05/08/2010 - 00:00

Change looms as wealth shifts to the East

05/08/2010 - 00:00


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A close look overseas reveals a potential shortage of commodities.

The US and Europe are said to be entering a new era of austerity, while Asia continues to grow. Where, it has to be asked, does that position Australia?

If looking only through ‘business-coloured’ glasses we are sitting pretty. Resources, from the original sheep’s back of the 1950s to the gas boom of the west and east coast, will underwrite profits and jobs in Australia for decades to come – but not for everyone.

If you look closely you start to see a long-term problem as regions that have given us the lifestyle we enjoy fade into something smaller, and with less interest in remote locations.

Austerity, of the sort being experienced in the US and Europe, is damaging, not just to the regions involved, but to industries in other parts of the world.

Take tourism as a case study. For many years we have relied on visits from British, American and European holidaymakers.

The loss of the Red Bull Air Race is a wake-up call that industries in Australia that rely on tourism are in trouble.

The Brits can’t afford to come, and the rising value of our dollar is making it awfully tempting to visit that giant theme park called Europe where goods and services are suddenly seen as being cheap, and likely to get cheaper.

Asia might provide replacement tourists, but like Australians with an interest in travel, low-cost Europe provides more interesting destinations.

Boiled down, a richer Australia relative to a poorer Europe means that in-bound tourism (foreigners coming here) will be a lousy industry for many years, while domestic tourism will not do much better as Australians head overseas in record numbers, armed with high-value Aussie dollars.

Other industries will also suffer as wealth migrates from west to east. Selling education services will become a lot tougher as our universities and colleges go head-to-head with cheaper courses in Europe.

Winning from the changes underway is the resources sector because even as we watch austerity bite in the US and Europe, we will also be entering an era which McKinsey & Company has so aptly named a time of “commodity constraint”.

What that means is that the Asian part of the world wants more of the minerals, metals, food and fibre, that we produce, triggering shortages of key commodities.

Wholesale change of the sort underway today puts pressure on everyone to adjust. Just take investment advice as an example.

If you listen to what is coming out of the US you would limit exposure to any company which sells services to government because, in the words of one report last week, ‘governments everywhere are going to be cutting their spending’.

No, they’re not. In Asia (a place terribly foreign to US investment advisers) governments are not bankrupt. Far from it. They are sitting atop economies growing steadily, or rapidly.

For Australian investors these are interesting times. The US and Europe, as with their tourist appeal, offer opportunities to buy cheap assets.

The problem is that most of those assets are trapped in a zero-growth zone, or even a region entering a deflationary spiral where asset values continue to fall, wages decline, and business growth disappears.

Far better to focus on what’s happening at home because this is where the resources are, and it’s where some of the smart money in Europe and the US is heading as investors over there look for better-performing opportunities than in their own shrinking backyard.

Vallar raising

No better example of the movement of money can be found than in a new London resource investment company, Vallar Resources.

Floated with little fanfare last month, Vallar raised more than $1 billion from rich Europeans keen to boost the return on their funds.

The Vallar sales pitch was a lesson in raising money, and a possible pointer to future similar events. It is yet to actually buy an asset, simply promising to look for bargains in the “bulk” commodities of coal and iron ore in North and South America, and Australia.

Nathaniel Rothschild, a 38-year-old multi-millionaire London hedge-fund manager and member of the famous banking family, is heading-up Vallar. Having a Rothschild lead a company in troubled times is a lightning rod for European money.

But, sitting alongside Nathaniel, and making the resource-project investment decisions, is someone of even more interest in Perth.

James Campbell, former chairman of Anaconda Nickel, and one-time bitter opponent of Fortescue Metals boss Andrew Forrest has re-emerged as a player in the global resources game.

As the key resources man at Vallar, Campbell will determine where the company invests its $1 billion with one area of interest being “assets sold by major mining companies”.

Perhaps a few morsels from the table of BHP Billiton and Rio Tinto, should their iron ore divisions merge, with strict conditions that some assets be cut free?

In a spin

Iron ore has also been in the news recently thanks to Rio Tinto’s joint venture in the Simandou project in the West African country of Guinea with China’s Chinalco group.

Of just as much interest given that Australia is deep into an election campaign was the remarkable example of how the two companies indulged in “spin” of the worst sorts to announce their deal.

Rio and Chinalco issued a joint media statement in which it was alleged that certain men said certain things.

Rio chairman Jan du Plessis, allegedly said, “This agreement takes our relationship with China and our largest shareholder Chinalco to a new level”.

Xiong Weiping, president of Chinalco, allegedly said, “This project can also efficiently balance China’s need for security of supply on the global iron ore market”.

You get the picture. Meaningless platitudes at 10-paces, which begs the question did those men actually say those things, or did a public relations scriptwriter draft a statement saying they said those things?

As with most such deals involving China, no questions were asked and no one from the media was present to see or hear what happened.

Spin to a new level? Perhaps. The way business communications will be controlled in the future? Certainly.

The truth? Don’t be silly.


“When prosperity comes, do not use all of it.”



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