“Export earnings from resources punched through the $100 billion mark in 2006-07 on the back of higher prices and volumes,” reports Felicity Williams in today’s Herald Sun. “Nickel, zinc, gold, oil, and iron ore exports were the stand-out performers amid a sustained resources boom fuelled by insatiable commodities demand from China…Uranium, lead, alumina, aluminium, LNG and copper export revenues also increased.”
All together, earnings from mineral and energy exports were up by 17% for the year. The lone laggard was coal. But when you throw in Woodside’s AU$45 billion deal with China last week, and if you accept our proposition that global reflationary policy may find its way directly into commodity prices, well then the scene is set for an earnings blowout in the resource sector.
Rising resource prices contribute immediately to producer cash flow. On the other hand, capital spending incurred to increase production volumes is amortised slowly, bit by bit. With income from assets up, but the cost of those assets not yet affecting earnings, well it could be salad days for resource stocks. What else could this mean?
Our colleague Chris Mayer in the States says, “It could also mean another buyout spurt as asset rich companies will look cheap – compared to the cost of producing those assets. Similar to the 1980s, when oil companies were getting bought out because they were cheaper in the stock market than it was to drill new wells and create your own reserves.
“The way I look at the market,” Chris elaborates, “is to look for those wide gaps between what’s happening in the public markets and what people are doing in the private markets. I imagine a stepped up bout of monetary inflation will create distortions between the two…and hence, opportunities to profit.”
“The fortunes of the Australia economy do not depend overwhelmingly upon what happens in the US,” said Australian Treasury official Ken Henry earlier this week. Henry made the case that Australia’s boom can continue even if America’s recession has just begun. The key is China’s growth — and whether China itself depends on America.
Though it’s possible it’s headed for a blow-out inflationary recession of its own, the key thing for Australian investors is to see that China’s future growth won’t be driven by exports in America, but by China’s own internal growth. “The big drivers [of Chinese growth] are continuing urbanisation of the country (still 56 per cent rural) and associated infrastructure spending, the desire to spread prosperity westwards away from the coastal strip where most exports are produced, and the lifting of living standards. These impulses will not fade quickly,” reports Barry Hughes in today’s Australian.
It’s a big bad scary investment world right now. But it looks pretty clear the US Federal Reserve will allow the American dollar to set new lows against various currencies and commodities. Coupled with the long-term resource-heavy demand from Indian and Chinese growth…well…it’s a good time to own a core collection of cash-flowing resource stocks.
The Daily Reckoning Australia