we're on the mining super-cycle
Pedal like mad, we're on the miner super-cycle By Alex Wilson January 20, 2006
THE Australian mining industry has had its most profitable year and, with the China-driven commodities boom defying predictions of a slowdown, the bar will be raised another notch in the coming 12 months.
Last year was supposed to be the year in which prices eased as supply began to catch up with demand and Chinese growth slowed to more normal levels. It did not happen and instead analysts decided the party was not yet over, and the commodities boom will be stronger for longer.
Daiwa Securities mining analyst Mark Pervan said that if forecasters had been told a year ago that Rio Tinto's share price would be $64, that the copper price would be $US2 a pound and gold would be more than $US500 an ounce, they would have laughed.
"The market, again, has been completely surprised on the upside — it completely underestimated the strength of the market," Pervan said.
"I think it underlines just how strong this Chinese growth story is."
Driving the sustained demand are the twin trends of rapid urbanisation and industrialisation in China. About 300 million people are expected to move from rural China to the cities over the next 15 years, urbanisation at a pace not seen before.
The breakneck speed of construction of housing and the growth of China's manufacturing sector are expected to drive demand for base metals for some time to come.
The most bullish of the bulls now believe we have entered a commodities super-cycle, like the ones driven by the United States in the 1950s and Japan in the 1960s, and that there will be a permanent step shift in prices.
The less excitable say commodity prices always move in cycles and have to come down eventually — the question is by how much and when?
Not in 2005-06 according to most analysts.
A survey of forecasts for the profits of the world's biggest miner tell the story.
BHP Billiton last year shattered Australian corporate records with its $US6.51 billion ($A8.6 billion) annual profit.
But that will seem like small change compared to the $US9 billion, give or take half a billion, that most analysts are forecasting for 2005-06.
The most dramatic signal that strong demand and prices were here to stay came in February when miners won a massive 71.5 per cent price hike in iron ore contract prices and 120 per cent for coking coal.
ABN Amro mining analyst Robert Clifford said the market was stunned.
"(The price rises) have never been that large and the market was so far off — most were looking for 30 per cent for iron ore," he said.
The new prices came into effect in April and, as a result, the Australian Bureau of Agricultural and Resource Economics has forecast that Australia's earnings from iron ore exports will soar 72 per cent to $14 billion in 2005-06.
The Chinese steel mills were stung by the price hikes and have moved to organise their fragmented industry into negotiating blocks.
But with demand still high, most analysts say the bargaining power is again with the producers, and forecasts are for another increase in the iron ore price of 10-20 per cent and for coking coal prices to hold or ease slightly.
Another factor keeping prices high last year was the slow increase in new supply.
Capacity constraints on the mining industry across the world have been worse than expected.
Traffic jams at transport hubs, shortages of crucial mining machinery and spiralling costs for labour and raw materials have frustrated miners keen to increase production and make hay while the sun shines.
Clifford says the pace of mergers and acquisitions has slowed since BHP Billiton swallowed up WMC Resources, and the major companies have held off as soaring share prices make potential targets expensive.
"But the big miners are cashed up and when the commodity prices fall there is going to be a feeding frenzy," he said.
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