Resource stock recovery BHP/RIO

[It's Snake Pliskin]

I dont think the US has the power economically or militarily to stop China from gaining dominance. Only time will tell, for the people in the game it will be very interesting over the next few years.

There's no question about the US military's might. To say China is a match for the US is ludicrous. The US has stated its goal is to remain technologically superior to any other country in the world. Economically China has a long way to go to even get close to Japan or the US. And then there is the implosion that will happen if the poor are not satisfied. There is a small percentage with money and power (growing) and millions and millions with nothing. It will be an interesting century!

 

[Investor]

....

... renewed talks about trade barriers against China (this if it happens, might have adverse impact on demand for commodities).

.....

Well. It has happened. The following announcement was made over the past 24 hours:

"The Bush administration, reacting to a flood of Chinese clothing imports since January, said that it would impose new quotas on cotton shirts, trousers and underwear."

This has potential ramifications for all mining company shares going forward.

If Europe follows, the implications for global trade barriers will have to go through the system. If trade barriers are imposed to any significant extent, the costs of goods sold increases, reducing demand for goods.

A potentially volatile week / weeks ahead. Seat belts and crash helmets on.

Mining company shares are not for the faint hearted. The volatility can be a roller coaster ride.

 

[Smurf1976]

Well. It has happened. This has potential ramifications for all mining company shares going forward.

...

A potentially volatile week / weeks ahead. Seat belts and crash helmets on.

Mining company shares are not for the faint hearted. The volatility can be a roller coaster ride.

I've been thinking for quite some time (2 or 3 years) that we were going to see a move towards protectionism in due course.

Also it is highly likely that China will suffer cyclical busts during its development since that's what has happened to everyone else - why would China be any different?

Agreed that this has implications for mining company (and for that matter practically all other) shares going forward, but what about the short term? I think that this issue is too complex for the market to digest it all on Monday. Fundamentals generally determine the long term but not the short term and I don't see any reason why this one would be different.

So, the big question is what to do right now? An argument for shorting mining stocks based on the overall economic picture and now this news too could be made. But what about the short term? Do we go up for a while, have we already seen the top etc.?

Any thoughts on what to expect next couple of weeks?

 

[ob1kenobi]

The charts for both BHP & RIO, especially using Bollinger Bands have been volatile for sometime now. I've been monitoring these two through my watch list and so far have held off buying. I'm not convinced that China is the answer, it may turn out to be a part of the puzzle rather than the solution. Tread with caution with resources stocks in the near term.

 

[Investor]

Yes, trade barriers are no surprise as the global imbalances do not lend towards any easy solutions. Indeed, talks of renewed trade barriers have gone on for some time now. The risk of course, is that increased trade barriers on a wider range of goods / services would add to inflation risk.

Mining shares are always volatile in the cyclical category. No surprises here either. The beta of BHP is around double that of WOW. Global exposure versus domestic oligopoly. No comparison. Part of the risk / return proposition.

BHP's SP went from around $8.30 to $19.50 in the past 2 years, in this cycle.

A bit more about the potential implications of trade barriers:

China May Retaliate Over Possible U.S. Textile Curbs (Update1)

May 14 (Bloomberg) -- China said it may retaliate against possible U.S. restrictions on Chinese textile imports, prompted by a recent increase in Chinese clothing shipments that is hurting U.S. producers.

``The Chinese government reserves the right to take further action within the framework of the WTO,'' the Commerce Ministry said on its Web site, citing spokesman Chong Quan. ``We urge the U.S. to correct the wrongdoing in order to avoid casting clouds over Sino-U.S. trade by abusing trade protection measures.''

The 2001 World Trade Organization agreement with China, under a category known as ``safeguard measures,'' allows members to impose limits on Chinese textile products if a sharp rise in imports disrupts their domestic markets. China's imports in the first quarter didn't cause disruption, the Chinese ministry said.

The U.S. Commerce Department yesterday instituted safeguard measures against three categories of products, including cotton shirts and trousers, and man-made fiber underwear from China. The measures would allow the U.S. to set a 7.5 percent cap on the growth of imports from China. The restrictions may be put in place by the end of the month.

The U.S. move comes less than five months after a four- decade-old system of global quotas on textile trade ended, and at a time of rising political pressure in the U.S. to compel China to revalue its currency and reduce its trade surplus. It's likely to be welcomed by U.S. producers who say they are being undersold and opposed by retailers seeking access to cheaper goods.

Import Surge

Monthly data released earlier this year showed an immediate increase in garment shipments into the U.S. from China after the quota system ended Dec. 31. Imports of trousers increased 1,500 percent in the first three months of this year from the same period in 2004. Knit shirts were up 1,250 percent and underwear imports tripled, the Commerce Department reported last month.

``We're in a tough situation right now with regard to textiles, and the increase in Chinese imports, I think, constitutes such a dramatic change,'' U.S. Trade Representative Robert Portman said in an interview a few hours before the new limits were announced.

The threat of U.S. curbs ``runs counter to the basic spirit of trade liberalization, damages the interest of Chinese enterprises and severely undermines the confidence of Chinese enterprises and the general public in post-WTO international trade,'' the Chinese Commerce Ministry said. ``It's a very bad precedent, and will severely harm multilateral trade systems.''

Dialogue Urged

Chinese Vice Premier Wu Yi urged the U.S. to solve the textile dispute through dialogue, after meeting U.S. Ambassador to China Clark Randt in Beijing yesterday.

``The Chinese side always seeks to resolve trade problems through consultation and avoid mixing trade and economic issues with politics,'' Wu was quoted as saying by the Communist Party newspaper People's Daily today, before the Commerce Ministry statement was released.

The U.S. decision was based on both proven ``market disruption and threat of market disruption,'' the Commerce Department said in a statement on its Web site. The move may help the Bush administration stave off calls from lawmakers and companies for more protectionist measures.

``It's clear that the U.S. government had no choice but to act,'' said Lloyd Wood, a spokesman for the American Manufacturing Trade Action Committee, a textile company coalition that filed a complaint last year asking for caps on Chinese imports.

Yuan Peg

The move also comes at a time when China is reportedly considering revaluing its currency. China pegs the value of the yuan at 8.3 per dollar, a rate some say is artificially low, giving Chinese exporters an unfair price advantage that undercuts profits and jobs in U.S. manufacturing industries.

European countries also are demanding restrictions on Chinese textile exports. The French government urged the European Union two weeks ago to curtail a 60-day investigation into a surge in clothing imports, and six other nations including Spain and Italy joined the call for emergency action.

EU Trade Commissioner Peter Mandelson said on May 12 it's ``imperative'' that China explain what it intends to do to curb the flood and avoid sanctions. Mandelson told the European Parliament he's still considering the French request for accelerated action.

Chinese Premier Wen Jiabao told three visiting EU foreign ministers on May 11 that China understood their concerns and pledged his nation would take further steps to prevent ``excessive growth'' in textile exports, according to the government's Xinhua News Agency. He didn't specify what steps.

Understandable Concerns

``It's understandable that the U.S. and EU have concerns over their industries, but the way they do this is a bit too mandatory,'' said Wang Xiaohong, an analyst at Beijing Orient Agribusiness Consultants Ltd., an affiliate of China's Ministry of Agriculture. ``China has agreed to cut exports to address this concern. I don't think this would effectively curb China's exports because we have other markets to sell to. Low labor costs in China are still a big advantage.''

Still, China's textile producers are worried about the repercussions. ``We are suffering a big headache after beginning to lose orders to our competitors in other countries since April,'' said Liu Qiong, chairwoman of Shanghai Hejing Textile Co., whose exports of shirts, socks and other clothing to the U.S. doubled in the first three months of the year. ``Our U.S. customers have refused to give us orders for the second half because of the trade risks.''

