Resources boom, but who will buy what we dig up?

[wannaretire!]

Perhaps I'm missing something (in fact there's a good chance of this) but I'm struggling to understand how our widely anticipated resources boom will commence/sustain itself.

The bulk of the finance news I hear and read talks of gloom. Europe is a basket case, America likewise. China's growth is slowing down...

So to me it sounds like we are geared to dig up all the goodies that grow in our back yard - so to speak- but who's going to buy them?

 

[hobo-jo]

who's going to buy them?

Maybe our own citizens / government?

They could introduce a First Resource Buyers Grant (or FRBG) whereby private investors receive a cash grant to buy and stockpile our own resources... that would keep demand high and prices stable or rising (and prevent a crash).

 

[Sunfish]

Doom'n'gloom and prices are generally at the margin. They talk about China crashing. Is a slowdown in GROWTH from 10% to 5% really a crash?

They haven't told me but they could easily revalue the RenminB. Would Australian manufacturing suddenly flourish if our Chinese imports became 10% dearer? We couldn't even make and ship empty boxes for the price of their consumer goods.

With a stronger currency their imports would be cheaper and they could then continue building new power stations every week, continue improving the lot of their lower classes. The only thing Chinese dictators fear is a popular uprising (as in the Summer Of Discontent in the Middle East) and they must start giving their people the better life.

We will continue to mine and ship, the world will generally go about it's business all be it a little less comfortably and they will still build things and switch on lights. Banks and countries will go bust but if the official currency dies a black market will thrive and life will go on.

The things that will change will be Labor's "rental resource rip-off tax" will not balance the budget as planned and our miners will gradually go overseas as manufacturers have done. They didn't all go at once either so for Swannee to shout about new projects is disingenuous.

Things will change, fortunes will be made/lost. Don't be on the wrong side of the trade.

 

[tom32]

Don't worry about demand.

As sunfish points out growth in China will continue whether its 10 or 5% it will still be at least on par next years demand to this years.

What worries me is supply and the 8% component of Australias GDP which is mining investment or investment in mining capacity.

Mining investment as distinct from mining itself...

We are gearing up to have Port Hedland in isolation supplying 500MTpa of ore. In 2000 Australia collectively produced about 550MTpa.

Australia is not in isolation with explosive growth in ore production / exports with many major projects starting to produce now.

What concerns me is government reliance on resource company profits. Our treasury looks forward and think: 1. production qty will increase, which is the easier one to estimate given you can just aggregate each companies plans and 2. prices will fall by only a small margin, which I think is a completely flawed assumption. When supply reaches demand levels and usually overshoots prices fall below costs for a period usually. They say it is conservative, I do not agree and when they blame Europe troubles and Chinese demand "falling" the real reason will be as clear as day for anyone who has elementary levels of mathematical ability and cares to do the numbers on capacity 1 year, 2 years and the stratospheric 3 year out supply levels we expect the world to soak up!

At some point a bell will ring in every sane persons mind and prices will fall back to around costs of production plus a small margin for the average miner. For most miners this will mean waiting it out for the next cycle, BHP and RIO and the many good miners they have soaked up over the last decade will make it no probs being some of the lowest cost producers in the world but for some marginal ones they will close. This however will not be where job losses will be predominantly it will be around investment / construction of new mines.

The thing is no one knows when capacity will beat demand forcing prices to disconnect from costs in the other direction but I don't see Chinas demand growing in the same way supply is across Australia, Brazil, India and other mineral rich nations.

Some resources are better than others where supply is being cut off by civil strife or political issues and supply is not responding to the stratospheric prices we are seeing at present where anyone with capital cares to project massive profits for a new mine based on todays prices but for iron ore I fear the clock is well and truly ticking.

I expected 18 months tops to go a few months back but in truth I was literally pulling that from my ****. It is impossible to know exactly when the investment phase of this cycle will end but end it will and when it does Australian politicians will blame everything but the bleedingly obvious. Oh a sudden slowdown in Chinese growth... pfft, what were we expecting them to start building the deathstar.

