An insidious outbreak of post-boom gloom

Those expecting the massive LNG projects under way in the north-west to ride to the WA economy’s rescue may need to think again.

If the concept of short-selling is foreign to you then get ready for a practical lesson, because Western Australia is at the centre of two of the world’s biggest short-selling gambles – one in iron ore and the other in LNG, the state’s top two exports.

High-profile US investment fund manager Jim Chanos is the big LNG bear. Mr Chanos has made his fortune selling things he doesn’t own because he believes they will fall in value, so he can buy them back cheaply and trouser the profit.

Goldman Sachs, one of the world’s canniest investment banks, reckons that now is the time to short-sell iron ore because the price is destined to retreat from its recent highs, creating an opportunity to make a handsome profit.

If Mr Chanos and Goldman Sachs are right, then they stand to make fresh fortunes for their already rich followers. If they’re wrong, then they’ll lick their wounds and move on to their next targets for a ‘bear attack’.

More interestingly for everyone in WA, Mr Chanos and Goldman Sachs are effectively recommending that clients ‘short WA’, which is a somewhat sobering thought as it appears to pitch us against some of the most powerful forces in the financial world.

What’s happening is one of the more unpleasant features of the aftermath of a busted boom, with investment decisions being made not on what’s likely to go up in value, but what’s likely to fall.

At a more personal level there is also an emerging domestic property situation, which will make some people rich and some poorer; and that’s the prospect of a drop in Perth house prices over the next year, or two.

Most real estate agents dodge the question (or fib) when asked for their opinion about property prices, which is why a few comments last week from prominent Perth property valuer Gavin Hegney were like a breath of fresh (honest) air.

Supply of property is exceeding demand, Mr Hegney said, which any first-year economics student can tell you will deliver an obvious result – lower prices; and his tip to the Australian Financial Review newspaper is that Perth could “give up 1 or 2 per cent this year”.

Given the problems confronting the WA economy after the end of the biggest resources boom in its history, that property price tip is probably a bit on the low side; but it is significant because it recognises the reality of what happens when the party ends.

Mr Chanos, who founded and runs Kynikos Associates, told an investment conference in Las Vegas that he was betting against some of the world’s biggest oil companies because he believed the LNG market was oversupplied.

“This is a disaster waiting to happen,” he said.

Among the companies he reckons will fall, along with the LNG price, are Royal Dutch Shell, Chevron and BG Group, which Shell is trying to acquire.

In iron ore, Goldman Sachs reckons that the recent rise in the price for the best quality material to more than $US60 a tonne will be short-lived with a fall back to an average price for the rest of 2015 around $US52/t.

“Investors may consider this as a window to take short positions,” the bank told clients last week.

Goldman Sachs argues that the fundamental forces in iron ore, where supply is exceeding demand, are unchanged from the middle of last year when the price crashed.

Other investment banks agree, which is not good news for WA’s iron ore industry. Sanford C Bernstein & Co told clients that the iron ore price would be determined by demand for steel and that wasn’t strong.

Mining companies with marginally profitable operations will not be pleased by this fresh outbreak of pessimism, but they will not be alone.

The WA government should be considering this latest vote of diminishing confidence in the resources sector before it makes any more taxpayer-funded commitments aimed at helping troubled mining companies.

The reason for such a blunt warning is that the premier, Colin Barnett, has been trying to talk-up the West Pilbara iron ore project of China’s Baosteel, suggesting recently that one way for the $7 billion development to move ahead would be for an ownership split – separating the mine and infrastructure assets, such as railway and port at Anketell Point.

It’s the possible port split that rings alarm bells, because state governments have a bad record when it comes to port facilities and associated project infrastructure, including the failed (many times) Oakajee port near Geraldton and the failed attempts to encourage onshore infrastructure, including a port, for the failed Browse LNG project.

Mr Barnett’s suggestion that Anketell Point be hived off from the West Pilbara mine has a whiff of Oakajee to it.

Part of the problem

ANDREW Forrest is not alone in blaming others for the world’s glut of iron ore and other raw materials, having recently found an ally in old adversary Ivan Glasenberg, the chief executive of the world’s biggest commodity trading firm Glencore.

Amusingly, both men seem oblivious to the role they’ve played in flooding world markets to the point where prices have collapsed.

Mr Forrest’s lament is well known in Australia and seeming to be getting louder, with his latest allegation being that excess iron ore output by arch-rivals Rio Tinto and BHP Billiton is jeopardising the country’s credit rating and standard of living.

Mr Glasenberg’s lament, delivered at Glencore’s annual meeting in Switzerland last week, is that his rivals fail to understand the basics of supply and demand.

“I’m doing my level best to convince our competitors that we should understand the words supply and demand,” Mr Glasenberg said.

Both men have a point, but both men also ignore the fact that they are part of the problem, and blaming others for doing precisely what you’re doing has the ring of double standards to it.

Social media models

SOCIAL media platforms such as Facebook, Twitter and LinkedIn are a modern obsession with young and old alike, but that doesn’t mean they can dodge business basics, such as the importance of earning a profit on what you sell.

In recent weeks, all of the market-leading social media websites have delivered bad news about sales and revenue, with their results slicing billions of dollars off their stock market values and raising fresh questions about whether a fad can ever be a viable long-term business.