The future appears bleak for Australia’s resources sector with just about every forward indicator pointing to a future lack of demand to maintain the long-standing commodities boom. The past few years have been good to the mining industry. Strong Chinese demand has allowed Australian miners to pull raw materials out of the ground, load them on to extremely well-equipped shipping infrastructure and send them straight to our conveniently placed Asian neighbour. Asia’s continued development in the face of a ballooning financial crisis has been a blessing for Australia and this has been covered at length in Trading Tutors newsletter articles.
Government figures have claimed credit for sound economic management, as has the RBA for on its prudent financial policy. Few will stake claim to being partly responsible for the undoing of the boom. The truth is that it may come to an abrupt end very quickly. In fact, the only party that can truly lay claim to Australia’s economic success is China! But now even China is showing signs of catching a cold…
BHP this week announced that $50 billion worth of projects are to be put on the development backburner, in a clear warning that the Australian mining industry isn’t what it used to be. The problem doesn’t lie in Chinese demand falling off a cliff; it is more about whether there is sustained demand for the approximate 20 billion tons of iron ore channeled largely out of our north-west. This resource rich region has spoilt Australian for nearly a century but the central bank is now estimating that the terms of trade already peaked at a 140-year high in 2011.
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BHP: Elliott Says Sell
This is a major worry for Australian investors who, unlike the Americans, British and even New Zealanders, haven’t learned to adjust to leaner economic times and the wave of effects that follow, beginning with sliding equities values and housing prices reaching bursting point as unemployment rises and Australians can’t continue to pay comparatively extortionate mortgage interest.
The RBA still has a few cards up its sleeve. Interest rates still sit at a comfortable 3.5% and economic hardship can be softened by a drop of the cash rate to ease mortgage pain for home owners and spur investment. Consumer borrowing has also taken a dive, sitting at 149%, down from a record 156% in 2006. Even at current borrowing rates, Australian consumer debt is higher than that of Americans, even at the peak of the 2009 Global Financial Crisis.
Australia may be in for a huge wake-up call. In recent years, Australia and its leaders have had a heavy reliance on its one large industry, mining. With this indulgent reliance came an even more dominant reliance on our Asian neighbours. Australia is largely at the mercy of China, something which is likely to become increasingly obvious as the government looks to sheet home blame for our economic short-comings.
Look out Australia, the worst is yet to come...
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