09/05/2012 - 11:12

For now, give me stability over excitement

09/05/2012 - 11:12

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Europe may still be in the doldrums but growth in the US and China is good news for the world economy.

Europe may still be in the doldrums but growth in the US and China is good news for the world economy.

THERE have been too many false starts since the GFC started five years ago to say that the end is in sight, but the latest signals from the US and China are indicating an end to the roller-coaster ride.

Put another way, the new normal of steady, if unspectacular, growth could be in sight.

Two factors are driving the US economy, explaining why that country’s stock market (as measured by the Dow Jones index) is up 28 per cent over the past seven months – the cost of money, and the cost of energy.

Money, for major banks and industrial companies at least, is super cheap, with the US central bank keeping interest rates close to zero and low-cost money making its way through to consumers.

Last week, the average 30-year fixed-rate home mortgage in the US fell to a fresh, all-time low, of 3.87 per cent, according to the US government-controlled home-loans agency Freddie Mac (Federal Home Loan Mortgage Corporation).

The 15-year fixed rate loan also tumbled, to a fresh all-time low of 3.07 per cent, and the five-year adjustable mortgage was an eye-catching 2.97 per cent.

New-car loans have been heading the same way, dropping last week to 3.28 per cent, and a prime reason why car sales in the US are booming. Chrysler last week reported a 20 per cent increase in vehicle sales. Toyota’s sales rose by 12 per cent.

There is a reason for the low-cost money; the US has been experiencing its deepest recession since the 1930s.

But those mortgage and personal loan rates (which is what a car loan is) indicate that cheap money is working its magic, drawing consumers back into the marketplace, boosting the sales of goods and services – as shown in another key measure, the purchasing managers’ index (PMI).

Last week the PMI, which measures manufacturing activity, rose to 54.8, with any reading above 50 indicating growth and anything below 50 indicating a slowdown.

That latest PMI from the US compares with 53.4 a month earlier, which means the US manufacturing sector is recovering strongly. It also means that one-third of the global economy is recovering.

Cheap money, a powerful economic tool, has been matched by cheap energy with the shale-gas revolution slashing the price of natural gas to less than $US2 per million British thermal units, compared with more than $US13/mbtu just five years ago.

In China, the picture is less clear thanks to the discount factor outside observers wisely place on government statistics in that country. However, last week, as the US economy developed more oomph the Chinese government’s PMI was sitting on 53.3, also indicating expansion.

Private PMI measures, such as one kept by the region’s top bank, HSBC, are less encouraging, coming in at less than 50.

If the US is in recovery mode and China’s downturn has bottomed, that means a large portion of the global economy is starting to grow, albeit slowly, with Europe the sick man and unlikely to resume growth for some time.

Europe, however, will not simply disappear. Even if it is in recession it will continue consuming, led by a robust German economy.

What this boils down to is a view of the world, which while flat and not particularly inspiring, no longer has a cliff at the end of the road.

The new normal will not please people who like an exciting economy, but five years is enough excitement for me.

Pig of a price

NICKEL, a metal that has played an important role in Western Australia’s mining past, is emerging once again as a newsworthy commodity, though perhaps not for the most positive reasons.

Two nickel projects in particular are probably causing their owners some pain, as the price of the metal struggles to climb out of a deep hole.

Ravensthorpe, which the Canadian-listed First Quantum bought from BHP Billiton in 2009, will be finding that nickel at its most recent price of $US7.86 a pound is alarmingly close to its breakeven cost of production.

Yabulu, bought around the same time by would-be parliamentarian Clive Palmer, will also be struggling at the current nickel price – especially on conversion to Australian dollars.

What’s happened is that cheap, low-grade, nickel ore shipped directly from Indonesia and some Pacific Islands (so called pig nickel) has killed the price of the metal.

Back in 2009 when First Quantum and Mr Palmer bought the BHP Billiton assets for what they said were bargain-basement prices, the nickel price was around $US7 a pound, and the Australian dollar was around US79.7 cents – producing an Australian price for nickel of $A8.78/lb.

The nickel price rose last year to more than $US11/lb, but the Australian dollar also rose. More recently, the nickel price has fallen sharply to its current $US7.86/lb, but the Australian dollar has not fallen as sharply and, at $US1.03, produces a local nickel price of $A7.63 – or more than $A1/lb less than the price in 2009 when Ravensthorpe and Yabulu were acquired.

Nickel, interestingly, is not a topic mentioned much these days by Mr Palmer, who seems to have set his sights on a career in politics, and perhaps as a shipbuilder if his plans to recreate the Titanic hold water.

Browse impasse

WOODSIDE Petroleum and WA Premier Colin Barnett continue to argue that an onshore gas-processing centre at James Price Point is the best solution for developing gas from the remote Browse Basin off the Kimberley coast.

Environmental protestors disagree, as do some of Woodside’s partners in the gasfields, though for different reasons. The environmentalists do not want any development, while Shell and BHP Billiton want to maximise their profits (and minimise their capital outlays) by pumping Browse gas to the North West Shelf.

The biggest losers in the long-pipeline to Karratha solution are the people of the Kimberley, as opposed to a small patch of coastal scrubland. If James Price Point is dropped it will be the second LNG project to bypass the region, condemning the locals to a life on government pensions and other handouts while acting as human amusement for a handful of rich tourists.

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“The meek shall inherit the earth, but not the mineral rights.”

J Paul Getty


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