Phase one of the boom may be done. Stand by for phase two

AAARRRGGGHHH. It’s the end of the boom!!!! A stunned nation reeled in horror on Wednesday to ”revelations” that BHP Billiton had canned two of its major expansion projects worth more than $50 billion.
Nanjing Night Net

Various newspapers laughably screamed EXCLUSIVE, claiming they’d been predicting the decision for months, conveniently overlooking the fact that BHP chairman Jac Nasser flagged it back in May at a lunch in front of hundreds of Sydney bizoids.

Even the politicians jumped on board. The Honourable Member for Warringah salivated at the announcement. No, he hadn’t read BHP’s statement. But finally he was vindicated. The carbon tax, he said, had killed Olympic Dam, conveniently overlooking that a carbon tax would make uranium more competitive as a power source. Oh yes. And BHP boss Marius Kloppers explicitly ruled out such an argument. Still, who cares? It makes for terrific headlines.

If you want to identify the real sages in this episode you need look no further than BHP investors. They correctly picked the trend more than a year ago, long before even those running our biggest listed company.

BHP shares, and those of its major rival, Rio Tinto, have been on the slide since April last year. And as each eruption in the eurozone’s meltdown gathered intensity, the bulk commodities suppliers took ever greater hits to their market value as investors dumped the shares.

By October, senior BHP executives were flummoxed. The company, even then, was priced for global recession. But it was selling every scrap of red dirt it could dig out of the Pilbara and load onto a China-bound ship. Commodity prices were at near record highs and capacity was strained to breaking point. It didn’t make sense.

But it made perfect sense for investors. For years, they had been complaining that BHP and Rio Tinto had their sights focused too far into the future. The mega-billion-dollar takeovers and the huge expansion plans would deliver returns to future generations. ”But what about us?” they screamed. We want it now.

That investor revolt, which has been bubbling beneath the surface for more than two years, finally has filtered through to the board and management of our resource giants and is the primary force driving this week’s decision. That and the sudden drop in mineral prices.

Postponing the Olympic Dam expansion and the Port Hedland port facilities will be forever etched in history as a turning point. In a sense, it is. But is it the end of the resources boom? Not on your life. It merely is the end of the first phase of the boom, the investment phase that has caused so much pain to the non-mining sector of the economy as the rampaging Australian dollar has battered manufacturing and service industries.

The second phase is destined to last for decades. That extra mining capacity will result in vastly greater volumes of mineral and energy exports. And even though prices are well down on last year’s peak, historically they are still in the stratosphere.

For months, analysts and economists have been fretting that iron ore prices have dropped below $US120 a tonne. That is likely to cause problems for the higher-cost and more marginal operators, some of whom will be forced to shut down.

But cast your minds back a decade. That very same tonne of red dirt would have fetched just $US12. That’s right, one-10th of the price. And remember that BHP and Rio Tinto were making handsome returns back then on those same West Australian mines they’ve been busy expanding in recent years.

That agitation from shareholders to stop the expansions ultimately will put a floor under commodity prices by reducing estimates of future supplies of key raw materials.

And in the next few months, expect more of these kinds of announcements. Marginal coalmine developments and expansions also will be put on ice. For the global economy is in the midst of a slowdown, a contraction that is likely to last quite a few years as the debt crisis in Europe and America is slowly unwound.

What began as a problem in outlying states such as Greece has moved to the centre of the eurozone. Spain and Italy have been under attack by bond markets. And more worryingly, Germany – the engine room of the European economy – seems to be descending dangerously towards recession.

China has felt the chill winds of the European slowdown. This week there were further warnings that the Chinese slowdown is worsening. The once voracious appetite for Chinese exports has abated. And with Chinese authorities apparently reluctant to embark on a huge stimulus program, the short-term outlook for the miracle economy is less than robust.

America, meanwhile, is breathlessly awaiting a new round of stimulus spending, another round of money printing that ultimately will create greater debt and depress the value of the US dollar.

Farcical it might seem, but Wall Street traders secretly sweat that each new set of numbers on the US economy paints a picture of a nation and an economy in trouble.

Why? A stalling economy improves the chances that the US central bank will flood the economy with stimulus money. And given most of that stimulus is delivered through US bond markets, guess who makes a killing?

The short- to medium-term outlook for the global economy is anything but rosy. But there are some heartening developments. That Europe so far has muddled through – despite the incompetence of its lawmakers, bureaucrats and bankers – is enough to give hope.

A radical restructure of the European Union is inevitable. But whatever form that should take – nations such as Greece departing and other nations pulling closer together – the shock value from such changes has greatly diminished. So, too, have the chances of a huge meltdown of global finance.

Greece already has defaulted once. It was an orderly affair. But its debt position remains unsustainable regardless of what policy action is instituted. A further default or perhaps a eurozone exit could be accommodated.

Until recently, the response from eurozone leaders to contain the crisis has been characterised as ”too little, too late”. But the mood is shifting.

For the most part, Australia has been sheltered from the icy winds blowing through the global economy. Now that China is feeling the chill, we, too, will be affected.

But the Asian region remains an area with enormous growth potential. And Australia is well situated to benefit in the medium to longer term. There is no doubt that things are likely to get worse before they get better. But the fruits of the resources boom have yet to flow fully through the economy.

Don’t let anyone tell you otherwise.

This story Administrator ready to work first appeared on Nanjing Night Net.