22/10/2009 - 00:00

Currency convulsions to play out painfully

22/10/2009 - 00:00


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Looking at commodity prices in US dollar terms is giving a misleading impression of how well the world economy is recovering from the GFC.

PICK a point in time and the world looks totally different, as can be seen by glancing at what’s happened to the price of commodities, the lifeblood of the Western Australian economy, during the past 12 months.

From bust to boom in the blink of an eye is one way of describing the change because just seven months ago commodities were a disaster, as is shown in this composite price graph of the world’s major commodities, such as oil, wheat and gold, three of WA’s key exports.

Looked at in March, the Bloomberg graph, which plots international indices compiled by finance houses such as UBS and Standard & Poor’s, showed a sorry picture of rapid decline in the wake of the collapse of the US investment bank, Lehman Brothers.

That dreadful time was a direct result of ‘the death of trust’, bankers no longer trusted customers and customers certainly did not trust banks, hence the need for all sorts of government intervention, guarantees, and stimulus payments.

Oh what a difference today. In fact, if you blot out the period from mid-October last year, through to mid-March this year, the past seven months look like a boom with commodity prices up by around 30 per cent.

Booms, however, are a bit like beauty; they’re in the eye of the beholder, and while the past seven months might look like a boom there are two layers of deception at work, with both saying that we are not yet in full recovery mode.

Firstly, there’s the currency factor, a subject Bystander has been going on about for weeks, and which remains absolutely critical because higher commodity prices are more about the falling US dollar than genuine price rises.

Yes, prices are higher. No, they’re not on conversion to Australian dollars, making this a classic illusion created by the dramatic effects of currency-value realignment – the money world’s equivalent of tectonic plates shifting in the earth’s crust, an event which leads to earthquakes and tsunamis.

Secondly, the world insists on looking at commodity prices in its only reserve currency, the US dollar, and it’s the US dollar that makes us believe that commodity prices have returned to where they were 12 months ago.

Exporters might be feeling richer, but they’re not, and that message is going to come through very loudly in the next profit-reporting season when the damage to earnings of goldminers, wheat farmers, and iron ore exporters will be revealed.

Currency capers

Currency moves are also a factor in a series of recent investment deals, involving some of the business world’s fattest of fat cats.

Brian Gilbertson, Hans Mende, George Soros, Gennadiy Bogolyubov and our own Gina Rinehart, have been among the key players, in separate events, which are tied together by a common thread, expanding their exposure to resources.

Mr Gilbertson, briefly the chief executive of BHP Billiton, has teamed up Mr Mende, a super-rich investor, to re-start the manganese war, which excited investors in Perth-based Consolidated Minerals two years ago.

Back then, Messers Gilbertson and Mende lost the ConsMin battle to Mr Bogolyubov, a Ukrainian oligarch. Today, it’s game on again as the former two men attempt to snatch a 22 per cent stake in another manganese miner with a Perth head office, OM Holdings, a company which just happens to have Mr Bogolyubov as a 12 per cent shareholder.

Bystander can’t give investment advice but reckons OM is a corporate battleground waiting to happen, with a share price set repeat what ConsMin did – double.

Ms Rinehart is also playing in the manganese business with a start on mining at Balfour Downs, while Mr Soros, a billionaire speculator who famously “broke” the Bank of England 17 years ago, has made his second big investment in a WA miner.

Last month it was copper explorer, Marengo Mining; last week it was Platinum Australia.

The deals are good news for WA because they show some of the world’s richest people have regained confidence in resources. Or have they?

Mr Soros is a clue to investments being made for other reasons, principally currency, which is his speciality.

In 1992, he made an overnight profit of $US1.1 billion when he short-sold $US10 billion in British pounds, a plunge which pre-empted the devaluation of the pound.

Today, Mr Soros is buying resources partly as a way to evade the plunging US dollar, and to benefit from Australia becoming a safe way of gaining exposure to China’s relentless growth.

Sand to Singapore

Sand, of the type commonly referred to as dirt, is not often thought of as an export item, until you look at what’s been happening in Singapore, where sand demand is booming as the island country grows by filling in the ocean.

For much of the past 20 years, as Singapore has expanded its borders in the same way the Dutch did a few hundred years ago, sand has been shipped in from Indonesia, Malaysia, Cambodia and other countries.

But in recent years the sand trade has been disrupted by government bans. Malaysia stopped supplying sand to Singapore in the mid-1990s, Indonesia in 2007, and most recently, Cambodia.

Given that the price of sand got as high as $50 a tonne a few years ago, and requires zero processing, surely there’s a business waiting for some bright spark to offer a never-ending supply of Australian sand to Singapore.

Come on down

The management team at the Burswood casino certainly know their market. In the south-west car park at the complex is a long line of ACROD bays, carefully marked out for drivers with disabilities.

A quick check one mid-week afternoon revealed 22 of an estimated 26 consecutive ACROD bays being used.

As there is a fair chance that a lot of ACROD drivers are on a pension of some sort, it appears that Burswood has found a nifty way of tapping into the flow of government cash by easing the way for the most needy in the community into its gambling halls.


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