How do you think Alan Greenspand has cooked his US economic landing? Soft, medium or hard boiled? Optimists believe the bottom may be reached by the Mid-Autumn lantern festival. Bold traders, betting on stronger world growth in 2002, are buying shares in Australian mining companies as a way to cash in.
Knowledgeable investors listen carefully to the commodities markets. As early as May last year, the action on the London Metal Exchange was telling us that global industrial production had peaked. Since then, the price of nickel has skidded from US$9,600 a tonne to a two-year low of US$6,250 as manufacturers cancelled orders for stainless steel. In September, copper, lead, aluminium and zinc, all plunged together, proving an accurate signpost to the abrupt US collapse at the turn of the year.
Base metal prices are still falling, but stockpiles are at their lowest levels since 1973-74. Any uptick in anticipated demand could have a dramatic effect. Some speculators are prepared to look across the valley of despair to the milk and honey on the next mountain.
US Warburg strategist in Sydney, Sakthi Shiva, says the average global industrial cycle runs for 15 months. She is looking for a trough in September this year, and has been advising clients to hold off buying resource company shares until the end of March, and then move in ready for what could be a nice upward run.
The key is the cheap currency. The Australian dollar has sunk to an all-time low of under US$0.50, where it is super competitive. Exports have put in a huge surge as a result. The assistant governor of the Reserve Bank of Australia, Glenn Stevens, says such a dollar-driven export boom had happened before, "but not for three or four decades". Mining exports will be up 24% at a record A$55 billion (US$30.19 billion) for the year to June 30. More importantly, they are tipped to chalk up similar rises until at least 2002-2003, unless demand totally falls off a cliff.
Coal will be a certain winner. Australia is the world's biggest exporter and sold 192 million tonnes of the stuff last year worth US$5.5 billion. Coal has been in the pits for four years, shafted by tumbling prices, excess production, and competition from other sources of power. Last year, surprisingly strong global steel production, and the spiralling cost of oil and natural gas, helped underwrite more demand for the black gold.
Further upward pressure on coal prices has come from the supply side. Mines have been closing around the world. Now there is a shortage. The major Japanese steel companies have just been forced to pay 8% more this year for Australian coking coal to feed their blast furnaces.
Oil has overtaken gold as Australia's second biggest resource export with the price of crude still not much under US$30 a barrel.
Copper and aluminium prices too have had a modest lift from supply cuts in the US prompted by the power crisis in the North West of the country.
Although resource companies are responsible for more than 55% of traded exports, they account for only 15% of the Australian All Ordinaries share index. Domestic institutions have shunned the sector, and hold only half the indicated index weighting. That is an excellent contra-indicator, because Australian fund managers invariably miss the boat in a mining stock rally. British, Hong Kong and Singapore investors have been nibbling since February. The favourite pick has been the Anglo-Australian Rio Tinto group, which earned its 2000 profits of A$2.7 billion from iron ore, coal, aluminium and diamonds. The shares have been pushed up to an all-time high of A$33.40. They are priced for perfection at that level, but Rio is one of the best-regarded mining houses in the world.
Slumbering giant BHP, which has woken up after two years of cost-cutting and rationalisation by US executive Paul Anderson, are a good buy at under A$21. BHP has to get bigger on the world stage to rank with the likes of Anglo-American and Billiton of South Africa, Rio Tinto and the Swiss-based Glencore group, which are together expected to control the bulk of world mine production within a decade. BHP took a step in the right direction recently when it bid for control of a Brazilian iron ore group, Caemi. Success would leapfrog it past Rio Tinto to become the second biggest iron ore producer in the world after another Brazilian concern, CVRD.
One curious reason for buying Australian mining company shares is that many have been atrociously managed. According to PriceWaterhouseCoopers, the industry's return on assets was a miserable 2% until last year, and more than A$10 billion in shareholder wealth had been destroyed by acquiring new capacity too expensively at the wrong point in cycles. That means if some local mining houses cannot get an acceptable return on assets, they will be gobbled up by foreign predators who can.
The best companies are already falling prey to raiders. Last year, Rio Tinto snatched iron ore group North Ltd and the Ashton diamonds company. Royal Dutch Shell currently has a takeover bid on the table for Woodside Petroleum, Australia's premier oil and gas concern, which is desperately fending off the men from the Hague.
Western Mining shares have scooted up to A$7.95 in recent weeks on hopes that it can repeat its trebled 2000 profits of A$746 million in the coming year. The group is one of the world's largest producers of nickel and it also has copper, uranium, gold and alumina. WMC is doing so well, after years of dragging its heels, that it is an almost dead-set target.
Another takeover candidate is Queensland-based MIM, a copper, lead, and zinc concern, which derives 25% of its earnings from coal, but has a talent for missing earnings forecasts.
Australian resource companies may represent a once-in-a-generation opportunity to buy world class mining assets cheaply, just as their prospects are turning upwards.