Pete Wargent blogspot

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

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Thursday, 10 November 2016

Blessed relief

Micawber Principle

I worked in the resources sector through the early years on the mining boom, so I'm by no means an impartial spectator when it comes to the slings and arrows of outrageous fortune being experienced by the sector.

On the other hand, I grew up in a flailing coal mining region with a population that was declining in more ways than one. As such, I'm also familiar with the downsides, and I'm not blind to the negative impact of mining on the environment. 

But what a year this is tuning out to be! 

Something that people consistently underestimate when it comes to the outlook for Australia is its dumb luck. 

In the spirit or Mr. Micawber, something always seems to turn up! 

Boom and then bust

It's been a punishing 4.5 years listening to all the carping and sneering about the decline in mining investment (which is still miles above its historical averages, by the way, not to mention that it totally saved Australia's butt through the Great Recession) in concert with the retracement of Australia's terms of trade.

Interestingly, though, the downturn in mining investment now has just a year or perhaps even less to run, in part because as the huge iron ore reserves of Western Australia are depleted, billions of dollars of further investment will be required just to maintain the status quo in terms of export volumes.

In spite of everything, it was the recession that never came, and soon better days will lie ahead. 

Pan y agua!

For those few of us who have had the hide to be optimistic about anything at all (optimism is not a cool thing these days, kids), it's felt like being back at school sometimes, week after week on report, stuck in detention, sent to the naughty boy corner, or to the headmaster's study to stare at the wall.

How could Australia have been so stupid to build all these mines and gas facilities? Didn't we know that China would have no use for our raw materials? 300 million Chinese can urbanise by 2025 without the need for coal and iron ore after all!

Malinvestment on an unprecedented scale, they said. And sure enough, it's been a punishing downturn for commodity prices.

Yet how suddenly and dramatically the tide has turned! 

China has imported more than a billion tonnes of iron ore over the year to October (imagine that!) - with just shy of 400 million tonnes of it from Port Hedland in the Pilbara - while restrictions imposed upon coal production have led to an improbably acute supply shortage.

If there's one thing we know about China, it's that when something becomes a trend, it really becomes a trend...

Dirty black coal

Despite the long decline since 2012, Australia's terms of trade remain as high as anything we'd seen within living memory, and in fact the index had even begun to rise again by the June quarter.

Still, the self-styled iconoclasts have missed no opportunities to sermonise, with the sternest and most cutting of the lectures saved for those daring not condemn the coal mining industry itself, especially when a new coal mega-project was proposed in Queensland. 

Sometimes, just have to respect the beautiful unpredictability financial markets, though!

Against any sort of common sense, the iron ore price has soared by 63 per cent higher this year to $71/tonne, while copper and zinc have suddenly decided to blaze higher. The beleaguered LNG sector may have timed its run far better than feared, with a solid rebound in prices just as export volumes from Gladstone begin to ramp up.

Meanwhile, the price of thermal coal has more than doubled to fly like a bird past $109/tonne. And, wildest of all, coking coal prices have quadrupled since June to an outrageous $307.20/tonne, to levels not seen since the Australian floods. What a breathtaking chart!

Source: Bloomberg

On odd says when I'm bored I go back and read a few of the lectures again, just for the fun of it. Sometimes, you just have to laugh! 

This is all too good to last, of course, and anyway, the cavilling will glide seamlessly and inevitably on to the next lament.

But this bull market has been a beautiful thing to watch, and observing national income cruise to record highs over the next six months will be a pleasure too, bringing a new wave of wealth into Australia's perennially lucky shores. 

It will certainly be a marvellous thing to enjoy before we're sent back into the naughty boy corner.


A slew of news out this morning, including Housing Finance, and Overseas Arrivals & Departures, both for the month of September.

And futures suggest stocks are off to an absolute flyer today. No dull moments here!