’Tis the season to be gloomy, that much we know from following financial markets; but an early nominee for the Dr Gloomy prize of the season goes to former ANZ Bank chief economist, Saul Eslake, who said earlier this week that the China-driven mining boom was “the last in human history”.
’Tis the season to be gloomy, that much we know from following financial markets; but an early nominee for the Dr Gloomy prize of the season goes to former ANZ Bank chief economist, Saul Eslake, who said earlier this week that the China-driven mining boom was “the last in human history”.
Once a man more cautious with his words, Mr Eslake seems to have been influenced by his recent decision to set up a private economics consultancy in Tasmania.
He delivered his astonishing remark about the ‘last boom’ during a speech to a stunned audience at a mining conference in Melbourne earlier this week.
Easy as it is to dismiss his forecast as a comment that might be expected from someone who stepped back from the cut and thrust of international finance to the cooler climes of Hobart, there are two aspects of his remark that deserve closer scrutiny, and debunking.
Firstly, the seeds of the next boom are already being sown, perhaps not in Tasmania (which has never had a boom), but certainly in other parts of the world, including Western Australia.
Secondly, anyone who predicts the last of anything is inviting comparisons with other less-than-successful predictions about the future.
In reverse order, if only because failed predictions can sound hilarious in hindsight, it’s worth considering some of the best, such as:
• “Wall Street indices predicted nine out of the last five recessions,” Paul Samuelson, economist;
• “There is no reason why anyone would want a computer in their home,” Ken Olsen, founder of Digital Equipment Corporation;
• “The herd instinct among forecasters makes sheep look like independent thinkers,” Edgar Fiedler, economist; and
• “If you have to forecast, forecast often,” Edgar Fiedler again.
Now to Mr Eslake’s prediction, which was made at the International Mining and Resources Conference on Tuesday and based on a belief that no other country could deliver the impact of China on commodities demand (and therefore a future boom was not possible).
“The countries that are still to develop are much smaller than China and India are; they are not, in most cases, starting from as far back on the development curve as China was in 1979 or India in 1991, and most of them are much more self-sufficient in commodities than China or India ever were,” Mr Eslake said.
“So it could well be, in my view, that the commodities boom Australia has just experienced in the last 12 or so years, is the last of its kind in human history, unless unforeseen technology developments ordain otherwise.”
In a way, Mr Eslake has provided himself with the classic forecaster’s escape clause when he referred to unforeseen developments, but he really didn’t need that because what’s happening in commodity markets today is the start of the next boom.
At the risk of sounding obscure, what that means is that low prices are the cure for low prices because they force high-cost material out of the market and lead, eventually, to a period of shortage, which triggers reinvestment.
Whether the next period of reinvestment is as big as the last is the really hard part about forecasting, but there’s no question that the cycle is turning in precisely the way it has always turned.
For WA, the two industries most exposed to the current downward leg of the cycle are iron ore and nickel, which is why Fortescue Metals Group chairman Andrew Forrest delivered a warning shot about future prices at the company’s annual meeting yesterday, and why a recent research paper into the nickel industry was equally pessimistic.
Mr Forrest’s worry about an oversupply of iron ore was a dead ringer for comments about the nickel industry from the investment bank, Credit Suisse.
The solution to the problems of iron ore and nickel is for high-cost mines to close and for no new mines to open, a trend already under way.
What no-one is quite sure of is which mines will be next to close; though in iron ore a reasonable assumption in the case of the WA industry are the Sino Iron project of China’s CITIC group, and the Karara project of the Chinese-controlled Gindalbie Metals.
In nickel, there are three WA projects facing a tough future – BHP Billiton’s Nickel West business, the Murrin Murrin mine of Glencore, and the Ravensthorpe mine of First Quantum. Add to these wth the Queensland nickel refinery controlled by the mining entrepreneur and politician, Clive Palmer.
Losing one, or more, of those nickel producers would do wonders for the nickel price. Credit Suisse reckons the impact could deliver a 45 per cent price rise from the current $US4.37 a pound to $US6.35; a price that looks even better if the Australian dollar crashes back to US50 cents, as some people are forecasting.
It’s when you consider the way the commodity cycle turns, and the way investment dries up in tough times, that you can see the start of the next upturn and understand that there will be another boom, though perhaps not in Tasmania.