Miners defy great fall of China

Guess you've heard the resources boom is over. Kaput.

The sharemarket certainly noticed, though some time in the past month or so it quietly changed its mind.

Since the market is six to nine months ahead of the economy, perhaps it's decided the resources boom was just having a good lie-down.

Certainly as the news from China - the last economy standing - gets worse, the share prices of blue-chip mining stocks like BHP Billiton have been rising.

So far this year the mining index has increased by 5 per cent, which would be nothing to write home about except the rest of the market has fallen by about 7 per cent.

Do you remember all those silly statements being sprouted when we still had a boom, that it would be "stronger for longer" thanks to demand from China (which just goes to show that our miners are even more Sinocentric than the Chinese)?

In reality China, like us, had been riding on the coat tails of the US economic boom with a little help from the two other economic growth centres, Europe and Japan.

China imported raw materials from us and exported manufactured goods to the US. In fact it was an elaborate game of swapping capital for cheap goods. China got the capital, and the biggest foreign exchange reserves the world has ever seen, and everybody else got cheap clothing and plasma televisions.

But as soon as the US - the buyer of last resort - went under, the game was over and the dominoes came tumbling down.

So expecting China to rescue Australia's resources boom is grabbing the wrong end of the stick. I mean there's only so much 1.3 billion people can do.

What about de-coupling then?

The idea that China could run its own race through the sheer force of domestic demand never had legs, though it sure fooled a lot of people who should have known better.

Recall BHP Billiton's then-chief executive, Chip Goodyear, saying a couple of years ago that "many people look at China as an export economy. But if you look at growth in China, the domestic component of GDP, something like 94 per cent of it is actually domestic." Goodness knows where he got that from.

Suffice it to say that in what is still a very poor country, domestic spending was only made possible by China's windfall exports.

And in a global recession no single country stands a chance. Just ask Wayne Swan. No, perhaps not.

Anyway there are worrying signs that, if anything, China has been hit the hardest by the global downturn.

Although China posted a 6.8 per cent annual growth rate in the December quarter (itself only half that of a year ago, by the way) in those three months the economy hardly grew.

It's likely that the Chinese economy is contracting as we speak. In any event, the March quarter is seasonally the weakest because of the three-week shutdown for the Chinese new year.

So if China's out of the picture, what's left?

The economic outlook is glum. The US is in no fit state to be seen in public, with its still-broken banking system.

And the eurozone is even worse. Its banks were just as footloose and fancy free, even to the point of doing exactly the same things as their US peers - such as investing in American sub-prime mortgages - and goodness knows what they've been up to in eastern Europe.

Then there's Japan, which (it tends to be overlooked these days) happens to be Australia's biggest market for energy and resources.

The trouble is, the Japanese economy is in an even worse state than America's, though for differing reasons.

Where the US is suffering the effects that a collapse in property prices has had on its surprisingly fragile banking system, in Japan the problem is an ageing population and a gigantic public sector debt burden, though they'll both be sharing that problem soon enough.

The US central bank has ruled out a recovery from President Barack Obama's stimulus package until next year. There's no quick fix for the banks in Europe, and Japan just goes on getting older.

This rules out any economic lift for Australia this year. Which begs the question why resource stocks are showing signs of life again.

And it's not as if it's a case of first in recession, first out, either.

Banking stocks had already dragged the market down well before resources stocks like BHP Billiton took a big price hit (one it seems to be recovering from quite nicely, thank you).

No, the big resource stocks are picking up because they did something different in the height of the boom.

Or rather it's what they didn't do that was different. Remember all those reports about bottlenecks at the ports, how higher fuel prices were making it more expensive to commission new mines and complaints about the lack of rail infrastructure near sites?

Well they all happened, which shows how the resources boom was much more price-driven than volume-driven.

Partly through necessity but mostly due to smarter management this time around, the big producers were happy to leave rocks in the ground and let prices soar instead. That would have to be a miner's idea of nirvana.

It wasn't quite a case of the less you mine the more you make (there has been investment by the sector) but you still get the drift.

BHP Billiton even came under fire for being too conservative in not risking new ventures - though it wasn't a perfect record as it turned out - and for sitting on piles of money.

Fortunately for this country, the high cost of diesel made some competing mines uneconomic.

As a result, resource companies have gone into this recession without the financial burden of having commissioned new mines to be developed or opened, let alone producing too much for the market to bear. On the contrary, there's the real prospect of a shortage in supply with even a mild pick-up in the global economy.

Mind you it won't seem that way for a while.

Coal producers have just taken a 44 per cent hit from Japanese buyers and BHP will be lucky to negotiate a new contract price for iron ore next month that's half of last year's.

Even so, these cuts are from a high base and in one of the worst global recessions ever, base metal prices are still well above their long-term trend.

But that's just the real world.

It's what's going on in the paper world of currencies, derivatives and hedge funds that's especially intriguing.

You just have to take a look at the oil price in the middle of last year to see the degree of impact they can have.

Oil almost touched $US150 a barrel when the credit crisis was well under way and although we didn't know it then (but suspected it), the US had already been in recession for six months.

So the biggest oil guzzler is in the middle of a recession yet the price is, um, still managing to barrel out of the stratosphere.

Come to that, OPEC couldn't produce enough to keep up with demand.

In fact there was an oil bubble that, as the subsequent 70 per cent price drop proved, had nothing to do with fundamental demand.

Nor, incidentally, did it show that we'd reached the point of "peak oil", where there isn't enough to go around.

It was due to hedge funds and others speculating against the US dollar, which was dropping like a stone at the time.

So where did the oil go? On tankers lined up in the Atlantic and Mediterranean.

The point is that paper speculation can wreak havoc on the prices of commodities.

The joke is the Chinese steel mills were playing this same game and have been caught out with too much ore.

This speculation can take all sorts of forms but the most obvious is on the US dollar, only this time it's panic buying. The US might have been responsible for the banking crisis that triggered global recession but its currency is still seen as the safest place to be.

With the exception of gold, the rising US dollar is pulling down commodity prices. Since the US dollar itself is in a speculative bubble, it can only be a matter of time before this is reversed.