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Message: Week in review ... from Australia ...
Australia, the
Energy Super-Power
The Daily Reckoning Week in Review
Melbourne, Australia
August 17th to August 21st, 2009
By Dr. Alex Cowie
Australia, the Energy Super-Power
Goldman Sachs has predicted a global commodity shortage on par with 2008's to kick in next year. Just like the world experienced last year, prices will spike thanks to decades of under-investment that has lead to poor supply which can't keep pace with rising demand. Suppliers of petroleum, wheat and coal are already flat out, operating at 90% of their output.
Chinese appetite for Copper, which is now a third of the worlds demand, has triggered a >resources boom that promises to dwarf the last". Specifically they are referring to the $50 billion
He said "it will make an important contribution to our economy and energy security for many, many decades". In fact, he's counting on it. Canberra sees it as the private sectors' stimulus package. Ten thousand jobs will be created in its construction, over three thousand to run it in the future, and it should earn the WA and Australian treasuries $40 billion over thirty years.
Such a big project needs some big players to run it like Chevron, Exxon Mobil and Royal Dutch Shell, all of whom are involved as partners. In the last week, they have already signed >Pluto LNG plant off the coast of Karratha, within eighteen months. It has now announced that it aims to triple its output by 2014. This means it will be producing LNG before Gorgon.
If you want to see a return sooner, then the look at the small caps. There are >David Wood, an independent energy sector analyst estimates the potential output of these regions is 90 million tonnes per annum (mtpa). Qatar is the world's biggest producer at the moment, with an output of 60mtpa. Global demand is currently 175mtpa, and is expected to more than double to 380mtpa within ten years. It sounds like demand could easily outstrip supply.
The International Energy Agency (IEA) estimates $170billion worth of projects were stopped due to the global recession. Because of the lull in development, Australia now can't develop the LNG market quick enough. The government estimates that there are $100 billion of LNG projects that require investment over the next 12-18 months.
Kris Sayce of the Australian Small Cap Investigator has had some great success picking LNG opportunities amongst the small cap' stocks. Kris recently travelled to Vancouver to present his research to the annual Agora Financial Investment Symposium where Marc Faber also spoke and strongly advised investing in resources. One exciting company in particular that Kris has found will be one the first producers in this region, and although small by Gorgon's standards, it will produce 1.5mtpa and meet just under 1% of the world's demand.
Martin Ferguson, the Federal Minister for Energy and Resources believes Australia is emerging as an "Energy Superpower".
That's right. And it's going to be powered by gas.
Twiggy and China scratch each others backs
Iron ore is not used to sharing the spot light. There is plenty happening in that department as well right now.
There has been some controversy regarding Andrew Forrest's decision to let Fortescue Metals Group (FMG.AX) cut iron ore prices more than his main competitors Rio and BHP. They see it as breaking solidarity with the pack. FMG has negotiated a 35% reduction in the price of its Iron Ore with the China Iron and Steel Association (CISA), compared to BHP and Rio's 33%. It's not a huge differential. In return though, FMG is getting preferential treatment in the form of $7.2 billion of loans from Chinese banks to expand mining operations in the Pilbara.
FMG will sell twenty million tonnes of ore over the next half year at the new mates rates. This is ten percent of the twenty million tonnes that Australia normally ships to China over that timeframe. The spot price on the open market is now $110/tonne, and in case you ever wondered what a tonne of Iron ore looks like, it would fill a box about sixty centimetres long on each side.
He gets capital, which is increasingly hard to come by these days, and China gets to invest some of their spare cash in stable Australian dollars.
This suits the Chinese just fine. They are justifiably terrified that their $US2 trillion of foreign reserves is at risk of depreciating through inflation. Robert Gottliebsen in The Business Spectator reported that the Chinese are now increasingly aware that they can invest in the Australian dollar without much of a currency risk.
They perceive our commodity-backed currency to be sound thanks to our stable economy, political system, and regulatory framework. The D&B global risk indicator, which is a highly regarded index of how safe a country is to invest and do business in, has put Australia in top place (equal with Canada, Norway and Switzerland), out of the 131 countries it measures.
HSBC's research distributed in China has supported this. A trend towards Chinese investment in Australian assets could see huge support to the currency at a time when it has already grown very strong. The trade weighted index has been greater than 65 all week. Whilst the $A is looking good against the $US at 0.83, the real action is against the very wobbly-looking pound. The Australian dollar has been above GBP0.50 for most of the last fortnight, compared to the twenty-year average of 0.4260. It is at 0.5043 at the time of writing. Above 0.5296 and it will be a 24-year high.
The strong $A has advantages and disadvantages of course. Bad for exporters, great for overseas holidays. It could also make us sloppy and at risk of getting into bad fiscal policy habits. Treasury Secretary Ken Henry said this meant that Australia could now run higher current account deficits without risking depreciation of the currency. Because our currency is in demand, it's ok to get into debt? Didn't we learn anything from our mates in the US and their spot of trouble?
Commercial property going through 'A difficult period'
A report by Property Investment Research, an industry analyst body was quoted in The Australian this week as saying that the Australian property sector has seen >Nouriel Roubini's opinion has been highly regarded in recent years, as he was the first to accurately predict the financial crisis years before most. As he has all along, he still forecasts the recession to finish at the end of this year, but warns of a double dip recession caused by the problems in reversing the extreme fiscal and monetary policy measures accurately and at the right time.
There is much talk about what shape the recovery will be, as is what shape the graph of economic growth will plot. The 'U' shaped means a gradual return to growth, the 'V' shape means a sudden return to growth, but Roubini also warns of the 'W' shape which means recovery followed by a second recession.
Gillian Tett, a columnist for The Financial Times, mysteriously suggested that the recovery could be '
The recovery Roubini expects sounds a bit 'bank-shaped'. If there is a single recovery, >at this fascinating video delivered at the infamous TED talks. It demonstrates how different countries' economic growth and life expectancy have changed over the last one hundred years. This is the most entertaining video I have ever seen on the subject, not just because the speaker finishes his lecture by performing his sword-swallowing skills!
About the author: Dr. Alex Cowie holds a Graduate Degree in Finance and Investment from the Financial Services Institute of Australia.
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