Rob Coyte's Blog

The Australian economy sailed through the GFC with not so much as a glitch. Many believe that our commodities industry who had revenues of $187 Billion last financial year is who to thank. Australia’s mining industry contributes 8% of our nation’s wealth as measured by GDP but a staggering 47% of our exports. 

Having had a number of conversations at the pub recently with people on the exciting long term prospects of these companies as investments it is probably time to step back and assess.

With all sectors more capacity is coming on stream due to the high prices currently on offer. A perfect example of this in Australia is Fortescue Metals, iron ore producer, who was born in this commodity boom. As well as new players existing players are increasing their investment in other projects and increasing supply. In their last report the CEO of BHP spoke about the difficulty in finding projects at the right price.

In any case Australia is a low cost producer and its proximity to Asia will always mean that it is a competitive force to help sustain pricing. Regardless, it would be a brave call to say that prices will not be impacted downwards at some point and the thing that does vary among such bears is the magnitude of any decline.

To show the difficulty in such factors world renowned investment manager Jeremy Grantham, who correctly forecast the tech wreck and the subsequent decade of US equity declines as well as the large bankruptcy of global banks in GFC, says that long term Asia demand for energy, metals and crops will outpace supply. However he also goes onto say that there is a 25% chance of China slowing considerably due to bank losses and the unwinding of a property bubble which would have a large impact on commodity prices. Hedge Fund Manager, Jim Chanos, who correctly forecast the collapse of Enron said that the property bubble in China is “as big or bigger than we saw in the west” after considering the size of the economy.

The question becomes how do you balance these risks as we assess the world economy going forward? As investors we need to ask what are the opportunities and traps we need to be looking for?

If you have any queries please call me on 1300 132 214.

Rob Coyte | Monday, May 02, 2011
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