envisioning is a person in a house that has a job but financial problems due to, say, an off the plan property tanking. Can’t sell it, renting at some stupidly low yield, and getting killed by the payments.

Say the house was worth $650k at the peak in ’03 and is now worth $500k (this is post-crash in my vision – and no, you can’t have some of whatever drugs I’m taking). Media is forecasting that the end of the world is imminent, so the owner is desperate to sell.

I would offer something like this:
Purchase price $400 - $450k (keep reminding the owner and agent about how the end of the world is near), maybe with an option to the seller for $500k+ so that he feels like he still ‘owns’ his home

Get the seller to finance part of the purchase price at below mortgage rates (e.g. $200k @ 4% or whatever). Tell them the bank isn’t willing to finance the whole amount because they expect the market to tank, but I’m willing to help the seller if they can meet my terms.

High rent (say 6% yield) and deduct that against the vendor financed amount. Play up the ‘you can basically live in your own house for free!’ factor, though in fact I’m getting tax-free rent and cashflow (reduction in vendor loan principle)

So I now have a neutral cashflow IP (high rent, low payments). In, say, a year or two, tell the seller ‘You know, I’ve come into some money, and I’d like to pay off the vendor finance loan. Now, given the time value of money $200k now is more valuable to you than $200k in 5 years, why don’t you give me a discount on the amount?’ Given mortgage rates of 7.5% bank interest is probably about 6 or 7%. So if there are 3 years to run on the vendor finance loan, it would be reasonable to offer, say $160k to settle the amount. I reduce my LVR.

(End of fantasy)

Of course all this is hypothetical. From what I’ve read, though, it’s possible if the market is crap enough. I would need to look at hundreds of properties to find this one desperate seller. It’d be worth it, though!
Alex

 

[kph]

Yes, anything is possible.

I would have thought you would likely be able to negotiate on either the price or the terms but not so likely on both.

But, anything is possible under the scenario you paint if it ever were to eventuate.

kp

( This thread seems to have strayed a long way from where it started.....)