The Big Pinch

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There are two not-so-high profile stories that illustrate the power of the resource bull market and the ties that bind Australia to Asia’s Boom. And it shows that while the rally in resources isn’t brand new, it ain’t over yet either.

There are at least two things going for a certain class of resource stocks. First is that there is no such thing as just in time resource production. Mining for coal, drilling for oil, finding gold-these are not as simple as cranking up the printing press. For example, Rio Tinto (ASX: RIO) announced today it is seeking approval to expand the ports from which it exports iron ore to China, the world’s largest producer and consumer of steel (and integral to the recommendation we’ve made in the November issue of OSI, learn more about OSI here).

Bloomberg reports that “China’s iron ore imports surged 32% to 275 million tons last year. The nation accounts for 53 percent of iron ore sales for BHP Billiton (ASX: BHP) for the year ended June 30, and 47 percent of Rio Tinto’s sales for calendar 2005.” China might even produce more steel, if BHP and Rio Tinto could get it the iron ore it needs.

Cape Lambert, where much of Western Australia’s iron ore begins its journey to China’s foundries, “has an export capacity of 55 million tons a year, and has been exceeded on an annualized rate…The plan will increase the port’s capacity to 80 million tons, and increase Rio’s total port capacity in the state to 220 million metric tons from 195 million tons…Rio is also expanding its Dampier port capacity to handle 140 million tons of exports a year, from 116 million tons.”

While Rio spends $200 million to find new iron ore reserves, the capacity constraints in finding and getting Australian iron ore to foreign customers are the kind of things that keep certain commodity prices much higher than you think, for much longer than you think. You may have to work harder to benefit from the asset class in general. For example, supply for some commodities may come on-line much quicker, alleviating even growing demand.

But for other commodities, expanding capacity is going to take much longer. And in the meantime, stockpiles of certain commodities are reaching levels not seen since the bottom of the last resource bear market.

The second not-so-high-profile story also shows how resource investors can make money even in a maturing bull market, namely a takeover. The best-performing stock on the ASX-200 this year was “informally approached” by world’s biggest smelter of zinc, Korea Zinc, Co. We don’t normally go recommending the best-performing stock on any sector. We prefer to own them before the record-setting performance. But for reasons we’ve outlined in the issue, we’ve found a zinc stock worth buying.

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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