jumbo junction, page-16

base metals are getting smashed again, the hot money is well and truly gone

thankfully iron ore is physical supply and demand at work, if it softens at least a weak A$ works in our favour

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from the Australian

BHP, Rio insist resources will prosper
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Matthew Stevens | October 09, 2008

AUSTRALIA'S two biggest export earners, BHP Billiton and Rio Tinto, remain convinced that the secular shift in the global resources business will survive what the International Monetary Fund is now describing as "an epochal restructuring of the financial system".

Over the past week, as the price of terminal-traded metals such as copper, aluminium and nickel have been sucked into the black hole of the global financial crisis, both of Australia's duelling miners have confidently asserted that the core drivers of our national export prosperity remain dented but intact.

The miners remain relatively sanguine because they can look through the wreckage on equities and the terminal commodities markets and see mines, rail systems and ports still running at capacity.

This view contrasts starkly with the message from the bloodbath on international metals markets. Surely if copper, the most trend-indicative of the terminal metals, is nearly 40 per cent off recent highs, and a core material such as aluminium has slipped 30 per cent from recent price peaks, then core demand has to be under pressure?

Well, yes and no.

The daily traded metals markets have been driven along through the resources boom by tonnes of speculative capital. But that game of soldiers is over for now. The money that once washed through the metals markets is now seeking safer havens.
But Australia is a bulk commodity trader. Its riches are earned on products such as iron ore and coal, which are traded on long-term contracts with prices fixed over 12 months.

That means the record iron ore and coking coal prices that produced last week's record trade surplus will continue until at least April next year. And the producers are quietly confident that the new round of price negotiations, which begin later this month, will bring further appreciation.

While the queues of ships sitting outside Australia's major bulk commodity export harbours may be a bit shorter these days, they are still there.

Speaking to The Australian from London overnight, Rio Tinto's chief executive Tom Albanese said no one in the resources sector imagined they were immune from the global financial calamities. But he remained confident that China's demand for the raw materials of middle-class prosperity had created a "secular shift" in demand for resources.

"What we have been saying is that there has been a secular shift in the resources markets driven by Chinese demand," Albanese said. "Our normal business cycles will persist, as we saw with the exaggerated upwards cycle in 2007 and are seeing with this shift down now.

"But real, underlying shift in demand caused by China's emergence will be sustained over many decades. It is not going away. And that has changed the demand side of the resources business."

Just a week ago, Mr Albanese told a Melbourne audience that China was "pausing for breath" but that over the next 15 years demand for Rio Tinto's products would double, "sustained in large part by China".

On Tuesday BHP Billiton China president Clinton Dines made a similar point at a private briefing of analysts in Sydney.

Mr Dines said Chinese growth would come in at 9 per cent next year and noted that Australia's wealth creator needed to grow at 8per cent to maintain net employment which, in turn, underpins domestic demand.

His other key point was that net exports were not a major driver to the Chinese economy. Rather, economic growth was driven by investment in fixed assets and that was sustained by private savings rather than imported capital.

Exports, he said, contributed about 18 per cent to GDP last year. Mr Dines noted Asian customers generated 46 per cent of overall demand for China's exports while Europe accounted up to 24 per cent and North America just 21 per cent. His point is that China is not as leveraged to Western markets as some might imagine.