Sunfish again is right you dont want to be on the wrong side of this trade but I suspect I am on the other side of it to him. That said my job is pretty dependent on mining investment so I see it as a hedge.

 

[Sunfish]

Sunfish again is right you dont want to be on the wrong side of this trade but I suspect I am on the other side of it to him. That said my job is pretty dependent on mining investment so I see it as a hedge.

I didn't say that I KNOW which side is the right side.

I'm looking for the SAFE side really and even that is illusive.

 

[Aaron_C]

I'm looking for the SAFE side really and even that is illusive.

Time to bring out the old mattress then.

 

[tom32]

I'm looking for the SAFE side really and even that is illusive.

I am the same, I just want to be able to provide for the family into the future and for myself in retirement but with uncertainty you end up paralysed and do nothing and the only thing you can be certain about is with 2% real returns I am going to be able to eat in retirement but not much else...

 

[Bon]

Maybe our own citizens / government?

They could introduce a First Resource Buyers Grant (or FRBG) whereby private investors receive a cash grant to buy and stockpile our own resources... that would keep demand high and prices stable or rising (and prevent a crash).

LOL! Love it!

 

[Bon]

Perhaps I'm missing something (in fact there's a good chance of this) but I'm struggling to understand how our widely anticipated resources boom will commence/sustain itself.

The bulk of the finance news I hear and read talks of gloom. Europe is a basket case, America likewise. China's growth is slowing down...

So to me it sounds like we are geared to dig up all the goodies that grow in our back yard - so to speak- but who's going to buy them?

China. China are trying to put the brakes on their economy and slow it down right now... think how much it would be growing if they weren't applying the brakes. It's different to the Industrial Revolution of 100 years because of the access to knowledge and IT they have access to these days that we didn't have for the Industrial Revolution - the access to knowledge and IT they have allows them greater productivity and efficiency than what was possible in the 18th century. This is why they can grow at unprecedented rates never seen before.

China are urbanizing their population. This requires investment in infrastructure... they invest around ~7% of their GDP in infrastructure. Even if their exports slow, they will still continue to invest in infrastructure as you can't move people from rural areas into cities without infrastructure.

China will not rely on their cheap manufacturing forever... they will eventually move away from manufacturing into services and other areas. The manufacturing will then shift to other parts of the globe where it's cheaper, this is all part of globalization. A shift from manufacturing doesn't mean the end of China, it's a good thing and part of the process.

People have been betting against China for the past 20 years and gotten it wrong, they will continue to bet against it today and into the future and keep getting it wrong.

Who are you going to bet on? The developed economies in the world who are basically bankrupt, or a Government who saves an incredible ~35% of their GDP and is the world's largest creditors? I know where I'd rather put my money.

 

[Aaron_C]

Problem with China is its ageing population. Japan had the same problem and look what happened to them, despite being the most technologically advanced nation in the world. It will not happen overnight but gradually.

 

[marg4000]

Most of these projects don't even begin until forward sales contracts are signed and sealed and the market secured for the product.
Marg

 

[tom32]

Most of these projects don't even begin until forward sales contracts are signed and sealed and the market secured for the product.
Marg

Are you talking about oil and gas?

An ore contract if the company favours these are usually 12 months in duration.

Also have you owned shares in up and coming ore miners through 2008? I had the nail biting experience of this through September of 08 and the Chinese were renegging on contracts anyway. I owned MGX and watched them go from $2.00 to 60c over a couple of weeks and to 20c shortly after. They assured us with legal proceedings they would get the cash in the end but then they were mostly bought by another chinese company at fire sale numbers while they had the stench of uncertainty about them. By fire sale it seemed good value when the shares were 20c and they were paying 60c for them...

So sure you have 12 months of "certainty". But the real question is would old mate build another mine or expand a current one if he knew at the end of 12 months, 2 years or 3 years the price was going to reset at another level.

I don't know if you are actually getting to the crux of this either. It is not about production it is about investment in new mines. This is the component of GDP which fluctuates heavily during the mineral cycle. Don't think about an existing mine or one about to be completed. Think about the many mines being built and expanded now and the scores of workers including me at times working on them. Will this go on when we can see the end of high minerals prices?