Cotton Trousers

Cotton trousers, a category affected by the U.S. action, is the single-largest textile and apparel import category in the U.S., worth about $11.3 billion in 2004, according to the U.S. office of textile and apparel.

U.S. companies that rely on apparel from China include Wal- Mart Stores Inc., Gap Inc. and Perry Ellis International Inc., according to a March 18 report from Wachovia Securities analyst Joseph Teklits, who's based in Baltimore.

Wal-Mart, the world's largest retailer, was expecting to save 12 percent to 15 percent on apparel costs this year with the removal of the decades-old quota system, Teklits said.

``A basic fact is that China's fairly cheap products are welcomed by U.S. consumers and have helped lower the living costs of U.S. families,'' Chinese Commerce Minister Bo Xilai was quoted as saying today in the government-owned Beijing Youth Daily.

 

[Investor]

I read the following article some time ago. As there has been some related discussion on this thread, on China's impact on the global economy and hence the ramifications for the mining sector in Australia, I decided to post the lengthy article here.

The real 'China threat'
By Chalmers Johnson

I recall 40 years ago, when I was a new professor working in the field of Chinese and Japanese international relations, that Edwin O Reischauer once commented, "The great payoff from our victory of 1945 was a permanently disarmed Japan." Born in Japan and a Japanese historian at Harvard, Reischauer served as US ambassador to Tokyo in the administrations of presidents John Kennedy and Lyndon Johnson. Strange to say, since the end of the Cold War in 1991 and particularly under the administration of George W Bush, the United States has been doing everything in its power to encourage and even accelerate Japanese rearmament.

Such a development promotes hostility between China and Japan, the two superpowers of East Asia, sabotages possible peaceful solutions in those two problem areas, Taiwan and North Korea, left over from the Chinese and Korean civil wars, and lays the foundation for a possible future Sino-American conflict that the United States would almost surely lose. It is unclear whether the ideologues and war lovers of Washington understand what they are unleashing - a possible confrontation between the world's fastest-growing industrial economy, China, and the world's second-most-productive, albeit declining, economy, Japan; a confrontation that the United States would have caused and in which it might well be consumed.

.......The major question for the 21st century is whether this fateful inability to adjust to changes in the global power structure can be overcome. Thus far the signs are negative. Can the United States and Japan, today's versions of rich, established powers, adjust to the re-emergence of China - the world's oldest continuously extant civilization - this time as a modern superpower? Or is China's ascendancy to be marked by yet another world war, when the pretensions of European civilization in its US and Japanese projections are finally put to rest? That is what is at stake.

China, Japan and the United States are the three most productive economies on Earth, but China is the fastest-growing (at an average rate of 9.5% per annum for more than two decades), whereas both the US and Japan are saddled with huge and mounting debts and, in the case of Japan, stagnant growth rates. China is today the world's sixth-largest economy (the US and Japan being first and second) and America's third-largest trading partner after Canada and Mexico. According to Central Intelligence Agency (CIA) statisticians in their Factbook 2003, China is actually already the second-largest economy on Earth measured on a purchasing-power-parity basis - that is, in terms of what China actually produces rather than prices and exchange rates. The CIA calculates the United States' gross domestic product (GDP) - the total value of all goods and services produced within a country - for 2003 as US$10.4 trillion and China's as $5.7 trillion. This gives China's 1.3 billion people a per capita GDP of $4,385.

Between 1992 and 2003, Japan was China's largest trading partner, but in 2004 Japan fell to third place, behind the European Union and the United States. China's trade volume for 2004 was $1.2 trillion, third in the world after the US and Germany, and well ahead of Japan's $1.07 trillion. China's trade with the US grew some 34% in 2004....

The truly significant trade development of 2004 was the EU's emergence as China's biggest economic partner, suggesting the possibility of a Sino-European cooperative bloc confronting a less vital Japanese-American one. As the Financial Times observed, "Three years after its entry into the World Trade Organization [in 2001], China's influence in global commerce is no longer merely significant. It is crucial." For example, most Dell computers sold in the US are made in China, as are the digital-video-disc players of Japan's Funai Electric Co. Funai annually exports some 10 million DVD players and television sets from China to the United States, where they are sold primarily in Wal-Mart stores. China's trade with Europe in 2004 was worth $177.2 billion, with the United States $169.6 billion, and with Japan $167.8 billion.

China's growing economic weight in the world is widely recognized and applauded, but it is China's growth rates and their effect on the future global balance of power that the US and Japan, rightly or wrongly, fear. The CIA's National Intelligence Council forecasts that China's GDP will equal Britain's in 2005, Germany's in 2009, Japan's in 2017, and the United States' in 2042. But Shahid Javed Burki, former vice president of the World Bank's China Department and a former finance minister of Pakistan, predicts that by 2025 China will probably have a GDP of $25 trillion in terms of purchasing power parity and will have become the world's largest economy, followed by the United States at $20 trillion and India at about $13 trillion - and Burki's analysis is based on a conservative prediction of a 6% Chinese growth rate sustained over the next two decades. He foresees Japan's inevitable decline because its population will begin to shrink drastically after about 2010. Japan's Ministry of Internal Affairs reports that the number of men in Japan already declined by 0.01% in 2004; and some demographers, it notes, anticipate that by the end of the century the country's population could shrink by nearly two-thirds, from 127.7 million today to 45 million, the same population it had in 1910.

By contrast, China's population is likely to stabilize at approximately 1.4 billion people and is heavily weighted toward males. (According to Howard French of the New York Times, in one large southern city the government-imposed one-child-per-family policy and the availability of sonograms have resulted in a ratio of 129 boys born for every 100 girls; 147 boys for every 100 girls for couples seeking second or third children. The 2000 census for the country as a whole put the reported sex ratio at birth at about 117 boys to 100 girls.) Chinese domestic economic growth is expected to continue for decades, reflecting the pent-up demand of its huge population, relatively low levels of personal debt, and a dynamic underground economy not recorded in official statistics. Most important, China's external debt is relatively small and easily covered by its reserves; whereas both the US and Japan are approximately $7 trillion in the red, which is worse for Japan, with less than half the US population and economic clout.

Ironically, part of Japan's debt is a product of its efforts to help prop up America's global imperial stance. For example, in the period since the end of the Cold War, Japan has subsidized America's military bases in Japan to the staggering tune of approximately $70 billion. Refusing to pay for its profligate consumption patterns and military expenditures through taxes on its own citizens, the United States is financing these outlays by going into debt to Japan, China, Taiwan, South Korea, Hong Kong and India. This situation has become increasingly unstable as the US requires capital imports of at least $2 billion per day to pay for its governmental expenditures. Any decision by East Asian central banks to move significant parts of their foreign-exchange reserves out of the US dollar and into the euro or other currencies to protect themselves from dollar depreciation would produce the mother of all financial crises.

Japan still possesses the world's largest foreign-exchange reserves, which at the end of January stood at around $841 billion. But China sits on a $609.9 billion pile of dollars (as of the end of 2004), earned from its trade surpluses with the US. Meanwhile, the US government and Japanese followers of George W Bush insult China in every way they can, particularly over the status of China's breakaway province, the island of Taiwan. The distinguished economic analyst William Greider recently noted, "Any profligate debtor who insults his banker is unwise, to put it mildly ... American leadership has ... become increasingly delusional - I mean that literally - and blind to the adverse balance of power accumulating against it."

The Bush administration is unwisely threatening China by urging Japan to rearm and by promising Taiwan that, should China use force to prevent a Taiwanese declaration of independence, the US will go to war on its behalf. It is hard to imagine more shortsighted, irresponsible policies, but in light of the Bush administration's Alice in Wonderland war in Iraq, the acute anti-Americanism it has generated globally, and the politicization of America's intelligence services, it seems possible that the US and Japan might actually precipitate a war with China over Taiwan.

