28/05/2013 - 15:11

Slowdown a speed bump on long road

28/05/2013 - 15:11

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It's not easy seeing economic blue sky when the air is filled with grey clouds, but one well-connected bank reckons we’re being too gloomy in Western Australia and that the ‘new normal’ will be much better than the ‘old normal’.

Slowdown a speed bump on long road

It's not easy seeing economic blue sky when the air is filled with grey clouds, but one well-connected bank reckons we’re being too gloomy in Western Australia and that the ‘new normal’ will be much better than the ‘old normal’.

HSBC Bank Australia, which has a big footprint in Asia, is confident that demand for Australia’s raw material exports will remain strong because of an ongoing boom in building infrastructure across the region.

Demand for new railways, roads, bridges and the other essential ingredients of a rapidly urbanising population means that while Australian iron ore, coal, LNG and other commodities might fade occasionally, the underlying trend is up.

Rather than look at short-term trends, which is often how investors see things, HSBC says it’s the big picture that matters.

In the latest edition of its Downunder Digest published today, HSBC chief economist Paul Bloxham points out that while commodity prices have declined in recent months, they are well above the low levels of the period between the 1980s and early this century.

As a sobering thought, he points out that iron ore was selling for $US13 a tonne in 2000, a fraction of its boom price of $US160/t set three years ago (and its current price of around $US125/t).

The key to the HSBC view of commodity prices, which are central to the performance of the WA economy, is that global growth is today being driven by an urbanising Asia, which means a much higher demand for basic raw materials than the growth coming from service-sector focused US and Europe.

“Strong demand for infrastructure and energy in the emerging economies is expected to keep commodity prices structurally high, despite rising commodity supply,” Mr Bloxham wrote in the report.

“Structurally high commodity prices would support the Australian economy and could support the Australian dollar at well above its post-float average level (of around US75 cents).”

To put the recent fall in commodity prices into perspective, Mr Bloxham notes that while commodity prices are “clearly past their peak”, they are still high as measured by the International Monetary Fund commodity index – with metal prices 190 per cent higher than in the year 2000 and energy prices 240 per cent higher.

HSBC said Asian demand for infrastructure went well beyond China, with total regional demand valued at $US11.5 trillion over the next 17 years.

That whopping infrastructure investment estimate was published earlier this month in a separate HSBC analysis of the Asian region by the bank’s north-east Asian economist Ronald Man, who helped create a new measure of the region’s economy called the Asia Infrastructure Measure (AIM).

For WA, which is intimately plugged into the development of its northern neighbours, following the AIM index could be a useful guide for local miners, gas producers and investors.

Central to the AIM index is urbanization, which has been a driving force in Chinese demand for raw materials and, in turn, a driving force of the WA economy.

While China is estimated to be about halfway through its rush to urbanise, there are still 80 Chinese cities with populations of more than 5 million people but without subway systems – which they are keen to build.

Mr Man has included 11 Asian countries in the AIM index, noting that it is not possible to use a one-size-fits-all approach, with three broad groups at different stages of urbanising.

They are:

• Foundation economies that have just started the urbanisation process, including Indonesia, the Philippines, Vietnam, Thailand and India. They will be the slow developers.

• Take-off economies, including China, Malaysia and Sri Lanka.

• Flying economies such as Hong Kong, Singapore and South Korea.

“Infrastructure projects are the building blocks of economic development,” Mr Man wrote. “Every road, railway, port, power station and airport increases growth, speeds up trade or helps business.

“Nowhere is this picture as clear as in Asia, where people are flocking to cities in their millions, generating a wave of urbanisation that, in turn, is creating more demand for infrastructure. It’s a self-fulfilling prophecy.”

In WA, which is feeling the pressure of project deferrals and delayed investment decisions, the HSBC view of the world is a reminder that the current downturn is more of a speed bump that a brick wall.

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