Resource Sector update August 2009
Transcript: Now the markets, since the last one of these, you can see that theyve preformed very very well, particularly the resource sector, the gold price has held fairly steady in US dollar terms (in A$ its fallen because we had a much stronger $A) but weve seen quite good performances out of the base metals over the few months, reflecting the Chinese restocking and a realization that probably were not going to see a rerun of the 30s even though Wall St economists and analysts are very much influenced by perhaps whats happening in their banking system and in their economy generally.
But there are other places we should be looking.
China, clearly is growing very well, weve seen steel production exceed 600million tones, thats a new record level over the last couple of months, so higher than the level of 2008, and thats a great contrast with whats happening in the United States, where its only running at about 55miilion tones, so its more than 10 times the size there in china at moment and it dwarfs whatever is happening in the United States.
The performance of the stocks, really the base metal stocks, things like the Mincors and Independence Groups, and the Kagara Zincs all those have done very well at that mid cap range, and what were seeing also now is some of the smaller stocks are starting to perform as people recognise that these things are really extremely cheap, theyre coming off the floor so were seeing very good percentage rises. We should see a lot more of these things particularly for the gold and base metal players.
The Iron Sector has been also buoyed by the iron or shipments into China at very high levels theyre record levels of imports into china and the prices of Iron ore above the benchmark prices achieved and set earlier this year. So a lot of those little Iron Ore companies are positioning themselves quite well. In the coal sector we see a parallel, and improvement there, and some mines have been reopened, weve still got the navies of ships sitting off the ports, all waiting to pick up on the coal and the numbers were starting to see for thermal coal demand going out two or three years are still quite substantial, were looking at about 5% per annum over the next 2-3 years increase in seaborne trade, most of that income really has to come from Australia. So the Australian resource sector is looking quite good, and its assisted by the US equity market rallying.
The driving force is obviously the very large level of liquidity, easing monetary conditions, and were seeing the American dollar weaken as a result of the increase in supply of dollars, the American bond market weakening, as a reflection of the increase in the supply in bonds, and with the deficits continuing hitting 1.8trillion dollars or there about for the next year or two, thats a lot of bonds that need to be rolled over or issued. So we must see lower bond prices, higher yields and I think were also going to see quite strong inflationary pressures picking up, particularly in the United States. That will come back and impact the gold price, reasonably soon.
I think the next two or three weeks will be the critical stage, however we look at it, the driving force of China, India, South America, middle East with a rise in demand for raw materials, and that those monetary issues effecting the US and UK as well, weakness in currencies, all those are just going to push money into the resource sector.
We saw 10 years of commodity bull market, from the December quarter 98, up until the big correction last year, but should be seen as a correction. We saw the low in November 98, in terms of commodity stocks, they didnt participate in the new lows that we saw in March, and they look as if theyve probably got another five to six years of bull market ahead of us.
Sure its not going to be straight up, therell be rocky bits, but it has been robust from here and I think its going to be robust for a bit longer, and then well get some sort of correction, of some sort of sector rotation and then probably a very strong market again, probably in early 2010. But I think most of 2009 will be good before we start getting that correction. But if the gold price does what I think it might do we may in fact find that correction is really only a matter of rotation within the market, gold market and the speculative should have a very good run up until Christmas.
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