......America's intention is to turn Japan into what Washington neo-conservatives like to call the "Britain of the Far East" - and then use it as a proxy in checkmating North Korea and balancing China. On October 11, 2000, Michael Green, then a member of Armitage Associates, wrote, "We see the special relationship between the United States and Great Britain as a model for the [US-Japan] alliance." Japan has so far not resisted this US pressure since it complements a renewed nationalism among Japanese voters and a fear that a burgeoning capitalist China threatens Japan's established position as the leading economic power in East Asia. Japanese officials also claim that the country feels threatened by North Korea's developing nuclear and missile programs, although they know that the North Korean standoff could be resolved virtually overnight - if the Bush administration would cease trying to overthrow the Pyongyang regime and instead deliver on US trade promises (in return for North Korea's agreement to give up its nuclear-weapons program). Instead, on February 25, the State Department announced that "the US will refuse North Korean leader Kim Jong-il's demand for a guarantee of 'no hostile intent' to get Pyongyang back into negotiations over its nuclear-weapons programs". And on March 7, Bush nominated John Bolton to be US ambassador to the United Nations even though North Korea has refused to negotiate with him because of his insulting remarks about the country.

......Koizumi has appointed to his cabinets over the years hardline anti-Chinese, pro-Taiwanese politicians. Phil Deans, director of the Contemporary China Institute in the School of Oriental and African Studies, University of London, observes, "There has been a remarkable growth of pro-Taiwan sentiment in Japan. There is not one pro-China figure in the Koizumi cabinet." Members of the latest Koizumi cabinet include Defense Agency chief Yoshinori Ono and Foreign Minister Nobutaka Machimura, both ardent militarists; Machimura is a member of the right-wing faction of former prime minister Yoshiro Mori, which supports an independent Taiwan and maintains extensive covert ties with Taiwanese leaders and businessmen.

Taiwan, it should be remembered, was a Japanese colony from 1895-1945. Unlike the harsh Japanese military rule over Korea from 1910-45, it experienced relatively benign governance by a civilian Japanese administration. The island, while bombed by the Allies, was not a battleground during World War II, although it was harshly occupied by the Chinese Nationalists (Chiang Kai-shek's Kuomintang) immediately after the war. Today, as a result, many Taiwanese speak Japanese and have a favorable view of Japan. Taiwan is virtually the only place in East Asia where Japanese are fully welcomed and liked.

......Meanwhile, Japan intends to upgrade its Defense Agency (Boeicho) into a ministry and possibly develop its own nuclear-weapons capability. Goading the Japanese government to assert itself militarily may well cause the country to go nuclear in order to "deter" China and North Korea, while freeing Japan from its dependency on the US "nuclear umbrella". Military analyst Richard Tanter notes that Japan already has "the undoubted capacity to satisfy all three core requirements for a usable nuclear weapon: a military nuclear device, a sufficiently accurate targeting system, and at least one adequate delivery system". Japan's combination of fully functioning fission and breeder reactors plus nuclear-fuel reprocessing facilities gives it the ability to build advanced thermonuclear weapons; its H-II and H-IIA rockets, in-flight refueling capacity for fighter bombers, and military-grade surveillance satellites assure that it could deliver its weapons accurately to regional targets. What it currently lacks are the platforms (such as submarines) for a secure retaliatory force in order to dissuade a nuclear adversary from launching a preemptive first strike.

.... Japan may talk a lot about the dangers of North Korea, but the real objective of its rearmament is China. This has become clear from the ways in which Japan has recently injected itself into the single most delicate and dangerous issue of East Asian international relations - the problem of Taiwan. Japan invaded China in 1931 and was its wartime tormentor thereafter as well as Taiwan's colonial overlord. Even then, however, Taiwan was viewed as a part of China, as the United States has long recognized. What remains to be resolved are the terms and timing of Taiwan's reintegration with the Chinese mainland. This process was deeply complicated by the fact that in 1987 Chiang Kai-shek's Nationalists, who had retreated to Taiwan in 1949 at the end of the Chinese civil war (and were protected there by the US 7th Fleet ever after), finally ended martial law on the island. Taiwan has since matured into a vibrant democracy and the Taiwanese are now starting to display their own mixed opinions about their future.

In 2000, the Taiwanese people ended a long monopoly of power by the Nationalists and gave the Democratic Progressive Party (DPP), headed by President Chen Shui-bian, an electoral victory. A native Taiwanese (as distinct from the large contingent of mainlanders who came to Taiwan in the baggage train of Chiang's defeated armies), Chen stands for an independent Taiwan, as does his party. By contrast, the Nationalists, together with a powerful mainlander splinter party, the People First Party headed by James Soong (Song Chuyu), hope to see an eventual peaceful unification of Taiwan with China. On March 7, the Bush administration complicated these delicate relations by nominating John Bolton to be the US ambassador to the United Nations. He is an avowed advocate of Taiwanese independence and was once a paid consultant to the Taiwanese government.

Last May, in a very close and contested election, Chen Shui-bian was re-elected, and on May 20, the notorious right-wing Japanese politician Shintaro Ishihara attended his inauguration in Taipei. (Ishihara believes that Japan's 1937 Rape of Nanking was "a lie made up by the Chinese".) Though Chen won with only 50.1% of the vote, this was still a sizable increase over his 33.9% in 2000, when the opposition was divided. The Taiwanese Ministry of Foreign Affairs immediately appointed Koh Se-kai as its informal ambassador to Japan. Koh has lived in Japan for some 33 years and maintains extensive ties to senior political and academic figures there. China responded that it would "completely annihilate" any moves toward Taiwanese independence - even if it meant scuttling the 2008 Beijing Olympics and good relations with the United States.

Contrary to the machinations of American neo-cons and Japanese rightists, however, the Taiwanese people have revealed themselves to be open to negotiating with China over the timing and terms of reintegration. On August 23, the Legislative Yuan (Taiwan's parliament) enacted changes in its voting rules to prevent Chen from amending the constitution to favor independence, as he had promised to do in his re-election campaign. This action drastically lowered the risk of conflict with China. Probably influencing the Legislative Yuan was the warning issued on August 22 by Singapore's new prime minister, Lee Hsien-loong: "If Taiwan goes for independence, Singapore will not recognize it. In fact, no Asian country will recognize it. China will fight. Win or lose, Taiwan will be devastated."

The next important development was parliamentary elections on December 11. President Chen called his campaign a referendum on his pro-independence policy and asked for a mandate to carry out his reforms. Instead he lost decisively. The opposition Nationalists and the People First Party won 114 seats in the 225-seat parliament, while Chen's DPP and its allies took only 101. (Ten seats went to independents.) The Nationalist leader, Lien Chan, whose party won 79 seats to the DPP's 89, said, "Today we saw extremely clearly that all the people want stability in this country."

Chen's failure to capture control of parliament also meant that a proposed purchase of $19.6 billion worth of arms from the United States was doomed. The deal included guided-missile destroyers, P-3 anti-submarine aircraft, diesel submarines, and advanced Patriot PAC-3 anti-missile systems. The Nationalists and James Soong's supporters regard the price as too high and mostly a financial sop to the Bush administration, which has been pushing the sale since 2001. They also believe the weapons would not improve Taiwan's security.

On December 27, mainland China issued its fifth Defense White Paper on the goals of the country's national defense efforts. As one longtime observer, Robert Bedeski, noted, "At first glance, the Defense White Paper is a hardline statement on territorial sovereignty and emphasizes China's determination not to tolerate any moves at secession, independence or separation. However, the next paragraph ... indicates a willingness to reduce tensions in the Taiwan Strait: so long as the Taiwan authorities accept the one-China principle and stop their separatist activities aimed at 'Taiwan independence', cross-strait talks can be held at any time on officially ending the state of hostility between the two sides."

