Home' Australian Resources and Investment : September 2009 Contents AUSTRALIAN RESOURCES & INVESTMENT • SEPTEMBER 2009 • 35
Australia continues to be an important source of commodities
for China, as Sean Fenton, Director at Sydney s Tribeca
Investment Partners, tells Australian Resources and Investment.
China s growth has been very much driven by high levels of
fixed asset investment and a high level of steel intensity. Australia has
played an important role being one of the lowest cost producers in both
iron ore and coking coal as well as being geographically close to China.
However, despite China s evident need for Australian resources,
short-term investment in the commodities markets doesn t have such a
stable outlook, with the recent upsurge in commodity prices increasing
the likelihood of a period of market consolidation in the near future.
Caution should be exercised in the current market climate, as resource
stocks perform most impressively under conditions of expanded global
growth, as opposed to the recent slowed contraction of global growth
that brought about the latest upsurge in market value.
The forecast market consolidation will bring an end to the resource
stock rally that began in March. Additionally, export demand in China is
likely to remain weak in the short term as a result of the global
financial crisis, curtailing economic growth in the huge nation, and
lessening the Chinese import demand for Australian commodities.
As Fenton notes, while growth will rebound in the short term it
won t be sufficient to close the output gaps in OECD countries and
upside to commodity prices will be capped by excess capacity and
inventory. A lot of the good news already seems to be anticipated by
equity prices so some caution is warranted, particularly if China takes
its foot off the accelerator.
The slowing of US demand for Chinese-manufactured goods has
caused some to surmise that this deceleration will filter down, and
negatively affect Australia s export commodity market. But it s not all
bad news---according to ABARE, Although economic growth in China
and India has slowed, there are signs indicating that domestic demand
has been holding up. China is expected to be the first nation to
experience economic recovery, and the main stimulus to economic
growth in the global powerhouse is expected to come not from exported
goods manufactured in China, but from domestic demand, supported by
a considerable increase in infrastructure investment. This in effect
means that Australia s huge supplies of iron ore will not go unnoticed or
With the proposed deal between Chinalco and Rio Tinto falling
through in June, there was widespread concern that China would
withdraw its interest in Australia s resources, leaving the country with
none of China s significant investment capital. In fact, China s Ministry
of Commerce reportedly suggested that they would attempt to veto the
alliance between Rio Tinto and BHP---two of Australia s mining
heavyweights---that resulted from the failed Chinalco deal.
Experts, however, expressed the view that China would have a lot to
lose by cutting ties with Australia. Martin Ferguson, Federal Minister for
Resources, acknowledged China s disappointment at the time of the
failed deal, but also remained positive about China s continued interest
and investment in Australian resources, saying, we ll get through it,
because in the end, China needs our resources and Australia needs
China, because as we return to global growth, we are key to actually
fuelling China s growth opportunities and China s also the key to our
recovery, as are other traditional markets such as Japan and Korea.
It now seems that China is well aware of the importance of
fostering a good relationship between itself and Australia. Recently, in a
move that will bring reassurance to the Australian commodities market,
Chinese state-owned Yanzhou Coal Mining announced a new takeover
bid for Felix Resources, which is enough to indicate that China s need
for Australia s resources is stronger than its desire to punish the
commodities sector as a result of the failed Chinalco deal.
A similar deal between Yanzhou and Felix was brought to the table
in 2008, but shelved due to differences of opinion regarding the
company s value. With Felix Resources stock prices recovering from a
low of $4.75 in 2008, to reach $16.90 in early August of 2009, the two
groups are now said to have reached a deal---subject to Foreign
Investment Board approval---worth approximately $3.5 billion. This will
make the agreement China s biggest Australian acquisition to date, and
is a clear indication that China s eyes are not wandering from Australia s
Also consolidating this evidence of China s fidelity is Emergent
Resources July announcement of a partnership with China Metallurgical
Investment, to develop Emergent s Beyondie iron project in Western
Australia. As well as providing Emergent with a $200 million dollar cash
injection, this partnership, along with the more recent Felix transaction,
is a sign of China s enduring interest in Australia s commodities in spite
of the Chinalco/Rio Tinto issue in June.
Fenton acknowledges that Chinese interest in Australian
commodities is still present, but cautions that this may not always be
the case. I would expect them to still be looking for opportunities,
although the world is a large place and there is plenty of development
potential outside of Australia.
Russell Scrimshaw of Fortescue Metals remains optimistic about
Australia s future with China, noting that they have a backlog of orders
from Chinese steel mills; We still have a healthy order book out over
several months ... (and) feel quite positive about the medium term. But
improvements are going to happen in spikes.
For investors in Australia s resource sector, gold, iron ore and
energy are considered to be fairly safe investments. Developing nations
require an abundance of iron ore to substantially increase and improve
infrastructure, and the demand for the mineral will stay consistently
strong for the foreseeable future. Additionally, the value of gold remains
high while the US supply of paper money continues to grow. Energy
resources will be in high demand due to the continuing and worsening
constrained supply of oil.
Companies to watch, according to industry experts, are Atlas Iron,
Jabiru Metals and Gold One International. In the energy sector,
Oz Minerals mentioned as a company to keep an eye on. Investment
advisers encourage investors to properly research companies before
investing, ensuring that the company s mines have long lives and low
Fenton advocates investment in the energy sectors, notably
uranium and LNG [liquefied natural gas] in the short term, but iron ore
will still be very important for the next few years. Oil is the commodity
with the most significant supply constraints in the long term so I d
expect the whole energy complex to be the strongest performers.
of US demand
caused some to
will filter down,
affect Australia s
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