23/03/2011 - 08:43

Analysis: Asian investors grow wary

23/03/2011 - 08:43


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Most Australians have never heard of Dutch Disease, but they will soon because it is the financial phenomena playing a key role in killing resource sector construction jobs.

Analysis: Asian investors grow wary

Most Australians have never heard of Dutch Disease, but they will soon because it is the financial phenomena playing a key role in killing resource sector construction jobs.

Other factors are at work, such as the soaring price of steel, but that too is largely a problem Australia has brought on itself as the world's leading exporter of iron ore.

Unionists marching on Parliament House earlier this month were a domestic example of how Australia's internal costs are hitting the flow of fabrication jobs.

Massive cost blow-outs on iron ore and gas projects, and at proposed port works, are another example of a what happens when an economy enjoys too much of a good thing.

Both of those issues, unhappy unionists and rising costs, come to a head this week when international investors meet Australian project promoters at a resources conference in Hong Kong.

In theory, the three-day Mines & Money conference ought to be a happy event. After all, everyone seems to be making oodles of money out of resources.

In practice, the happiness will only be as deep as the froth on a Tsingtao beer because Asian investors are becoming increasingly wary of what's happening in Australia, and even warier of what Australian company promoters are trying to sell them.

Boiled down, Australia is starting to price itself out of several markets thanks to:

- the high exchange rate which makes imports cheaper than what can be produced locally - which is Dutch Disease, named after what happened in Holland during its 1960's North Sea gas boom.
- Iron ore processing and proposed port development work which are suddenly suffering from 50%-to-70% cost explosions which have the potential to destroy the underpinning business case.
- Fear of a return of union militancy which can add significantly to project costs.

A record roll-up of around 2000 delegates gathered in Hong Kong for Mines & Money are talking openly about the problems that lie ahead for Australia, and whether the boom which drew them together might be about to hit a speed bump.

Chinese investors in particular are shocked by what has happened at the Sino Iron magnetite processing project near Karratha, the Karara magnetite project near Geraldton and the Oakajee port also near Geraldton.

Cost blow-outs at those three alone add up to more than $5 billion, extra money that the project developers (and bankers) have to find or be left with a half-finished investment, or an abandoned construction site and heavy write-offs.

Meanwhile, in the background of the cost question are constant reminders from investment banks such as Goldman Sachs and Citi that tougher times lie ahead as a surplus of raw materials builds in the global pipeline and Asian economic data starts to "flash red".

That data warning was sent to clients of Citi earlier this week and was based on its curiously-named Economic Surprise Index. According to analysts at the bank data out of Asia has "taken a turn for the worse" with rising interest rates and tighter banking rules in China bumping into high oil prices and Japan's inevitable post-tsunami slowdown.

Complex as the situation looks there is a way to measure the mood in Asia for Australian resources and that's in the availability of finance and willingness to do deals.

That's when you also discover an unpleasant surprise in the form of Asian investors walking away from deals, such as Regent Pacific dumping its bid for BC Iron, Galaxy Resources postponing its proposed Hong Kong listing, and a cool reception to Australian promoters trying to sell surplus magnetite iron ore deposits.

Given the cost blow-outs at Sino and Karara it should come as no surprise that other magnetite marketers are struggling extract cash from rich Asian investors.

Clive Palmer's failure to launch his Resourcehouse float is the best known of the big deals on the sidelines but, if the background chatter in Hong Kong is correct then Andrew Forrest's Fortescue Metals Group is also finding that a similar plan to offload unwanted magnetite is making slow progress.

Time will tell whether we are passing through a short-term speed bump or a longer term slowdown.

Whatever the answer to the time question it would be unwise to ignore the red alert on Citi's Economic Surprise Index, or the impact of sharply higher costs and the high exchange rate on Australian resource sector activity.


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