..... If the United States and Japan left China and Taiwan to their own devices, it seems possible that they would work out a modus vivendi. Taiwan has already invested some $150 billion in the mainland, and the two economies are becoming more closely integrated every day. There also seems to be a growing recognition in Taiwan that it would be very difficult to live as an independent Chinese-speaking nation alongside a country with 1.3 billion people, 9.6 million square kilometers of territory, a rapidly growing $1.4 trillion economy, and aspirations to regional leadership in East Asia. Rather than declaring its independence, Taiwan might try to seek a status somewhat like that of French Canada - a kind of looser version of a Chinese Quebec under nominal central government control but maintaining separate institutions, laws and customs.

The mainland would be so relieved by this solution it would probably accept it, particularly if it could be achieved before the 2008 Beijing Olympics. China fears that Taiwanese radicals want to declare independence a month or two before those Olympics, betting that China would not attack then because of its huge investment in the forthcoming Games. Most observers believe, however, that China would have no choice but to go to war because failure to do so would invite a domestic revolution against the Chinese Communist Party for violating the national integrity of China.

........ It has long been an article of neo-con faith that the US must do everything in its power to prevent the development of rival power centers, whether friendly or hostile. After the collapse of the Soviet Union, this meant they turned their attention to China as one of the United States' probable next enemies. In 2001, having come to power, the neo-conservatives shifted much of the US's nuclear targeting from Russia to China. They also began regular high-level military talks with Taiwan over defense of the island, ordered a shift of US Army personnel and supplies to the Asia-Pacific region, and worked strenuously to promote the remilitarization of Japan.

On April 1, 2001, a US Navy EP-3E Aries II electronic spy plane collided with a Chinese jet fighter off the south China coast. The US aircraft was on a mission to provoke Chinese radar defenses and then record the transmissions and procedures the Chinese used in sending up interceptors. The Chinese jet went down and the pilot lost his life, while the US plane landed safely on Hainan Island and its crew of 24 spies was well treated by the Chinese authorities.

It soon became clear that China was not interested in a confrontation, since many of its most important investors have their headquarters in the United States. But it could not instantly return the crew of the spy plane without risking powerful domestic criticism for obsequiousness in the face of provocation. It therefore delayed for 11 days until it received a pro forma US apology for causing the death of a Chinese pilot on the edge of the country's territorial airspace and for making an unauthorized landing at a Chinese military airfield. Meanwhile, the US media had labeled the crew as "hostages", encouraged their relatives to tie yellow ribbons around neighborhood trees, hailed the president for doing "a first-rate job" to free them, and endlessly criticized China for its "state-controlled media". They carefully avoided mentioning that the United States enforces around the country a 200-mile aircraft-intercept zone that stretches far beyond territorial waters.

On April 25, 2001, during an interview on national television, President Bush was asked whether he would ever use "the full force of the American military" against China for the sake of Taiwan. He responded, "Whatever it takes to help Taiwan defend herself." This was US policy until September 11, 2001, when China enthusiastically joined the "war on terrorism" and Bush and his neo-cons became preoccupied with their "axis of evil" and making war on Iraq. The United States and China were also enjoying extremely close economic relations, which the big-business wing of the Republican Party did not want to jeopardize.

The Middle East thus trumped the neo-cons' Asia policy. While the Americans were distracted, China went about its economic business for almost four years, emerging as a powerhouse of Asia and a potential organizing node for Asian economies. Rapidly industrializing China also developed a voracious appetite for petroleum and other raw materials, which brought it into direct competition with the world's largest importers, the US and Japan.

By the summer of 2004, Bush strategists, distracted as they were by Iraq, again became alarmed over China's growing power and its potential to challenge US hegemony in East Asia. The Republican Party platform unveiled at its convention in New York in August proclaimed that "America will help Taiwan defend itself". During that summer, the US Navy also carried out exercises it dubbed "Operation Summer Pulse '04", which involved the simultaneous deployment at sea of seven of the United States' 12 carrier strike groups. A US carrier strike group includes an aircraft carrier (usually with nine or 10 squadrons of planes, a total of about 85 aircraft in all), a guided-missile cruiser, two guided-missile destroyers, an attack submarine, and a combination ammunition-oiler-supply ship. Deploying seven such armadas at the same time was unprecedented - and very expensive. Even though only three of the carrier strike groups were sent to the Pacific and no more than one was patrolling off Taiwan at a time, the Chinese became deeply alarmed that this marked the beginning of an attempted rerun of 19th-century gunboat diplomacy aimed at them.

This US show of force and Chen Shui-bian's polemics preceding the December elections also seemed to over-stimulate the Taiwanese. On October 26 in Beijing, then secretary of state Colin Powell tried to calm things down by declaring to the press, "Taiwan is not independent. It does not enjoy sovereignty as a nation, and that remains our policy, our firm policy ... We want to see both sides not take unilateral action that would prejudice an eventual outcome, a reunification that all parties are seeking."

Powell's statement seemed unequivocal enough, but significant doubts persisted about whether he had much influence within the Bush administration or whether he could speak for Vice President Cheney and Secretary of Defense Donald Rumsfeld. Early in 2005, Porter Goss, the new director of the CIA, Defense Secretary Rumsfeld, and Admiral Lowell Jacoby, head of the Defense Intelligence Agency, all told Congress that China's military modernization was going ahead much faster than previously believed. They warned that the 2005 Quadrennial Defense Review, the every-four-years formal assessment of US military policy, would take a much harsher view of the threat posed by China than the 2001 overview.

In this context, the Bush administration, perhaps influenced by the election of November 2 and the transition from Colin Powell's to Condoleezza Rice's State Department, played its most dangerous card. On February 19 in Washington, it signed a new military agreement with Japan. For the first time, Japan joined the US administration in identifying security in the Taiwan Strait as a "common strategic objective". Nothing could have been more alarming to China's leaders than the revelation that Japan had decisively ended six decades of official pacifism by claiming a right to intervene in the Taiwan Strait.

It is possible that, in the years to come, Taiwan itself may recede in importance to be replaced by even more direct Sino-Japanese confrontations. This would be an ominous development indeed, one that the United States would be responsible for having abetted but would certainly be unable to control. The kindling for a Sino-Japanese explosion has long been in place. After all, during World War II the Japanese killed approximately 23 million Chinese throughout East Asia - higher casualties than the staggering ones suffered by Russia at the hands of the Nazis - and yet Japan refuses to atone for or even acknowledge its historical war crimes. Quite the opposite, it continues to rewrite history, portraying itself as the liberator of Asia and a victim of European and US imperialism.

....... China and Iran already did a record $4 billion worth of two-way business in 2003. Projects included China's building of the first stage of Tehran's Metro rail system and a contract to build a second link worth $836 million. China will be the top contender to build four other planned lines, including a 30-kilometer track to the airport. In February 2003, Chery Automobile Co, the eighth-largest auto maker in China, opened its first overseas production plant in Iran. Today, it manufactures 30,000 Chery cars annually in northeastern Iran. Beijing is also negotiating to construct a 386-kilometer pipeline from Iran to the northern Caspian Sea to connect with the long-distance Kazakhstan to Xinjiang pipeline that it began building last October. The Kazakh pipeline has a capacity to deliver 10 million tons of oil to China per year. Despite US bluster and belligerence, Iran is anything but isolated in today's world.

