14/03/2012 - 11:19

Supply-push theory hints at longer boom

14/03/2012 - 11:19

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Australia is likely to benefit from any constriction in the world’s supply of raw materials.

Australia is likely to benefit from any constriction in the world’s supply of raw materials.

FALLING demand for commodities from China sent a shudder through the Australian resources sector last week, which is understandable, though the major factor in the future will not be demand but supply.

On the same day that China announced a reduced national economic growth target for 2012 of 7.5 per cent, India was slapping a ban on cotton exports.

There might not seem to be much of importance in the Indian action, but there is if you’re a Chinese textile mill that relies on Indian cotton exports, or an Australian cotton producer suddenly presented with an enormous opportunity.

Indian cotton, which has become a touchy subject in China and sparked an urgent review of the export ban by the Indian government, is an interesting case study of the next phase of the resources boom – the supply shortage phase.

Until recently, the dominant factor in the boom that has enriched WA and Queensland (and damaged Victoria) has been Asian demand for raw materials, which commodity-exporting countries have struggled to meet.

That demand, whether from China growing at 7.5 per cent or even somewhat lower, will remain largely intact because the industrialisation of China is a process that cannot be turned off without widespread social dislocation, something the Chinese authorities will avoid at all costs.

Supplying China with all of the commodities it requires to power an economy of 1.2 billion people, plus India with its 1.3 billion people, is becoming a heavy lift for the rest of the world, particularly as an increasing number of countries are becoming concerned about a lack of commodity processing at home, and high levels of foreign ownership of their resources.

India’s cotton export ban, which Agriculture Minister Joe Ludwig reckons is a great opportunity for Australian farmers, was not the only supply issue brewing in the commodity world last week.

Indonesia, keen to develop its own mining sector, announced new laws designed to effectively nationalise its mining industry, with foreign investors required to sell a minimum 49 per cent of all mines they develop within 10 years of production starting.

A relatively benign form of nationalisation compared to what has been happening in some African countries, the Indonesian approach will have a similar effect on future investment because of the uncertainty it introduces.

Owners of the capital essential to pay for new mines will be asking, well before they commit to an investment, what price will they get from local Indonesians when the sale becomes essential. As for banks lending money to countries with nationalisation agendas, forget it, especially at a time when banks around the world are fretting about big losses from loans to failed European states such as Greece.

South Africa, Zimbabwe, and other African countries are also travelling the nationalisation, or indigenisation, path in the name of boosting local ownership of resources.

Laudable as those aims might sound, the problem is that the locals do not have the capital to pay for mine and farm developments, which means that the pipeline of future supply is starting to be constricted.

India and its cotton export ban, which comes on top of a partial iron ore export ban, is setting the tone for what will soon be called the ‘supply phase’ of the resources boom, with increasing shortages of a range of commodities.

The flip from demand pull to supply push should, in theory, have a similar effect on commodity prices which, in turn, means that the resources boom that has been driving the Australian economy will continue for a lot longer than some investors believe.

All hail shale

THOSE two great economic forces, supply and demand, can also be seen at work in a commodity which is of increasing importance to Western Australia, but which represents a double-edged sword for investors – shale gas.

After two years of slow acceptance by the market, shale-gas stocks took off last week, led by Buru Energy, which has developed a cult following among speculators looking for the next hot fad.

During the past five months Buru has risen by 400 per cent, soaring from 60 cents to more than $3, partly thanks to a conventional oil discovery but largely because shale gas has suddenly caught the eye of share traders.

Good fun and fat profits will be had by all the early movers in the shale gas space, but don’t hang around too long if you decide to play because shale gas in the US has started producing as many losers as winners.

The problem is a surplus of supply, with gas prices in America plunging to a 10-year low last week of around $US2.30 per million British thermal units, a fraction of the $US13/mbtu commanded just a few years ago.

There is now so much gas available in the US market that last year it exported more finished petroleum products (such as gasoline and diesel) than it imported for the first time since 1949.

Australia has a long way to go in the shale gas revolution, but it’s almost guaranteed that we too will have a boom, followed by a bust.

Naughty on the net

CORRUPTION comes in many shapes and forms but two recent examples deserve a wider airing, if only because they involve the clever and naughty use of the internet.

In the clever corner is an Indian-focused website called ipaidabribe.com, where aggrieved ‘bribees’ can register their complaint for the world to see. Recent examples include payments to government officials for driving licences and for issuing a passport.

In the naughty corner is a retail trend called ‘de-shopping’, which involves returning goods acquired for a few days, or a big night out, and then returning them when used.

There is nothing new in the de-shop scam, but internet retailers are being hit hard by a rising trend of customers having goods delivered to their homes, using them, and claiming that a fault developed somewhere in the delivery process, which is a lot harder for a retailer to dispute.

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“Teaching is not a lost art, but the regard for it is a lost tradition.”

Jacques Barzun


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