Too Much Luck: The Mining Boom and Australia's Future

[tom32]

In 2007, the BRW said that they thought the resources boom would last 50 years (give or take).

Not sure what their recent comments have been?

In 2008, we thought the boom was over. Not just me, the market smashed ore prices.

We thought we had a structural fiscal deficit. Why did we not plan for this, was the question on everyones lips? Why were we not like Finland, who saved a large part of their excess during the boom?

Mining projects were shelved all over the place. Indeed this is why I suggest this boom has gone on longer than most. We pared back the supply response in 08 which set projects back longer than 12 months.

It is amazing IMO that people seemed to have slept walked through this period.

An industrial cycle is between 1 to 1.5 times the length of time it takes for new capacity to be built. If you have demand rapidly ramping up it may be extended. If you have a monopolistic position it can be kept sustainably, this is the only way prices can exceed costs for long periods.

The problem with demand v supply is supply can be ramped up much faster than demand grows (usually demand on a 5 or at best 10% p.a. growth rate v supply which can ramp up faster than this, look at RIO and BHP's and the new players production data and worse their projections?) There is often an undersupply of capacity at the beggining the very reason prices spike in the first instance but capacity always catches up and it never ever ever takes 50 years.... We have over 200 years of data to look at and across multiple heavy industries that have a long lead in time.

 

[Sunfish]

If you mean your terms of best performing asset class I would give 50/50 for this, and in this I would be robbing you blind, so of course happy to oblige.

In ten years? Don't like your chances of collecting from my estate. LOL

You need to be more particular about conditions of wagers before you make them.

 

[tom32]

Purely rhetorical Tom. I just have a different opinion which is as valid as yours.

Why do you want odds anyway? Besides, nobody rings a bell on these things. I would claim to be a winner if I'd had a punt that the property boom would be a property bust by now but I'm sure no bull would pay up.

Agree.

It definitely is as valid, indeed what surprises me is most people agree with you.

That makes me the one with the less valid opinion if we are going for concensus.

I still think I am right though.

But as I said above, I am happy if proven wrong too.

 

[tom32]

In ten years? Don't like your chances of collecting from my estate. LOL

You need to be more particular about conditions of wagers before you make them.

indeed. plus should we see inflation in bank fees, in 10 years the $50.00 would likely not be worth the bank fees to transfer it anyway...

Yes I took the bet to be in jest, but would take it nonetheless if you were serious.

Agree on clarity of the outcome too. This is important in drafting any contract or taking any wager. The last thing you want is an unclear outcome where we both spend $10,000.00 trying to recoup our $50.00 due to ambiguity.

Thats why I always like the other person to write the terms, so I get contra proferentum on my side!

 

[Sunfish]

That makes me the one with the less valid opinion if we are going for consensus.

Play nice Tom. Whenever have you seen me blindly accept a consensus view? I've been in the minority here for years.

If you go back 7 or 8 years here you would find I made some bold predictions which definitely weren't mainstream.

I said we would get to parity with the US$ when we were still <60c. The timescale then was "by the end of the decade". Guess what? we were @ 98c within a few years. Would you have taken that bet and would you have paid up in spite of me missing by 2c? I also put $13k into a gold miner which is now worth a qtr mil. I do read widely.

BTW I was "Thommo" back then so don't look at Sunfish's join date.

 

[tom32]

Play nice Tom. Whenever have you seen me blindly accept a consensus view? I've been in the minority here for years.

If you go back 7 or 8 years here you would find I made some bold predictions which definitely weren't mainstream.

I said we would get to parity with the US$ when we were still <60c. The timescale then was "by the end of the decade". Guess what? we were @ 98c within a few years. Would you have taken that bet and would you have paid up in spite of me missing by 2c? I also put $13k into a gold miner which is now worth a qtr mil. I do read widely.

BTW I was "Thommo" back then so don't look at Sunfish's join date.

nicely done on the miner.

How did you pick commodities as a winner sunfish a decade ago? The reason I ask is that now 11 years on the other end of the equation is coming home to roost. Those who assesed market dynamics a decade ago and understood we were in for some good times, could use those same projections now to see it is coming to an end?

Rising demand against flagging supply? Unsustainably low prices to bring new investment on line? This was the situation in 1999 - 2001.

Rio Tinto when they bought North Limited caused North to send out a newsletter in 2000. Basically in no uncertain terms it spelled out that the next decade was going to be one of rising iron ore prices, i.e. reject RIO's bid they are worth more than that price irrespective of the market price at the time being half the final bid price where they got them in the end. They explained chinas growing demand v worldwide falling supply was about to cause a boom.

At the time miners were pretty ordinary stocks to hold. The funny thing is in the end Norths directors were right, while the price doubled due to RIO's bid a pure ore play with established ops in 2000 would be worth many multiples of its price in 2000 now if we the shareholders had rejected the bid and gone it alone. Of course who would when it had more than doubled and in that market looked like a stand out! In the end on Rios second offer after a counter from some jap steel producer got the directors on board anyway.

But the opposite of this story plays out in the end. Prices at unsustainably high levels cause massive investment in capital works increasing capacity to the point that their is too much supply.

Price drops back to costs of production for the marginal producer at qty demanded. No new investment till the next cycle.

This is the industrial cycle. How can it be different this time and for this particular asset? Why?

 

[Sunfish]

This is the industrial cycle. How can it be different this time

Because this is a mining cycle. Different animal.

It is easy to find iron ore but hard to get it loaded on a ship. There is never a problem getting your TVs onto a ship.

We have passed "peak (cheap) oil" and "peak gold" and peak many things.

Every time a yank buys a new car, he scraps an old one. They're scrapping very few in India/China but making millions of new ones every year.

But enough of this. I've said it all before. Not again.

 

[Belbo]

Anyway, I have no way of knowing when it will end, only that it will end. If I had to bet I'd give it another 12 - 15 months.

I'll multiply that monthage by 10, and bet you a carton of North Korea's finest cigarettes on the outcome! (But if I'm wrong, I'll lend you lend you my spoon at Vinnies soup kitchen in The Cross before work.)

 

[redwing]

A very interesting article Redwing. It boggles the mind that with only 22 million people in Australia and all those resources, the majority of us are just one pay check away from bankruptcy.

I was recently reading about a chinese municipality consisting of 32 Million people; amazing that we've only recently reached 23 million across the whole country in comparison

Another article talked about the fact that if all of Greece's debts were forgiven today, they would be in the red again tomorrow... that’s how bad it is

 

[Dazz]

How do people blissfully go about their lives spending way more than they earn, day in day out, and not even realise what they are doing.....and what the nasty long term consequences of such actions are that lie waiting for them ??

 

[Aaron_C]

How do people blissfully go about their lives spending way more than they earn, day in day out, and not even realise what they are doing.....and what the nasty long term consequences of such actions are that lie waiting for them ??

Yet those big spenders are the ones who shop at your tenants' businesses, which then allow you to pass on big rental increases each year. Those same spenders also rent/buy residential properties for a 2% yield even though it kills their monthly budget. As long as they make you money, I don't think it matters.

 

[Dazz]

Aaron, the assumptions you are making about my Tenants and my Tenant's customers are wildly off the mark....but carry on.

 

[Sunfish]

Aaron, the assumptions you are making about my Tenants and my Tenant's customers are wildly off the mark....but carry on.

He was merely rephrasing The Paradox Of Thrift Dazz.

 

[Dazz]

I'm not familiar with that text Thommo.

I am familiar with sustainable organisations conducting sensible business over long terms that is mutually beneficial to both parties.

Not every business has to have an over-zealous spendthrift clown as one of the parties to the transaction.

 

[redwing]

Norway has its wealth fund, an enormous future tied to strict rules that keeps it intact.

Income from the fund means that long after North Sea oil is gone, Norway will still have income coming in for thier future generations.

It's the elephant in the room, what if the Boom goes Bust?

 

[Aaron_C]

It's the elephant in the room, what if the Boom goes Bust?

Don't worry the $1.5bn surplus will bring us back into the Black.

 

[BayView]

I think that is more a case of "Bukra, inshallah" with the arabs.

Is that the same as "Boom, sha la la, lo"?

 

[redwing]

From Scott Pape (no shoes guy)

I've said it before: as a nation we're like the Kardashians: incredibly rich, not particularly productive, and inclined to go on silly spending sprees (like the National Broadband Network) - and we got away with it because we were born with some red hot 'assets' everyone wants.

 

[Sunfish]

Originally Posted by Sunfish
I'd take that bet.

It will be the best performing asset class for another ten years.

Hmm, it is hard to guage what odds the market can give me... It sure aint 50/50 though.

What are you suggesting 4 to 1, For my terms? I think it will be easy enough to guage if the investment boom is over or not though perhaps clearer terms would be better?

You can have have 10:1 and I'll double it if you can collect from my estate. LOL

 

[redwing]

Interesting to review in light of the MRRT and how it's fared