The European Union is China's largest trading partner and China is the EU's second-largest trading partner (after the United States). Back in 1989, to protest the suppression of pro-democracy demonstrators in Beijing's Tiananmen Square, the EU imposed a ban on military sales to China. The only other countries so treated are true international pariahs such as Myanmar, Sudan and Zimbabwe. Even North Korea is not subject to a formal European arms embargo. Given that the Chinese leadership has changed several times since 1989 and as a gesture of goodwill, the EU has announced its intention to lift the embargo. Jacques Chirac, the French president, is one of the strongest proponents of the idea of replacing US hegemony with a "multipolar world". On a visit to Beijing in October, he said that China and France share "a common vision of the world" and that lifting the embargo will "mark a significant milestone: a moment when Europe had to make a choice between the strategic interests of America and China - and chose China".

In his trip to Western Europe in February, Bush repeatedly said, "There is deep concern in our country that a transfer of weapons would be a transfer of technology to China, which would change the balance of relations between China and Taiwan." In early February, the House of Representatives voted 411-3 in favor of a resolution condemning the potential EU move. The Europeans and Chinese contend that the Bush administration has vastly overstated its case, that no weapons capable of changing the balance of power are involved, and that the EU is not aiming to win massive new defense contracts from China but to strengthen mutual economic relations in general. Immediately after Bush's tour of Europe, the EU trade commissioner, Peter Mandelson, arrived in Beijing for his first official visit. The purpose of his trip, he said, was to stress the need to create a new strategic partnership between China and Europe.

Washington has buttressed its hardline stance with the release of many new intelligence estimates depicting China as a formidable military threat. Whether this intelligence is politicized or not, it argues that China's military modernization is aimed precisely at countering the US Navy's carrier strike groups, which would assumedly be used in the Taiwan Strait in case of war. China is certainly building a large fleet of nuclear submarines and is an active participant in the EU's Galileo Project to produce a satellite navigation system not controlled by the US military. The Defense Department worries that Beijing might adapt the Galileo technology to anti-satellite purposes. US military analysts are also impressed by China's launch, on October 15, 2003, of a spacecraft containing a single astronaut who was successfully returned to Earth the following day. Only the former USSR and the United States had previously sent humans into outer space.

China already has 500-550 short-range ballistic missiles deployed opposite Taiwan and has 24 CSS-4 intercontinental ballistic missiles (ICBMs) with a range of 13,000 kilometers to deter a US missile attack on the Chinese mainland. According to Richard Fisher, a researcher at the US-based Center for Security Policy, "The forces that China is putting in place right now will probably be more than sufficient to deal with a single American aircraft-carrier battle group." Arthur Lauder, a professor of international relations at the University of Pennsylvania, concurred. He said the Chinese military "is the only one being developed anywhere in the world today that is specifically configured to fight the United States of America".

The US obviously cannot wish away this capability, but it has no evidence that China is doing anything more than countering the threats coming from the Bush administration. It seeks to avoid war with Taiwan and the US by deterring them from separating Taiwan from China. For this reason, China's pro forma legislature, the National People's Congress, passed a law this month making secession from China illegal and authorizing the use of force in case a territory tried to leave the country.

The Japanese government, of course, backs the US position that China constitutes a military threat to the entire region. Interestingly enough, however, the Australian government of Prime Minister John Howard, a loyal ally of the United States when it comes to Iraq, has decided to defy Bush on the issue of lifting the European arms embargo. Australia places a high premium on good relations with China and is hoping to negotiate a free-trade agreement between the two countries. Canberra has therefore decided to support the EU in lifting the 15-year-old embargo. Chirac and German Chancellor Gerhard Schroeder both say, "It will happen."

The United States has long proclaimed that Latin America is part of its "sphere of influence", and because of that most foreign countries have to tread carefully in doing business there. However, in the search for fuel and minerals for its booming economy, China is openly courting many Latin American countries regardless of what Washington thinks. On November 15, President Hu Jintao ended a five-day visit to Brazil during which he signed more than a dozen accords aimed at expanding Brazil's sales to China and Chinese investment in Brazil. Under one agreement Brazil will export to China as much as $800 million annually in beef and poultry. In turn, China agreed with Brazil's state-controlled oil company to finance a $1.3 billion gas pipeline between Rio de Janeiro and Bahia once technical studies are completed. China and Brazil also entered into a "strategic partnership" with the objective of raising the value of bilateral trade from $10 billion in 2004 to $20 billion by 2007. President Hu said this partnership symbolized "a new international political order that favored developing countries".

In the weeks that followed, China signed important investment and trade agreements with Argentina, Venezuela, Bolivia, Chile and Cuba. Of particular interest, in December, President Hugo Chavez of Venezuela visited China and agreed to give it wide-ranging access to his country's oil reserves. Venezuela is the world's fifth-largest oil exporter and normally sells about 60% of its output to the United States, but under the new agreements China will be allowed to operate 15 mature oilfields in eastern Venezuela. China will invest about $350 million to extract oil and another $60 million in natural-gas wells.

China is also working to integrate East Asia's smaller countries into some form of new economic and political community. Such an alignment, if it comes into being, will certainly erode US and Japanese influence in the area. In November, the 10 nations that make up ASEAN (Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam), met in the Laotian capital Vientiane, joined by the leaders of China, Japan and South Korea. The United States was not invited and the Japanese officials seemed uncomfortable being there. The purpose was to plan for an East Asian summit meeting to be held next November to begin creating an "East Asia Community". Last December, the ASEAN countries and China also agreed to create a free-trade zone among themselves by 2010.

According to Edward Cody of the Washington Post, "Trade between China and the 10 ASEAN countries has increased about 20% a year since 1990, and the pace has picked up in the last several years." This trade hit $78.2 billion in 2003 and was reported to be about $100 billion by the end of 2004. As senior Japanese political commentator Yoichi Funabashi observed, "The ratio of intra-regional trade [in East Asia] to worldwide trade was nearly 52% in 2002. Though this figure is lower than the 62% in the EU, it tops the 46% of NAFTA [the North American Free Trade Agreement]. East Asia is thus becoming less dependent on the US in terms of trade."

China is the primary moving force behind these efforts. According to Funabashi, China's leadership plans to use the country's explosive economic growth and its ever more powerful links to regional trading partners to marginalize the United States and isolate Japan in East Asia. He argues that the United States underestimated how deeply distrusted it had become in the region thanks to its narrow-minded and ideological response to the East Asian financial crisis of 1997, which it largely caused. On November 30, Michael Reiss, the director of policy planning in the State Department, said in Tokyo, "The US, as a power in the Western Pacific, has an interest in East Asia. We would be unhappy about any plans to exclude the US from the framework of dialogue and cooperation in this region." But it is probably already too late for the Bush administration to do much more than delay the arrival of a China-dominated East Asian Community, particularly because of declining US economic and financial strength.

.....Why should China's emergence as a rich, successful country be to the disadvantage of either Japan or the United States? History teaches us that the least intelligent response to this development would be to try to stop it through military force. As a Hong Kong wisecrack has it, China has just had a couple of bad centuries and now it's back. The world needs to adjust peacefully to its legitimate claims - one of which is for other nations to stop militarizing the Taiwan problem - while checking unreasonable Chinese efforts to impose its will on the region. Unfortunately, the trend of events in East Asia suggests we may yet see a repetition of the last Sino-Japanese conflict, only this time the US is unlikely to be on the winning side.

(Source citations and other references for this article are available on the website of the Japan Policy Research Institute.)

Chalmers Johnson is president of the Japan Policy Research Institute. The first two books in his Blowback Trilogy - Blowback: The Costs and Consequences of American Empire, and The Sorrows of Empire: Militarism, Secrecy, and the End of the Republic - are now available in paperback. The third volume is being written.

 

[Investor]

In the BRW, 5/5/05, on page 25;

"According to statistics from the Australian Bureau of Agricultural and Resource Economics, total Australian minerals (including energy) exports will rise from $67.1 billion this financial year to $80.9 billion in 2005-06, and $81.8 billion in 2006-07. But, in 2007-08, they are projected to drop to $76.6 billion."

