Like drunks at a party, speculative share traders always say there is time for one more round before quitting. That’s largely why Peter Costello was rubbished last week for daring to say that the resource-boom party is almost over, and it might be wise to take a little precautionary action with investment portfolios.
Proof of the ‘drunks at a party’ theory can be obtained by looking back at where the loudest jeers came from. No prize for guessing that it was Perth and Brisbane, the two cities jockeying for the title of ‘boom central’.
The problem for the drunks (sorry, speculators) is that if Mr Costello is right (and Briefcase reckons he is), then this is the second bottle taken away from the party, because some time earlier in the year the property-go-round stopped spinning under the weight of rising interest rates, affordability, and state government taxes.
Smart investors (and that generally means older investors) will have seen the phase of the cycle we are about to enter many times before. The key to (a) survival, and (b) potential profit, is to focus on quality management, cash flow and costs of production, while also keeping some of your powder dry for the bargains that will emerge.
But, before we get to the bargain phase of the slowdown, it is important to understand why the boom is coming to an end. In a nutshell, supply is rising to meet demand – just as the Scottish economist, Adam Smith, said it would more than 200 years ago.
Two items of evidence are available for those who want to see, as opposed to those who refuse. First is the stockpile level at the London Metal Exchange. This is not secret information; it’s there for all to analysis. And what it shows is that the stockpiles of most minerals have stopped shrinking.
The copper stockpile actually bottomed in the middle of last year at around 40,000 tonnes. Recovery has been slow because this boom really has been stronger for longer, but a fresh look at the LME website shows that the stockpile is back up to around 130,000t.
In historic (and daily world usage) terms that 130,000t is a drop in the bucket (copper bottomed, naturally) and a country mile short of the one million tonne surplus sloshing around in the LME’s warehouse back in early 2002. The trend, however, is always the friend of the investor, and the copper stockpile trend is up.
Nickel tells a somewhat different story in that its warehouse movements fluctuate violently, largely because of erratic deliveries of metal from Russia. However, even after allowing for the Russians, there are clear signs of a bottom forming, just as BHP Billiton gets closer to flicking the ‘on’ switch at its big Ravensthorpe mine, and Inco does the same at its Goro mine.
Briefcase will bore his readers no more with warehouse levels, just take it as read that a bottom has formed in most commodities (zinc being a possible exception), and it is the stockpile bottom that caused Mr Costello to call the end of the boom.
But, and this is a significant but, our beloved treasurer only did that because he was following a rather long list of experts doing the same thing.
The day before Mr Costello said “it’s over”, Access Economics was doing the same thing, and a month before that happened Macquarie Bank was saying prices will remain high, but the peak is with us, or has passed.
For example, Access is tipping the copper price to fall from around $US7,600 a tonne to $US5,900/t by the end of next year; zinc to fall from $US3,320/t to $US2,882/t; and nickel from $US28,800/t to $US18,700.
Macquarie, which uses pounds for some prices, is tipping copper to drop from $US3.15/pound to $US2.75/lb; zinc from $US1.41/lb to $US1/lb by 2008; and nickel from $US10/lb to $US7.50.
Tips on metal prices are, as we all know, as valid as Melbourne Cup tips. But there is trend emerging, and all Mr Costello did was note the trend, and wise investors never forget the oldest adage of investment, “the trend is my friend”.
Speaking of trends here are two more, neither particularly pleasant.
First, the remarkable decline in relevancy of the farming sector to the Australian economy. Briefcase knows that this is a very sensitive subject because of the drought, rural hardship, and the fact that most of us have friends on the land.
But there was table printed the other day that showed Australia’s top 20 exports. According to Australian Bureau of Statistics data, the top nine export items, in pecking order, are coal, iron ore, tourism, transport, education, gold, crude oil, alumina and aluminium.
Tenth, and the top ranking agricultural product, was beef. Wheat was 13th and wool 20th, beaten by curious categories such as cars (14th), medicines (16th) and alcoholic beverages (18th), which probably includes wine, in which case it can be seen as an agricultural export.
Whether you count wine, or not, the point remains that we definitely no longer ride on the sheep’s back. It’s a case of jumping in the ore car.
The second grim trend is an observation that might help investors, or business buyers. It is the combination of high employment rates, large number of ‘situations vacant’ signs in shop windows, and declining service standards in many restaurants.
There is a theme running here which points directly to an inability of service-focused businesses to find good workers.
The situation for businesses is so grim that they are relying on new migrants, or taking the other way out and closing their doors.
Briefcase, before accusing it of exaggeration, is aware of a number of mining projects on ice because skilled geologists and other professionals cannot be found. And I’m equally aware of local cafes and restaurants struggling to find cooks and waiters, people who are somewhat essential to the running of a noshery – unless we’re resorting to a cook-your-own-steak style, as was the case in the 1960s.
“The English instinctively admire any man who has no talent and is modest about it.” James Agate