10/12/2013 - 14:13

Get ready, 2014 looks the goods

10/12/2013 - 14:13

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Is the world about to become a better place? That’s not a philosophical question, it’s simply an observation that economic conditions might be better than we realise, as shown by recent developments in China, the US and the UK.

Miners such as Rio Tinto, BHP Billiton and Fortescue Metals Group have been able to justify large-scale expansion projects thanks to a higher than expected iron ore price.

Is the world about to become a better place? That’s not a philosophical question, it’s simply an observation that economic conditions might be better than we realise, as shown by recent developments in China, the US and the UK.

In China, demand for iron ore continues to rise strongly despite an expectation that it is overdue for a fall; the result is that the price of Western Australia’s most important export remains stuck at a very attractive $US139 a tonne.

Employment creation in the US appears to be accelerating, as the wall of cash unleashed by that country’s central bank combines with low energy prices to finally deliver a faster-than-expected rate of growth.

In the UK, a low exchange rate is having a similar effect as cheap energy in the US, with growth and job creation accelerating to its fastest pace in a decade.

For countries that rely on international trade for the bulk of their wealth creation, such as Australia, conditions are pointing to 2014 being a much better year than is widely appreciated.

Iron ore is the big surprise, with that $US139/t price feeding directly into the WA economy and explaining why companies such as Rio Tinto, BHP Billiton and Fortescue Metals Group are able to justify large-scale expansion projects, and Gina Rinehart is able to push ahead with her $10 billion Roy Hill mine.

The explanation for the high iron ore price is simplicity itself. Demand is high and therefore prices are high. Rather than being a commodity that can be stockpiled at a relatively low cost, iron ore is largely used as it is produced, with port stockpiles part of the production process.

Any sharp decline in demand for steel in major consuming countries such as China is quickly felt up the supply chain; and while a downturn has been expected all year, it simply has not arrived.

In fact it is quite the reverse, with the latest data from China showing that iron ore imports are running at a level 18 per cent higher than 12 months ago.

The US job creation engine is another measure of the brightening outlook that is starting to cause practitioners of the dismal science (as economics was once called) to dust off their spreadsheets and factor in a ‘soft landing’ once that country’s central bank starts to taper its money-printing stimulus.

For much of the past year, talk of an end to the bank’s stimulus, under which an extra $US85 billion a month has been pumped into the banking system, has been dominated by fear that the taper would kill optimism in the stock market, and slow growth.

Those fears are now being seen as overblown and the start of the taper, which could occur in a matter of weeks, is no longer seen as a problem but more of a sign than economic normality is returning and therefore a cause for optimism, not pessimism.

There is an even more unusual debate developing in the UK about whether those countries will finally outperform their great rivals for European economic supremacy – Germany and France.

Beating the French is something that gives the British particular pleasure, but given the parlous state of the French economy, that’s not a particularly high bar to clear.

Beating the Germans is another matter entirely, but that’s what looks like happening next year, and perhaps for the next five years as the entire European region using the euro as a common currency is dragged lower by the deadweight of the economic basket-case that is Club Med – the no-growth countries such as Spain, Italy, Portugal and Greece.

Staying out of the euro and retaining the pound as its own currency has given the UK a significant advantage, which is being aided by policies that are more business focused than the rest of Europe.

For WA, which is more directly plugged into the international economy than any other state, the signs of recovery in the US and the UK, and the continued expansion of the Chinese economy, is remarkably good news because it means demand for our exports is more likely to rise than fall.

Rather than worry about more cutbacks to resource development it might even be time to start planning for faster growth than anyone had expected.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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