It happened about six days before I expected it, but at long last the hardball tactics of iron ore giant Rio Tinto resulted in an 85% increase in iron ore prices this year. It happened earlier this week, after eight months of intense and sometimes rather unfriendly negotiations. The consequences could be very friendly for investors, though. More on that in moment.
But let me just repeat that in case you missed it - with the stroke of a pen, the value of a commodity exported by Australia went up 85%. Not even the oil market moves that fast!
The Australian resource boom is rapidly becoming one of the biggest missed boats in American investing. There are staggering (and growing) numbers being posted by Aussie commodity exporters. Since it is an election year in America and your senses are being assaulted (and likely offended) by noxious fumes coming from politician’s mouths, let me remind you of the extraordinary story taking place here in the Lucky Country.
Just yesterday, the Aussie organization that tracks these things forecast 40% year-over-year growth in the value of Australian mineral, energy, and farm exports. Can you think of many companies that report 40% earnings growth year over year?
GM? Washington Mutual? Citigroup?
Led by 21st century blue chips like BHP Billiton, Rio Tinto, and Woodside Petroleum, Australian companies will export over $212 billion worth of coal, iron ore, gold, crude oil, copper, and LNG (to name a few commodities) next year. These booming exports are evidence of the structural revaluation of global resources. And the booming stock prices of resource producers represent the structural revaluation of those stocks (once cyclical, now more like growth)
Gold to India. Coal to Korea and Japan. Iron ore to China. Copper, uranium, rare earth elements, and a host of other base metals and bulk commodities…they are all on big boats to points North and East. This is why American investors cannot afford to ignore the story any longer.
By the way, thanks to a huge spread in short term interest rates (2% in the U.S. and 7.25% in Australia) the Aussie dollar is nearly at parity with the greenback after rising 70% in the last four years. The strong Aussie currency derives much of its strength from the roaring commodities market. And it’s that commodities market that is lately under scrutiny from some investors.
The numbers above suggest that the commentators who are calling for a top in the commodity cycle are actually complete morons. But rather than name calling like a candidate for national office, let me suggest that the commodity market has evolved beyond a simple boom-bust cyclical analysis. It is still boom-bust, but with a twist.
No. I am not suggesting that, “This time it’s different.” The basic economics behind the business (and/or credit) cycle are as valid as ever. Early business investment based on real demand leads to good times. Good times lead to easy credit. Easy credit leads to more investment (some of it very bad).
As money and credit expand, prices rise. Rising prices attract new investment from commodity producers. Eventually supply exceeds demand, credit tightens, and the cycle of growth ends in inflation in energy that destroys demand.
Is that where we are now?
Sort of.
There is a popular theory here in Australia - where I moved in 2005 for a front row seat to the resource boom - that China will suffer a post-Olympic slowdown.
