Always Keep China In Mind
Sun Herald
Sunday July 6, 2008
It's been a rough week for resources companies but the future is bright.
LEST you were starting to believe you could use resources stocks to hide from the market malaise, the sharemarket last week shattered that cosy little notion.So far this calendar year our miners, buoyed by spectacular demand from China as it industrialises, have shrugged off the downturn, losing only 4 per cent against a loss of 20 per cent for the broader market. Meanwhile, consumer discretionary stocks have plunged 41 per cent, industrials and financials 32 per cent and consumer staples 24 per cent. But on Thursday it was resources that drove the market down, shedding 6 per cent on fears the ever-surging oil price would slow global growth and a corresponding overnight slump in US steel and coal stocks. Indeed, a turnaround by our beleaguered banks was completely overshadowed as investors contemplated the unthinkable: that the resources super-cycle might be over.So let's look at whether that could be true - and our No.1 commodities customer China is an obvious place to start. Although there is evidence China's economic growth is slowing, we are talking from 11 per cent to 10 per cent. That's going at a fair clip in anyone's books. As Federal Treasurer Wayne Swan said in a speech to the Australia China Business Council on Friday, China has accounted for 25 per cent of total growth in global output in the past five years, making it the world's second largest economy behind the US. He said, in all likelihood, China would be the biggest economy in the world within a few decades. So there's a fair chance China will continue to urbanise on an enormous scale. In fact, it is said that the Chinese Government will build a city the size of Brisbane, Sydney and Melbourne combined, every year for the next decade. Take a moment to think about the scale of that!China will need a huge amount of iron ore to produce steel for buildings, coal for energy and steel production, copper for electrical wiring, nickel for stainless steel . . . all of which is great news for our resources companies. The final variable is what our companies can charge for this massive volume of raw materials. Rio Tinto and BHP have secured an 85 per cent increase in the price they charge on iron ore contracts with China. And there have been even larger increases in the price of coal contracts. The effect of these improved contract prices is so significant that newly released figures show that, in April, our trade with China briefly eliminated our long-standing trade deficit. And at a time when company earnings are widely expected to disappoint (brace yourself for the impending reporting season), they will provide unprecedented support to the earnings of resources companies. In fact, AMP Capital Investors forecasts 60 to 70 per cent growth in resources sector profits in 2008-09.Sure, sustained high oil prices would be an issue, as they would mean higher production costs. But over time this will actually, indirectly, boost the price of our exports.In his speech on Friday, Swan spoke of the "magnificent opportunities China's extraordinary growth presents to Australia".It would take China to call a wide-scale halt to construction for the bottom to fall out of demand for our resources. And it would have to be a pretty severe global slowdown to produce that.If you would like to appear in Investor Overhaul (page 8) and receive free financial advice, send an email to investor@fairfax.com.au. You need to be willing to have your photo and financial details published.
© 2008 Sun Herald