China thaw, rates fall key in 2024

Falling interest rates and what appears to be a more civil relationship between China and the US are two of the big events that will shape 2024, along with the potential return of Donald Trump as US president.

Whether Mr Trump can win next November’s election might seem to be an issue solely for Americans, but his abrasive personality has affected Australia in the past and could again, so it’s one of the issues worth thinking about with the new year just over a month away.

For Western Australia, the future of the state’s energy sector is of growing importance as the government tries to match demand for gas from industry and households with objections from environmentalists who want the fossil fuel to be permanently phased out.

China and interest rates are the two topics that will have the greatest impact on WA’s business community and, without being overly optimistic, the outlook for both looks promising.

China: in from the cold?

Years of poor decision making in China has forced its government to eat a small serve of humble pie as it wakes to the problem of a wrecked housing sector, the flight of foreign investment and, most disturbing of all for a country of 1.2 billion people, the threat of social disorder.

No-one in Australia should be so bold (or rude) as to say China’s problems are entirely of its own making even if that is true, far better to let Beijing figure that out while WA remains a reliable provider of high-quality materials for its giant manufacturing complex.

Iron ore is the thread which most intimately connects WA and China and will likely remain the dominant trade connection.

Planning for the next wave of iron ore projects, those capable of delivering higher-grade (lower polluting) material, should lay the foundations for a boost to WA’s construction industry.

Lithium will further cement the WA-China connection because the state has a geological endowment that perfectly complements China’s massive investment in electric vehicles and electricity storage systems.

The economy

Interest rates will start falling in the next year, but how quickly will depend largely on national policies, with a recent decision to rein in capital spending a sign Canberra is concerned about the inflationary effects of excess government spending.

Breaking the inflationary spiral that followed the burst of COVID spending will be a major issue in 2024, with Australia at risk of being late to the lower-rates party, which is expected to start in Britain and then spread to the US.

The latest inflation reading in the US of 3.2 per cent indicates that ‘inflation fever’ is breaking and the target inflation rate of 2 to 3 per cent being within sight in the first months of 2024.

A downshift in official rates by the Reserve Bank of Australia, no matter how small, will send a jolt of confidence through the economy, especially households and small business.

Energy transition

Weaning the economy off a diet of fossil fuels is proving to be more difficult and likely to take longer than optimists hoped for, and pessimists predicted.

The farce of importing coal from Newcastle to fire old boilers at the Collie power station is a prime example of what happens when rushing a fundamental economic shift.

Forcing households to buy an electric car when most can’t afford it and, even if they could, they will struggle to find a charging station is another example of trying to do too much too soon.

There’s likely to be a forced slowdown in energy transition next year.

Property

Lower rates will boost the property sector though a bigger influence is immigration, which has been a major cause of house prices continuing to rise even as interest rates have been moving up.

If the federal government trims its migration target, the effect of falling rates on property values could be less than would normally be expected.

A particularly worrying change in the home building sector is that banks have become lenders only to the rich, with families on average incomes no longer qualifying for a home loan.

If that trend continues, government intervention is possible with the creation of a specialist home loan institution to replicate the role once played by building societies.

Gold

The almost forgotten precious metal, which has risen and fallen with the state’s economy for more than 120 years, could enjoy a revival in 2024 because of its unique status as a form of cash and an asset that rises as US interest rates fall.

Competition for professionals and skilled labour will be a hurdle for goldminers to clear but, with the price tipped by investment banks such as UBS to rise above $US2,100 an ounce by the end of next year, the incentive to explore and develop will be strong.

Another factor driving the gold industry is the value of the Australian dollar, which is unlikely to rise much above its current US65 cents. This should underwrite a local gold price of more than $3,200/oz.

Gas and alumina

Gas and alumina are two important industries at risk of terminal decline thanks to a confusing government approvals process, which is making the state a less attractive investment destination.

Woodside’s half-built Scarborough project is likely to be the last big offshore development as the costs associated with a ‘lawfare’ campaign mounted by environmentalists encourages the company (and others) to invest elsewhere.

The Gulf of Mexico and offshore Africa offer better opportunities for Woodside and perhaps even the long-delayed Sunrise project off East Timor.

The double irony of what’s happening is that the Australian and WA governments claim to want more gas investment while funding an agency, the Environmental Defender, to thwart the company’s plans.

Alcoa’s alumina projects in the south of WA are in a similar pickle, with a government go-slow on land access approvals putting investment at risk – another way of saying the Kwinana refinery could soon close and Pinjarra could follow.

The rich

WA, more than other states, is being influenced by the personal investment decisions of a handful of the mega-rich, a group that includes Gina Rinehart, Andrew Forrest and Chris Ellison.

The interest of Mrs Rinehart and Mr Ellison in lithium promises to shape an industry of increasing importance to WA as well as strengthen their hold on the state’s mining industry.

Mr Forrest, however, is likely to play a reduced role in WA as he takes his hydrogen energy ambitions to a global audience via a recently created New York-based funding operation that will seek to raise capital for projects spread around the world.

Local politics

Will he, or won’t he?

The man in question is Basil Zempilas, Perth’s lord mayor, potential election candidate, potential member of parliament and potential future premier.

Next year could be the time for Mr Zempilas to reveal his political hand.