If these forecasts should prove close to accurate, BHP and Rio Tinto will continue to be "cash machines" and short term share price volatility (caused by a multitude of factors) will revert to fundamentals.

In recent times, I have read a few comments comparing the mining boom with the previous tech boom.

The world only needed one good search engine like Google (free plug ). The world did not need 1,000 search engines.

There is no comparison with mining resources. Without mining resources, there can be no production of goods. People cannot build things. Global human population is expected to rise from the current 6.3 billion (?) to 8 billion. A lot of mining resources will be required.

 

[mime]

I agree.

I think you should not listen to who ever compared the IT boom with the mining boom because the miners are acually making money while the IT stocks wern't.

I think the mining/energy stocks will turn aound. Well that's what I think.

 

[Smurf1976]

I agree.

I think you should not listen to who ever compared the IT boom with the mining boom because the miners are acually making money while the IT stocks wern't.

I think the mining/energy stocks will turn aound. Well that's what I think.

I was a bit early when I told my boss in 1998 that the NASDAQ was going to crash and that oil stocks were the go. Long term I agree with you but TIMING is the problem to which I keep having problems with. Always too early...

 

[Investor]

Today's harvest from the internet that I bring to you...... comments from someone who happens to be thinking what I have been thinking for the past few weeks (incidentally, I have been relaxed about current market volatility - over 20 years of experience has given me some confidence - whether such confidence is misguided or not)

Profiting From the Wall of Worry
By Doug Casey

In this article, I want to address what stage of the market cycle resource stocks are in, why, what’s likely next, and what you should do about it.

For pretty much all my adult life I’ve been a speculator. That is to say, someone with an appreciation for the relationship between risk and reward, an appreciation far too many people clearly don’t share.

Take for example, ostensibly conservative investments such as money market funds and T-bills. To my worldview, these are just bad jokes being played on the masses. Piling all your assets into increasingly worthless paper paying next to no interest is the financial equivalent of a death of a thousand cuts, guaranteeing that a large swath of the nation’s senior citizens will spend their golden years sporting paper caps while tossing fries. My view is that, certainly in today’s world, it’s much more prudent to risk 10% of your capital with a prospect of getting a 1,000% return than risk 100% of your capital for the prospect of a 10% (or less) return.

This brings me to the current market in natural resource stocks, a sector in which I have been an active investor for over 25 years. That’s enough time to have witnessed all manner of cycles and market action. As is to be expected, in the early years especially, I made mistakes, most attributable to the hubris of youth. On one memorable occasion, the error was serious enough that I felt the need to spend a day in bed pondering the magnitude of my losses.

But most humans (politicians and most economists being the exception) learn from their mistakes, and I learned from mine. As a direct consequence, I have made considerable money in the resource sector. Certainly enough to retire and hang out in upscale locales for the rest of my life, if that were my wont. (It’s not… as you read this, I’ve just returned from a rock-kicking expedition to a developing gold play in the boondocks of Columbia).

Further, I’m convinced that if I were wiped out tomorrow, I could start with a small grubstake and recoup most of my losses in a few years’ time. In fact, I believe I could do it even if I was airdropped into the Congo, with no money at all. And so could anyone with an entrepreneurial spirit, who knows the difference between something’s price and its value, and understands how to balance risk and reward.

But there’s no need to do anything exotic, starting with nothing. A relatively small amount of money, skillfully deployed in the right market at the right time, can compound quickly.

With that in mind, perhaps the most critical thing for people now in resource stocks is to examine the nature of bull markets. Many believe that, since resource stocks have had such a big move since their absolute bottoms in the 2000-2002 period, the bull market is, if not over, at least long in the tooth.

I don’t think so. And the reason goes back to an understanding of the way bull markets work””at least major, secular bull markets. They generally have three stages: 1) Stealth, 2) Wall of Worry, and 3) Mania.

THE STEALTH PHASE

The best time to buy in any market is when shares can be purchased on the basis of value alone. Of course that’s generally only possible when nobody wants to own them because they’ve been so beaten up in the previous bear market. It’s then, when people are most bearish, that new bull markets are born””quietly, unbeknownst to almost anyone. That’s why I term the first stage the Stealth phase: It’s there, but nobody can see it.

In the case of mining stocks, the bottom came between early 2000 and mid 2002, when few investors were even aware that a market in resource stocks existed any longer. It was so beat up that many companies were selling for less than their cash in the bank. Every week, several would change their names, roll back their stock, and make themselves over as dotcoms, or China telecom parts distributors, or some other then-fashionable fad business.

In March 2002, for instance, when the risk-averse investing masses wanted nothing to do with precious metals stocks, I wrote this in the International Speculator, (Vol. XXIII No. 3), complete with the uncharacteristically hyperbolic punctuation:

“Junior gold stocks are the most volatile securities on the planet, with the possible exception of lately minted Internet stocks, and the market is still off about 95% from its previous peak. THIS CONTINUES TO BE THE TIME TO BACK UP THE TRUCK. If I could call your broker for you, I would.

“What we're looking at is a rare opportunity, perhaps twice a decade in the resource stocks, to make a real killing. The last time it was this good was Jan 1993. In fact, now is actually the best time to buy gold stocks (and they're usually terrible things to hold) since 1971, when the dollar was devalued. Gold is now, in real terms, almost as cheap as it was at $35 back then; silver is considerably cheaper than it was at $1.29.”

Attentive subscribers joined me in making a lot of money by buying solid resource stocks while they were almost being given away. Another term I use for the Stealth phase is the “Easy Money” phase, because almost anything you buy in this stage will make you a lot of money, and with little actual risk””although perceived risk is very high.

Then, as is the nature of things, word got around and investors began rediscovering the resource stocks. Two things happened, as they always do.

One, a new wave of investors started pouring into the sector, eager to join in the fun and willing to throw money at any good story (and most are good stories… whether those stories are fact or fiction, is another matter).

Two, a new wave of resource companies were launched to meet the demand. Conference halls previously suitable for yodel practice filled up with clamoring hordes of cash-waving investors, who were met in force by resource company executives happy to relieve them of that cash.

Predictably, the tsunami of money””much of which hit the market in the second half of 2003””floated all boats, pretty much regardless of merit. The new money, however, put an end to the Stealth market. Early investors looked like financial geniuses and began to believe trees grow to the moon. Actually, they will””but not until the third stage of the bull market.

The flood of money also did one more thing: it provided the juice needed by the well-run companies to lock up new properties and fund the exploration required to come up with a find.

WALL OF WORRY

The approximate C$7 billion of IPO and Private Placement money that materialized over the last two years acted like a rainstorm in the desert, causing stock prices to blossom. There were quite a few that went up 1,000% and more. But stocks””especially mining exploration stocks””aren’t heirlooms, they’re highly volatile trading vehicles. Seeing momentum diminish, speculators with (sometimes) huge profits started selling to realize them. This led to the second stage of a bull market, commonly called the Wall of Worry stage. That’s where we’ve been for much of this year.

Periodically in 2004, and intensively so far in 2005, prices of most resource companies have been driven down, casting a dark cloud over the psychology of most investors and market observers.

People are worried for a number of reasons. Technicians fret about the huge run-up and subsequent loss of momentum; they wonder if the mining stocks aren’t about to go right back where they came from. Fundamentalists are concerned that (inevitably) higher interest rates will cause people to buy fewer new houses, cars, and other consumer goods; as demand falls, so would commodity prices. They worry that the boom in China will soon come off the rails. They worry that all the money that’s been raised will result in gigantic new supplies of metal, depressing prices. They worry that environmentalists will make it impossible to develop new properties at any price. They worry that feckless and bankrupt governments might nationalize good-looking discoveries, or tax them into unprofitability. They worry that new technologies will radically reduce the use of some metals, collapsing their prices. They worry that anything that can go wrong will go wrong. And they’re right””but their timing is wrong.

As a consequence, even good news out of a resource company is met with selling as investors decide to use any volume to liquidate positions in order to “watch from the sidelines”.

But in this stage, despite all the fear and sharp sell-offs, the market slowly climbs the Wall of Worry. It eventually digests selling from the profit-takers and the timid, as new buyers overwhelm them.

As a speculator, this phase of the market is almost as good as the Stealth phase, because while the easy money has been made, the big money is still ahead. It will come once the market enters the next phase, the Mania stage. That’s when the broad base of individual and institutional investors become convinced the market is going to the moon, pile in, and drive it half way to that destination. By positioning yourself in the right companies before the mania phase begins””and then having the intestinal fortitude to stay invested, and even buy more, through any periods of weakness””your investments can make you rich.

But you may be asking: Casey, what makes you so sure that this actually is a major secular bull market for the resource stocks?

There are lots of reasons. Enough that even a cursory discussion of them will take another article. But in brief, to refute some of the current Worries: We’re coming off the longest and deepest secular commodity bear market since the depression of the ‘30s. Commodity prices are still far closer to historic lows than historic highs, at least in “constant” dollars, which is what counts. The world economy is evolving away from the debt-burdened U.S. and towards China, India, and numerous smaller countries; their growth will be volatile, but it’s for real, and they’ll consume unbelievable amounts of raw materials in the coming years. There’s been very little mineral exploration for a full generation, the industry has come nowhere near replacing reserves, and a historic supply crunch in many commodities is in the making. Governments will always act stupidly, but the long-term trend is inevitably towards freer markets, higher standards of living””and higher resource consumption.

If I’m right about these things, and I’m confident that I am, then the current Wall of Worry will be followed by a mania.

MANIA

The fundamentals””although of a much different sort than we saw in the Stealth stage””will drive these stocks much, much higher when the third, the Mania stage hits. And thanks to the 1980-2000 bull market in the general stock market, everybody (probably even including most homeless people) now has a stock account. They know little about stocks except to get on board anything that seems to be headed up; they’re trend followers. The commodity story tells well, and a whole generation of investors are going to hear it for the first time. Remember, even during the secular resource bear market of 1980-2000, there were three spectacular cyclical bull markets in exploration stocks that took them up an average of 1,000% each time. The power behind the coming Mania phase will drive the resource stocks we are currently covering up like the contents of Hoover Dam trying to fit through a garden hose.

I expect the Mania stage to resemble what we saw with the Internet stocks in the late ‘90s.

WHAT TO DO NOW

If you are going to be successful as an investor in this phase of the market, you are going to have to suppress your fight-or-flight response and take the time to identify those companies with the goods: adequate financing, great management, realistic market capitalization, and solid properties in the right locations.

How long will you have to wait for your payoff? Not long. The typical exploration cycle lasts about two years, which means that 2005 and 2006 should see a stream of news as a result of all that money raised in 2003 and 2004. As far as the Mania stage, that will begin once people get over the Wall of Worry, likely triggered by a resumption of the downward trajectory of the U.S. dollar. I’d be surprised if it didn’t start materializing within the next year or so.

In the final analysis, it is the worrisome aspects of the current market””when you and everyone else are feeling on edge about the risk””that makes this such a good time to invest. People do dumb things when they are scared. Like sell great companies. Or sit on the sidelines, keeping their powder dry for a brighter day. And when the brighter day comes, they will do even dumber things, like spend twice, or ten times, the current ask for the same shares. They’ll be buying those shares from me. The key, if you agree with me that the long bear market of 1980-2000 is over and the new bull market has only gone through its first stage, is to buy when everyone is afraid (like now, while the market climbs the Wall of Worry), and sell when everyone is confident (in the coming Mania).

Finally, for the record, let me emphasize that if you don’t have a tolerance for risk, or a willingness to do enough homework to reduce the risk of falling for a good story without substance, you really shouldn’t be investing in this sector””any more than you should invest with money you can’t afford to lose. By definition, any investment that can turn dimes into dollars can also turn dollars into dimes if you aren’t attentive. This isnâ™t an arena for amateurs. Although I expect millions of complete amateurs will be in it over the next few years.

But if you can handle the risk, there is a very serious opportunity””and maybe the last in this cycle””for you to get well positioned in this “Wall of Worry” stage. Don’t miss it.

 

[DTM]

Thanks Investor, nice article. I'll be taking another look at resource stocks.

I also think this drop has largely been driven by fear but fear is good, it provides good waves to surf.

 

[It's Snake Pliskin]

Posted by Investor:

Today's harvest from the internet that I bring to you...... comments from someone who happens to be thinking what I have been thinking for the past few weeks (incidentally, I have been relaxed about current market volatility - over 20 years of experience has given me some confidence - whether such confidence is misguided or not)

Hi Investor,

Interesting article! I haven't found any thing like this under the bridge.

Your posts are always welcome, thanks.

 

[mime]

Yeah nice post investor.

The problem is cycles arn't always the same but I leant of predictions of what's going to happen and I'll keep it in mind.

 

[excalibur]

Dear Mr Investor,

May I express my compliments for your outstanding article.
I think that we have much more in common than only our avatar.
I see that you do your homework.
Be pleased to hearing more of you.

 

[Investor]

Hi DTM, Snake Pliskin, mime and excalibur;

Glad you enjoyed the article.

If I can spare the time, I might post more fundamental analysis about BHP and Rio Tinto in more precise terms.

excalibur, homework is part of the chess player's forte, yes (Oui, Oui).

En guard......

 

[DTM]

Metal prices seems to have stopped their free fall. I am trying to time my entry into BHP in line with metal prices on the LME, specifically copper and aluminium. I am also looking at oil, gold and the USD.

Is this a correct way to look at things? Or is there a better way of doing it?

Thanks in advance.

 

[markrmau]

As far as I am aware, the US statement on China/Yuan came after LME closed (??? Is this correct ???) What affect will this statement have on metal prices? Also, I note chineese bargain hunting at these lower metal prices suggesting temporarily oversold.

 

[Investor]

DTM and markrmau,

All global trading markets (equity, forex, bonds, commodities, oil) have been in a state of flux with volatility, due to the end of the carry trade and the unwinding of positions by many hedge funds.

Please see the thread "The Influence of Foreign Investors" for an indication and also read the latest aireview no. 59.

Mining shares are in the High Risk Industry sector, due to global exposure to supply and demand forces. There has been and will continue to be volatility with SP movements.

Views about trends over the next one to three years differ.

Bottom line is - if you want to place your investment money, you need to examine all the relevant information that you can get hold of and form your own decision. If the super mining cycle should prove accurate, then there is money to be made. Otherwise, depending on your time horizon for holding of any shares that you might buy, you will need to ride out the volatility, should the price move down.

I cannot and have no wish to give financial advice.

I continue to hold, but the bulk of my holdings were at the onset of the "lift off". I also see very little chance of BHP and Rio Tinto ever collapsing in any major way. I have always expected volatility because that is the nature of mining shares. Volatility does not bother me. I make my decisions on my own after doing considerable research. I know what the attendant risks are and I am willing to take those risks.

For you, if you are placing your money, just be sure that you are prepared to face the volatility. If volatility can cause you sleepless nights, the risk / return proposition is probably not your cup of tea or you are in too deep. Therein lies another potential solution - place a smaller sum that you feel more comfortable with, if that suits. Make your own decision.

 

[Investor]

A report from Macquarie:

Australian resource stocks have fallen sharply over the past four weeks due to fears that global economic growth may be slowing and that the Chinese government may crimp economic growth by moving towards a free-floating currency. While there is no doubt that demand is weaker than expected in the US and Europe, much of this appears to be the result of de-stocking of inventories. Macquarie believe that the current weakness in resource stocks represent an ideal opportunity to increase exposure to diversified heavy-weights such as BHP Billiton (BHP) and Rio Tinto (RIO). In the attached report Macquarie review the outlook for the resource sector.

Fears of a pronounced slowdown. With the OECD leading indicator moving into negative territory, a sharp sell-off in base metals, and a false Chinese currency revaluation scare combining to dent sentiment, resource stocks fell heavily last week.

Base metal shares were particularly hard hit, declining between 10–13% on average, although the diversifieds were also down 5–10%.

This resulted in louder cries of “it’s all over” as market commentary deftly switched from a stronger for longer theme to headlines proclaiming “the end of the supercycle”. What a difference just one quarter makes!

Never mind that the last supercycle persisted for at least 20 years as Japanese industrialisation proceeded apace. Consensus thinking already appears to believe that this supercycle is over and that China has passed its peak!

While there is no doubt that demand is weaker than expected in the US and Europe, there has been a substantial destocking effect and the very strong 1Q04 numbers (both OECD and China) make year-on-year (yoy) comparisons a little misleading.

From a longer term perspective, this would appear to be just the end of a normal IP cycle – of which there have typically been three within each of the last three to four economic cycles. After a period of consolidation over the next three to six months, we would therefore expect to see a pick up in growth again and an acceleration into 2006 as the next IP cycle gathers pace.

This scenario would suggest that resource stocks should stabilise at current levels, albeit with increased volatility in the short term as the “hot money” continues to exit. This would result in a sideways trading pattern over the near-term. As a result, there should be attractive opportunities to rebuild or increase positions at these lower levels, in anticipation of renewed outperformance into 2006.

Macquarie Research Equities Recommendation

Rio Tinto and BHP Billiton remain Macquarie’s preferred global resource picks, given their exposure to bulk commodity prices, their exceptional short term growth in profit and free cashflow, and the increasing quality of their earnings mix. Macquarie maintain Outperform recommendations on both BHP and RIO and 12-month share price targets of $20.00 and 50.00 respectively.

 

[Investor]

Super Cycle Favourites
May 19 2005 - Australasian Investment Review – (AIR)

In recent weeks commodity prices have come off the boil, a reflection of the increasing uncertainty about the sustainability of global economic growth.

Smith Barney Citigroup suggests such uncertainty is normal as the economic cycle is indeed maturing and commodity prices are approaching a peak. But investors shouldn’t jump off the bandwagon just yet, as the broker suggests commodity prices will continue to garner support from a combination of robust demand and supply constraints, meaning prices will in fact remain high by historical standards.

The broker published its half yearly update on the natural resources cycle. If anything, the update confirms the broker remains a true believer in the
‘Super Cycle’ thesis of base metal prices remaining stronger for longer while continuing to move in shorter cycles within this trend.

As a result the broker suggests the current environment will result in this cycle having a prolonged tail, as the strong demand coming from China in particular will be enough to cope with increased supply, which itself is being restrained by lengthening lead times in bringing new production to market.

Looking at the global picture, the broker highlights the importance of the US and China in the current cycle, as demand from both countries has been the driving force behind the rally in commodity prices.

As a result the broker has examined each country closely to identify a potential source of risk and an ongoing positive, which on balance support a continuation of the current higher commodity prices.

The ongoing positive (to no-one’s surprise) is China, even despite the threat of a revaluation of its currency, the renminbi (or yuan).

Indeed, the broker suggests a revaluation of the currency would actually be a positive for commodity markets as it would effectively make them cheaper for the Chinese, meaning there would be little impact on demand as the country’s demand for raw materials is primarily for domestic consumption anyway.

In the opposite corner, the broker believes the US has now become the centre of risk as there is the possibility of consumption, which has been the driver of US economic growth, collapsing.

The broker suggests such a collapse would be the result of de-stocking as demand slows. When demand accelerates early in a growth cycle consumers build inventory to support higher levels of output and in response to higher prices and concerns over availability.

However, as the cycle turns consumers then do the opposite and de-stock, increasing supply at the same time as demand is falling. The broker suggests that while this risk has increased recently the overall outlook for the US remains robust, particularly in the manufacturing sector.

On balance the broker is forecasting that while global growth is indeed likely to slow going forward, it should remain above long-term trend levels, raising the question of where investors should look to invest to maximise returns.

In terms of commodities, the broker continues to favour iron ore, coking coal and alumina in the bulks sector, and aluminium and zinc within the base metals suite.

Iron ore remains a core exposure as the broker expects the market to remain tight through 2008, with prices unlikely to decline over the next two years despite the potential for some short-term weakness due to high inventory levels in China as a result of increased exports to beat the introduction of recent higher contract prices.

Similarly, coal markets are benefiting from strong demand, with metallurgical coal supported by China’s shift from being an exporter to an importer and thermal coal being boosted by growing Indian demand.

On balance, the broker suggests the increased supply likely in coming years will be offset by demand growth, maintaining tight market conditions.

The broker continues to favour alumina and aluminium as supply constraints and policy moves in China to reduce capacity are likely to limit smelter output until at least 2007, with these moves expected to push the market into deeper deficit over the period.

With respect to zinc, the broker has become increasingly confident unreported stocks have been depleted, meaning the mine supply shortage will continue to be acute and ongoing, as there is no clear sign as to where
additional capacity may come from and scheduled production increases of 0.53mt annually are insufficient to meet increased demand.

In terms of commodity price forecasts the broker has made a number of changes, lowering previous estimates for both aluminium and zinc in 2005 but lifting forecasts for 2006 and in zinc’s case 2007 also.

Copper has also been modestly upgraded in 2005, while nickel has had more significant upgrades in both 2005 and 2006, though the broker remains bearish overall on its outlook.

Both thermal and PCI coal have benefited from the prices achieved for 2006 contracts, these benefits are expected to flow on to 2007 prices also.

Based on its sectoral preferences, SB Citigroup has outlined its key stock picks across its universe of stocks, with BHP Billiton (BHP) and Rio Tinto (RIO) on the list for their bulk leverage, production growth and capital management initiatives.

The broker rates both stocks Buy, Medium rRsk and notes if current spot prices were maintained it could potentially add 16% and 17% respectively to the broker’s earnings forecasts in 2006.

In BHP’s case the broker sees continued production growth as new projects come on stream, while its position in the lowest quartile in terms of operating
costs means its brownfields projects will be strong contributors to earnings.

For Rio Tinto, the broker notes that even if the company completed its full capital return to shareholders in 2005 its gearing would fall, a reflection of its strong cash flow. This suggests further capital management is possible going forward.

While noting Alumina (AWC) has a high P/E relative to the rest of the metals and mining sector, the broker suggests it is justified by virtue of the fact its
return on equity (ROE) continues to increase and it is entering into a phase of strong production growth from brownfields projects.

Both Centennial Coal (CEY) and Excel Coal (EXL) are forecast to generate increased earnings on the back of higher forecast thermal coal prices, while both stocks are expected to lift production in coming years as a result of both acquisitions and the development of new mines.

Unlike the other two coal plays, the broker doesn’t expect Macarthur Coal (MCC) to lift production over the next three years due to capacity constraints in terms of rail and shipping.

However, in the broker’s view the stock should be re-rated given it is currently trading on a P/E ratio of about 7x its FY06 forecast earnings while offering a yield of about 7%.

With respect to Iluka (ILU), the broker notes its Murray Basin project will be a major driver of volume growth in 2006, while increased exploration work is being undertaken at the company’s Eucla Basin prospect.