Seismo Market Insights – October 1st, 2008
Resources - Boom to Bust
China, the juggernaut behind the Australian Mining boom is rapidly slowing down and may well be in the throws of an emerging commercial property bubble, similar to Japan’s in the 1980’s.
The Chinese slowdown will have major effects on the demand for Australian raw materials and resources, in particular for metals such as iron ore*.
Emerging recessions in the US, Japan & Europe will cause a dramatic contraction in Chinese export sales world wide. This combined with rising inflation and a potential commercial property bubble is causing a pronounced slowdown in the China growth story.
The Chinese domestic construction sector (demand down 30% since last year) and the Chinese stock market (down over 70% since November 2007) are in a synchronised downturn. Vacancy rates for newly built commercial buildings across China are rising. These factors combined will bring down both the demand for and export pricing of steel, iron ore and other metals as construction demand and occupancy slow further.
This situation has emerged after more than 12 months of tightening credit control by the Chinese Central Bank in an all out effort to curb inflation within China. Despite strong domestic demand and previous high growth, falling exports and inflation are China’s two greatest risks going forward.
China and other emerging economies represented up to 50% of the world’s economic growth last year. However, the trend and speed of the slowdown indicates that China is now more likely to fall in sync with the rest of the western world economy rather than lead it in the years ahead. It is becoming increasingly clear that no country is immune to the collateral damage created by the current world financial markets crisis, including China and other BRIC economies.
Commodity markets have already priced in falling emerging market demand by way of falling metals prices. Nickel has fallen over 70% and Copper has fallen by 40% since May 2008. The Seismo system shows further falls to come.
Australian resource companies are already showing the effects in their share prices with MRE down over 80%, RIO down 49%, BHP down 38% & FMG down 73% - all since May 2008.
Many Seismo clients exited or reduced significantly their resource holdings in July and August 2008 based on weekly Seismo exit and profit protection signals.
For those who have not already exited their resource holdings, Seismo believes there will be many consolidation and takeover opportunities over the next 12-18 months in the resources sector as larger and or well capitalised resource companies look for increased efficiency and synergies in the face of falling commodity prices and demand.
While taxation and capital gains can be an issue in selling long term holdings (see your accountant), this has to be carefully considered against potential share price falls that maybe well in excess of any tax or capital gains consequences. Example: Profits on resource sector shares exited and or sold from a Self Managed Super fund may have been taxed at 15%, however this would have saved between 23% and 65% in losses above the tax cost (based on the shares quoted above).
Long Term investments should ultimately undertaken to make a profit. There are no medals for holding forever and making a loss. Timing to enter and exit is ultimately required. Every investor must have an exit strategy before they enter any investment or trade. Resource boom cycles are traditionally very long. Recent commodity pricing, slowing Chinese growth and falling demand indicates that this current boom is now over. Not every investor can afford to wait another 20 years for the next one.
It is all well and good to adhere to the mantra of Buy & Hold for the long term, but as we say at Seismo: “How long is your term?”
*Note: Seismo Managing Director, Mr Jim Taig predicted a major resource sector fall in a web interview with David Taylor of Finance Network News on 13th March 2008, two months before the fall commenced. Click here to watch the full interview with Jim Taig 13/03/2008.
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