Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 241

Commodities rebound still running

Mining has always played a major role in Australia’s stock markets, from the first days of informal share markets in dusty mining towns in the early-mid 1800s and up to today. About every 30 years, there is an almighty mining boom when great fortunes are made quickly, followed by busts when fortunes are lost, and many long years waiting for the next boom.

China dominates demand

The most recent mining boom was driven by China’s surge in demand for the minerals it needed for its industrialisation, urbanisation and export manufacturing booms starting in the early 2000s. China quickly became the largest consumer in almost all industrial commodities in the world. Commodity prices soared as supply (exploration, development and bringing new mines into production) takes several years to catch up with surging demand.

The 2000s China-led mining boom was punctuated briefly by the GFC but thanks to China’s massive stimulus spending programmes to boost activity when the GFC crunched global trade, the mining boom went on to peak in April 2011 after the Fukushima tsunami. The Aussie dollar hit US$1.10 and BHP reached $50. Mining companies went on a wild debt-funded spending spree buying over-priced mines at the top of the market assuming prices would rise forever. They don’t.

Then supply caught up and overtook demand, as it always does. On the supply side, many of the mines developed early in the boom came into production. On the demand side, Chinese urbanisation reached 50% of the population and started to slow, and global demand for Chinese exports reduced in a lower spending post-GFC world. Chinese economic growth peaked at 14% in 2007 but by 2012 the growth rate had halved. Rising supply and slowing demand resulted in price falls and this is how all mining booms end.

Here is a price chart for Australia’s two largest exports: iron ore and steel.

Click to enlarge

The commodities price collapse ... and rebound

Prices of all industrial commodities collapsed by up to 80% in the four years following the 2011 peak. The price falls triggered losses and bankruptcies in miners, oil, gas and steel producers all over the world. These losses caused a global ‘earnings recession’ in the main developed markets including the US, UK, Europe and Japan, and triggered deep recessions and political crises in commodities producing emerging markets. The losses also flowed through to their bankers. Meanwhile Europe and Japan relapsed into recessions, and the collapse of the 2014-15 Chinese stock market bubble and housing boom raised fears of ‘hard landing’ in China, sending commodities prices even lower. The Aussie dollar followed the same path down.

The crisis ended when the Chinese government finally announced a range of new stimulus measures at the Peoples’ National Congress in March 2016, targeting 6.5% growth driven by deficit-funded infrastructure spending. This immediately turned around commodities prices, miners’ share prices and flowed through to rises in company profits and dividends over the past year. The Aussie dollar (and Australian share prices) followed the same path. In 2017, demand was supported by long-awaited signs of recovery in Europe and Japan and continued steady growth in the US.

In 2018, the AUD is now running into expensive territory again, but we see commodities prices remaining relatively firm this year.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

 

RELATED ARTICLES

BHP v Rio v Fortescue: it's all about the iron ore price

I will survive! Investing amid structural change

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.