Thursday, November 02, 2006

Bull dust and banana republics

When Paul Keating was Australian Treasurer, he provoked a primed market to meltdown with his off-handed comment that the Australian dollar was looking like a currency from a banana republic.

Will Treasurer Peter Costello provoke a similar market response with his "ownership" of the "as good as it gets" thesis?

Commodity boom has peaked, says Costello
AUSTRALIA'S commodity boom has peaked, federal Treasurer Peter Costello says.

“I think we've reached a high point and I think prices are going to return to more normal levels,” he told Fairfax newspapers.

“The increase in commodity prices, the mining boom that was the story of the last couple of years, I don't think will be the story of the next couple of years.”

This suggests the Government will be more constrained in next May's budget before an election due in the second half of the year.

Mr Costello said the end of the commodities boom would be one of three forces dragging down the rate of Australia's economic growth.

“In my assessment, if you put three factors together, the globe is probably moderating, we've seen the peak of commodities, and the drought is knocking growth, so I'm just saying that I have no expectation at all of a boom in the years ahead - we will have moderate growth.”

The Australian stock market has, so far, not even noticed that the commodities have peaked.

Perhaps that's because the fund managers don't really care what they're doing with our hard earned savings, or because they are listening to the other end of the bull.

Boom gloom's bull-dust: analysts by Robin Bromby
REPORTS of the death of the mining boom from Peter Costello may be greatly exaggerated.

While the federal Treasurer now says the boom is at an end, analysts generally are more cautious.

There may not be any more 71.5 per cent hikes in iron ore prices like there was in 2005, but neither are prices likely to slump in the near future.

"It's way too early to tell whether (the boom) is over," said AMP Capital chief economist Shane Oliver.

But he believed prices would probably keep edging up, with China still growing at 10 per cent a year.

"China consumes 4.7 pounds of copper a year per person, and in the US and Australia it's more like 15 pounds," he said.

Demand for metals would continue as China sought to lift its living standards.

But Bell Potter Securities senior client adviser Richard Campbell was more robust, calling Mr Costello's comments "puerile" and "extraordinary".

"Why can't the Treasurer of Australia distinguish between the coal market and the nickel market and the zinc market it's not that hard," he said.

The sight of 30 ships queuing to load coal at Newcastle and all those new shiny cars on a recent China visit makes Mr Campbell think this boom has a way to run.

Even self-confessed bear Andrew Harrington, resource analyst at ANZ, said that although the end of the mining boom was inevitable, it was too difficult to call.

"Even the most bullish analysts have a graph that shows prices going up and then coming down again."

But Mr Harrington does add a rider: that the constraints on mine output and infrastructure, along with rising fuel prices, may have put a new and higher floor under metal prices.

He calls it a secular shift; a bull would use the term "super cycle". [See, generally]

Already this year, two Jeremiah-like predictions have failed to come to pass:

* That the high oil price would slow global growth.

* That the Chinese economy would cool rather, the opposite has happened and China looks as hot as ever.

Nickel is close to setting a new record after it reached $US32,450 a tonne on the London Metal Exchange on Monday. The people who put their money on the line are, in terms of contracts for delivery in 27 months' time, betting that nickel will be worth $US21,725/tonne down, but nowhere near the $US13,000/tonne the metal fetched this time last year.

Copper is still below its highs in May but this week was selling above $US7300/tonne and in two years from now the futures contracts are saying it will fall only slightly to US$6220/tonne. When trading opened after New Year on the LME last January, copper spot was sitting at $US4537/tonne. Zinc prices hit new highs on Monday when the metal rose to $US4248/tonne, a far cry from its $US1912/tonne on January 3. The 27-month sellers expect $US2773/tonne.

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