China Metals Demand to Affect Australia More Than US Housing Crash

Can you tell me whether the China boom will survive and outlast an American housing-lend recession? Gwen Robinson over at the FT says, “There is simply no means of knowing that, since we are in new economic territory. Nor do we know whether the recent strength in commodity prices is structural or cyclical. But a word of warning came from David Humphreys, who as chief economist first with Rio Tinto and now with the nickel giant Norilsk has seen more cycles than most.

“The base metals industry is crucially exposed to time-lags, he noted. Both supply and demand are inelastic and lead times are long. In the last cycle, the copper price peaked in 1995. But capital expenditure kept rising until 1997 and production did not peak until 2003.

“This time, the cycle could prove more acute. In the 1990s, the psychology of the big mining companies was dominated by low growth expectations. When the present cycle kicked off in 2003, they were slow to grasp how things had changed. When they did, they ran into the usual supply constraints caused by rising prices, only worse. But there are now enormous projects under way. For the next three or four years at least, big increases in the supply of base metals are inevitable.”

“Meanwhile China forges ahead on the basis of cheap labour, free capital and – until lately – free use of the environment. It also consumes about three times as much base metals per unit of GDP as an advanced economy – for the meantime, anyway. Could that all go wrong?”

Yes. It could all go wrong. But will it?

For now, China’s per capita use of base metals continues unabated, and not exactly in defiance of cycles. China is in its own growth cycle. That cycle has more or less collided, or coincided, with downside of America’s great industrial growth/decline cycle. The risks of an integrated world notwithstanding, we think that China’s structural growth will continue to be good news for Aussie resources. It’s a New World Order.

By the way, that is what we’ll be speaking on this Sunday at the Melbourne Investment Expo. The show begins tomorrow at the Melbourne Convention and Exhibition Centre. We go on at high noon on Sunday. Tickets for the whole weekend are $12 for adults (presumably free for precocious, capital-minded youngsters). Details available here.  

“Australian firms stuck inside the square,” writes Conrad Walters in today’s Sydney Morning Herald. Is it true? Are Australian firms “lacklustre” innovators as a recent study by ACA Research suggests? Are we all stuck inside a boring square?

Innovation is driven by competition and exposure to an abundance of new ideas. Perhaps Australia’s geographic isolation works against it in this sense. The place is hard to get to. And it’s difficult for a new competitor to set up shop against established firms. Does that mean large, quasi-monopoly firms are complacent? After all, without stiff competition, profit margins remain abnormally high, and if customers can’t take their business elsewhere, where is the incentive to improve services or lower prices?

Dan Denning
The Daily Reckoning Australia

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