The Biggest Event of Your Investing Lifetime

The Biggest Event of Your Investing Lifetime

The good news in the mining sector just keeps rolling in.

Today, management at BHP Billiton Ltd [ASX:BHP] announced that they’ve given the go-ahead to the $4.5 billion South Flank iron ore mine in Western Australia.

That’s a fair chunk of capital spending in anyone’s book.

It’s also going to lead to 2,500 construction jobs and 600 operational roles.

The project will produce for 25 years, replacing an ageing mine that’s come to the end of its economic life.

One wonders what the world will look like when South Flank shuts down in 2043. You would think it’s safe to assume there’s going to be a lot more middle-class Chinese citizens.

That number could be as large as 500 million by 2026, according to fund manager Charlie Aitken. The Australian reported today on the presentation he gave this week to the Livewire Live conference in Sydney.

He’s quoted as saying that the rise of Asia’s middle class is the biggest opportunity in our investing lifetime.

I agree wholeheartedly.

The only mystery is why so many people think the world is going to collapse at the same time that all this is playing out.

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Aitken mentioned something I’ve often wondered myself, and that’s just how high meat and dairy prices are going to go as the Chinese adopt a more Western diet.

If you think lamb is expensive now, just wait until we Australians are competing with this monstrous Chinese market.

Maybe become a farmer while you can. This development certainly has the potential to send agricultural land values soaring.

Adjacent to this huge Chinese expansion is oil demand. China is not only consuming large amounts of gasoline, diesel and jet fuel, it’s also building up a huge petrochemical industry. This provides the feedstock for plastics, fertilisers and beauty products.

As you know, demand for oil goes up alongside a rising consumer base.

It’s also partly why the International Energy Agency (IEA) expects demand for crude oil to grow by 1.4 million barrels a day in 2019. That’s on par with this year.

The signs are good.

There was actually a surprise this week when it became apparent that US crude stockpiles fell.

An analyst cited in the Wall Street Journal put it down to soaring US oil demand (I keep emphasising that it’s a hot economy in the US).

The IEA naturally enough cautioned that trade protectionism and a strengthening US dollar could inhibit this oil demand strength.

Yet I worry more about supply. There’s the ever-present risk of a major supply disruption.

Just this week there was an attack on the oil infrastructure in Libya. It has shut down a quarter of the country’s output — around 250,000 barrels.

That’s not many in the context of the world’s near 100-million-barrels-a-day production. But it is a little more so when inventories are as tight as they are now.

All eyes are going to be on Vienna next week when OPEC and Russia get together to discuss their production strategy from here.

If they decide to lift output, as most expect, the spare capacity available will shrink below 2%. Spare capacity is production that oil producers can bring onstream and sustain at short notice.

Saudi Arabia has largely been responsible for this for the last 30 years; that’s why it’s known as the world’s ‘swing producer’. But those days are changing.

Saudi Arabia is investing more in ‘downstream’ capacity to capture more of the value creation in the oil market. It’s also thanks to the short cyclical nature of the US shale industry. They can develop wells much faster.

However, caution is warranted here. US export terminals and infrastructure are still catching up with the prodigious boom in US oil.

Bottlenecks are appearing. There is a limit to how much US oil can get to the global market at any one time.

Watch this space.

For now, I expect oil to stay strong, perhaps moving in a sideways range for a time and reacting to newsflow.

The US dollar will play a role here too.

The Aussie dollar has weakened under 75 cents for the moment. That’s going to show up in higher commodity prices, all else being equal.

Gold in Aussie dollars is back up around $1,740 an ounce. The good margins for Aussie gold producers keep ticking over.

There’s a real sweetspot for Aussie mining right now. Commodity prices are strong and projecting a positive outlook. Meanwhile, the Aussie dollar is boosting the tailwind because it’s down against the USD.

This is giving existing producers good cashflow — money that keeps building on the balance sheet and can either get paid out or invested in further exploration or expansion.

This why I keep hammering the point that the good mining juniors are going to be well placed to get funded or bought out. We’re seeing more merger and acquisition activity happen.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia