commodities boom 'to last'

Commodities boom 'to last'
From: By David Uren and David Nason (Australian)
April 20, 2006

THE commodity boom will be more powerful and last longer than expected, market economists said yesterday, amid evidence that world economic growth is also accelerating more quickly than expected.

The bold predictions underpinned the wave of buying across major global stock markets in the past 24 hours, sending local resource stocks firmly higher as gold, oil and copper reached record highs.

BHP Billiton led the way, surging almost 2 per cent for a 33 per cent rise in the past month, while second-ranked Rio Tinto added 2.7 per cent for a 23.5 per cent gain in four weeks.

The immediate catalyst for the increases this week is a report from China, which stated that its GDP rose by 10.2 per cent in the first quarter, compared with an official forecast that growth would slow to an average rate of 76.5 per cent.

Markets were also helped yesterday by the release of minutes from the last Federal Reserve Bank meeting, suggesting interest rates are near their peak. The minutes, taken at the first meeting run by new chairman Ben Bernanke, said most members of the central bank's Open Market Committee believed "the end of the tightening process was likely to be near".

They revealed a general consensus that inflation expectation measures were suggesting that underlying inflation was "not in the process of moving higher".

On Wall Street, the Dow Jones industrial average posted a rise of almost 200 points - its biggest one-day jump in a year.

The buying spilled over into Asia yesterday as the All Ordinaries added 32.9 points to finish at 5233.2, consolidating Tuesday's strong gains, and the Tokyo Stock Exchange's benchmark Nikkei-225 index rose 0.68 per cent, while Hong Kong's Hang Seng index gained 1.16 per cent.

Figures released by the International Monetary Fund yesterday show world growth will reach 4.9 per cent this year, as commodity prices rise by 10.2 per cent. When the IMF updated its economic outlook last September, it expected commodity prices to fall by 2.3 per cent and world growth to average only 4.3 per cent. It has sharply upgraded its growth estimates for China, India, Japan and Russia.

"The markets have been anticipating the global outlook would continue to improve and the IMF forecasts are consistent with that," Citigroup's Paul Brennan said yesterday.

"This means commodity price forecasts could be revised upwards as well. Throughout the last year, forecasts by commodity analysts were consistently exceeded by actual prices. We may not be at the end of these upward surprises," he said.

Merrill Lynch investment strategist Kerry Duce said world economic growth had been soft in the middle of last year, but started accelerating last August from a much higher base than expected. He said people who doubted the strength of this recovery were now changing their views.

"My view is that, fairly late in this recovery cycle, the doomsayers have been forced to capitulate."

He said that, until several months ago, the consensus forecast was that mining company profits would fall 3 per cent in 2006-07. That has now been revised to a rise of 9 per cent.

Analysts expect the rise in oil prices will only have limited adverse effect on isolated sectors, such as air travel.

ABN Amro equities strategist Greg Goodsell said the downturn in the retail sector last year was more a product of gloom over housing, rather than petrol prices.

Higher petrol prices were more likely to result in squeezed profit margins rather than higher inflation.

Macquarie Bank has upgraded its estimates for resource stocks, and does not believe the market has fully valued either BHP Billiton or Rio Tinto at current prices.

"There was a school of thought two or three months ago that the value of these stocks was stretched, but we have put through a 10 per cent increase in price targets on those two stocks," Macquarie private client adviser Joe Youssef said.

The rally in gold, at a 25-year high of $US624 an ounce yesterday, is helping the market, he added.

Although resource exporters had accepted lower prices on new coking coal contracts, he noted that spot prices for thermal coal were now just under $US50 a tonne, compared with estimates of $US40 a few months ago.