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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 8 June 2016

Port Hedland hammers out moar ore

Moar ore!

The Pilbara Ports Authority reported that the Port of Port Hedland crunched out a rip-snorting 39.3Mt of iron ore exports through the thirty one days that were the month of May 2016.

This was 4 per cent higher than the total volume of iron ore cargo exported in May 2015, with monthly throughput just a notch below the all-time record levels set only two months earlier in March. 


As the above chart shows, the ramp up in iron ore supply has been spectacular, with more than 80 per cent of the iron ore cargo being shipped to China and Taiwan. 

Of course, in turn this supply response dynamic has kept firm downward pressure on commodity prices. 

The spot price of iron ore this morning is US$52.30/tonne (or ~A$70/tonne, a figure which could be higher were the Aussie dollar to US dollar exchange rate not remaining so stubborn). 

Richer or poorer?

This enormous ramp up in export volumes has done wonders for Australia's Gross Domestic Product (GDP) which continued to thrust higher through the global financial crisis and beyond. 

Whether or not Australia is better off for the boom is largely a question of whether you adopt a glass half full or glass half empty viewpoint. 

The recession throng would argue that although they didn't get their headline forecasts right - since the economy has not experienced a technical recession now for an exceptional 99 consecutive quarters - real national income has stalled, with commodity prices having retraced from a once-in-a-century terms of trade boom.


There can be little argument about that point, as depicted in the above chart. 

Iron ore exports can hardly be as valuable to Australia as when prices doubled and then doubled again to above an outlandish US$180/tonne, from a historic level of around US$10/tonne. Coal prices have also collapsed from their once outrageous highs.

But another way to look at this is to note the surge in real gross national income between 1991 and 2008, which was compounding at an extraordinary rate of about 4 per cent per annum for fully 17 years. 

The Reserve Bank of Australia's Glenn Stevens often preferred to look at China's urbanisation and consumption of commodities as a good news story for Australia. 

There has been a massive increase in iron ore and coal use by China, and Australia has been well place to capture a hearty share of that boom, he would argue.

Deficit

People tend to worry an awful lot about the fact that Australia has been running a trade deficit in recent years, despite a 20 per cent improvement last month.

Since this is a blog often concerned with asset prices, it is worth noting that somewhat counter-intuitively running a trade surplus may not be a net positive for asset prices, at least over the short term.

Take the obvious example of Sydney, where real dwelling prices were treading water through the early stages of the mining boom broadly from early 2004 until 2012.

Yet since 2012 Sydney dwelling prices have been performing tremendously well, exactly through the period where Australia has mostly been running a wide trade deficit. 


Debunkery

Indeed this very topic was tackled in Ken Fisher's best-selling Debunkery in 2010 - an outstanding book that I only got around to reading a fortnight ago - where the 48th of Fisher 50 bunks is that "Trade Deficits Make Deficient Markets".

Fisher's research found that periods of trade surplus often corresponded with stock market underperfomance, and vice-versa.

In Australia's case we may find that our correspondingly weaker Aussie dollar makes asset prices considerably more attractive to foreign capital, while low interest rates have also been a boon for both equity markets and dwelling prices. 

The higher dollar through the mining construction boom phase was destructive to industries such as tourism, manufacturing, education, and rural exports, but now that the dollar has fallen these industries should begin to thrive again, aiding the eastern state capitals.

In particular watch out for record issuance of international student visas from 1 July 2016 forth, while Chinese tourism visitors also break record highs.