Finally As a general rule of thumb people like there mineral plays un hedged. they want exposure to world prices, not a 10 year contract over them. Gas is different. TO get a 10, 20 or 30bn investment off the ground you need certainty. These are at least in part covered by long dated contracts.

 

[Deltaberry]

Maybe our own citizens / government?

They could introduce a First Resource Buyers Grant (or FRBG) whereby private investors receive a cash grant to buy and stockpile our own resources... that would keep demand high and prices stable or rising (and prevent a crash).

That's a great idea. I'd love some uranium to throw at some people.

 

[Marti]

China. China are trying to put the brakes on their economy and slow it down right now... think how much it would be growing if they weren't applying the brakes. It's different to the Industrial Revolution of 100 years because of the access to knowledge and IT they have access to these days that we didn't have for the Industrial Revolution - the access to knowledge and IT they have allows them greater productivity and efficiency than what was possible in the 18th century. This is why they can grow at unprecedented rates never seen before.

China are urbanizing their population. This requires investment in infrastructure... they invest around ~7% of their GDP in infrastructure. Even if their exports slow, they will still continue to invest in infrastructure as you can't move people from rural areas into cities without infrastructure.

China will not rely on their cheap manufacturing forever... they will eventually move away from manufacturing into services and other areas. The manufacturing will then shift to other parts of the globe where it's cheaper, this is all part of globalization. A shift from manufacturing doesn't mean the end of China, it's a good thing and part of the process.

People have been betting against China for the past 20 years and gotten it wrong, they will continue to bet against it today and into the future and keep getting it wrong.

Who are you going to bet on? The developed economies in the world who are basically bankrupt, or a Government who saves an incredible ~35% of their GDP and is the world's largest creditors? I know where I'd rather put my money.

Bon's reply is excellent and on the money. You have to appreciate the scale and the population movement from country to city. It runs at the rate of 150,000 people a year? month?

No a week.

With a population in the region of 1.3 billion many more people will be moving with the requirement for new infrasturture, that includes housing, airports hospitals etc. India with a slighly smaller popoulation is thought to be about 14 years behind China in terms of urbanizing their population. Currently their resource shortage is in metallurgical coal where they have recently been active in Queenland.

Australia really is in the right place at the right time.

 

[Aaron Sice]

can mods please change the title to remove the word "boom"....?

there is no and will be no boom.

 

[Deltaberry]

Bon's reply is excellent and on the money. You have to appreciate the scale and the population movement from country to city. It runs at the rate of 150,000 people a year? month?

No a week.

With a population in the region of 1.3 billion many more people will be moving with the requirement for new infrasturture, that includes housing, airports hospitals etc. India with a slighly smaller popoulation is thought to be about 14 years behind China in terms of urbanizing their population. Currently their resource shortage is in metallurgical coal where they have recently been active in Queenland.

Australia really is in the right place at the right time.

Yes it's great. We're supplying coking coal so they can keep up with their construction - you know, to build those new developments that aren't selling.

 

[Bon]

Yes it's great. We're supplying coking coal so they can keep up with their construction - you know, to build those new developments that aren't selling.

Haha, seriously?

There's around 25, 000 excess dwellings in Victoria right now...

 

[Deltaberry]

Haha, seriously?

There's around 25, 000 excess dwellings in Victoria right now...

Yea serious. Oh well. Who knows.

Should go and have a look at some time. I look at this stuff all the time.

 

[Ergophobia]

back to OT

Australia is set to become to No1 in the world for natural gas production.

As much of the gas demand is driven by production of electricity as Japan moves away from nuclear things I see it as a very sustainable boom.

every day I think myself lucky to be Australian, and work in the resource industry.

 

[Aaron Sice]

back to OT

Australia is set to become to No1 in the world for natural gas production.

As much of the gas demand is driven by production of electricity as Japan moves away from nuclear things I see it as a very sustainable GROWTH.

every day I think myself lucky to be Australian, and work in the resource industry.

i'm going to throttle someone soon.