SHARP falls in commodities prices, concerns about a slowdown in the Chinese economy and predictions of a breakup of the eurozone have sparked fears over risks to the strength of Australia's mining boom, leading to the biggest fall on the local sharemarket this year.
Global markets fell yesterday and the Australian market was down more than 2 per cent, led by BHP Billiton and Rio Tinto which sank to near three-year lows.
The dollar continued its slide, falling below US99? and at one point to its lowest for the year at US98.95?.
Commodities prices have fallen heavily since February, with key indices such as the Thomson Reuters/Jefferies CRB index at near two-year lows, having fallen 11 per cent since February.
Jac Nasser, the chairman of BHP, said the company would not proceed with all the $80 billion in new investment announced last year, raising questions about jobs creation. Its chief executive, Marius Kloppers, said yesterday that cash flows across the industry were lower than they were a year ago.
The chief executive of ANZ, Mike Smith, added his voice to concerns about a fallout from the ructions in Europe, saying a break-up of the eurozone was "quite likely". The former Treasury secretary Ken Henry predicted this week the eurozone would fail within six months.
The President of Greece, Karolos Papoulias, has said that almost ?1 billion ($1.28 billion) has been withdrawn from the country's banks since the May 6 elections, which had resulted in a failure to form a government.
Added to the continuing uncertainty over Europe, fresh concerns have emerged about the impact of China's plans to lower economic growth to a more sustainable 7 per cent annually, from 10 per cent.
Lower projected demand has hit commodity prices, forcing mining companies to weigh up the profitability of projects and investors to question their pricing of stocks.
Australian commodities companies have fallen heavily. BHP shares fell 4 per cent to $32.49, their lowest since July 2009. Rio Tinto fell 4 per cent to $57.99, their lowest since October 2009. BHP has fallen 10 per cent this month and Rio has fallen 12 per cent in the same period.
Other energy stocks followed suit yesterday, with Newcrest Mining falling $1.07 to $23.80. Fortescue Metals fell 26? to $4.84 and Origin Energy fell 22? to $12.93.
The benchmark S&P/ASX200 index has fallen 6.5 per cent in the past 12 trading days, closing yesterday at 4165, its low for the day. Markets in the region were awash with red. The Hong Kong exchange fell 3 per cent. Japan, Shanghai, Taiwan and South Korea all fell heavily.
Adding to those pressures, investors expect increased production from new mines commissioned at the peak of the boom to start coming online in the next few years, increasing supply and putting further downward pressure on commodities prices.
Investors fear the fall in commodities prices signals that the peak in Australia's terms of trade and the peak of the boom may have passed.
A fall in growth in China, which this week made it easier for banks to lend money and stimulate the economy, may spell concern for Australian investors.
"Risks to the commodity boom have increased," said the chief economist at AMP Capital Investors, Shane Oliver. "We are certainly seeing a commodities correction. The broader question is: is this the top of the boom that got under way at the end of last century?"
Inside
Resources boom turns
to gloom
Pages 6-7
Frequently Asked Questions about this Article…
Why did the Australian sharemarket experience a sharp fall?
The article says the local market plunged mainly because commodities prices fell sharply, there were worries about a slowdown in China's economy and predictions of a possible eurozone breakup. Global markets were down, and major miners such as BHP Billiton and Rio Tinto sank, dragging the S&P/ASX200 lower (the index had fallen 6.5% in the prior 12 trading days and closed at 4165).
How did BHP Billiton and Rio Tinto shares react to the market downturn?
According to the article, BHP shares fell about 4% to $32.49 — their lowest since July 2009 — and Rio Tinto fell about 4% to $57.99, their lowest since October 2009. The piece also notes BHP has fallen about 10% that month and Rio about 12% over the same period.
What role is China’s slowdown playing in falling commodity prices and mining stocks?
The article reports that China plans to lower growth to a more sustainable 7% from 10%, which reduces projected demand for commodities. That weaker demand has pushed key commodity indices (the Thomson Reuters/Jefferies CRB index was near two‑year lows, down about 11% since February), forcing miners to reassess project profitability and leading investors to reprice mining stocks.
How are European concerns affecting Australian markets and investor sentiment?
European uncertainty is adding pressure: executives in the article warned a eurozone breakup was possible (ANZ’s CEO said it was 'quite likely' and former Treasury secretary Ken Henry predicted failure). Greece was cited as an example, with its president saying nearly €1 billion had been withdrawn from banks since elections. Those concerns have pressured global risk appetite and weighed on Australian shares.
How did other Australian resource and energy companies perform in the sell-off?
The article notes a broad fall across resources and energy names: Newcrest Mining fell $1.07 to $23.80, Fortescue Metals fell to $4.84 (reported as a 26% drop), and Origin Energy fell to $12.93 (reported as a 22% drop), illustrating widespread weakness beyond the big miners.
What happened to the Australian dollar during the market turmoil?
The article says the Australian dollar continued to slide, falling below US99 cents and at one point reaching as low as about US98.95, reflecting currency weakness alongside the equity sell-off.
Is this a correction or the end of Australia’s resources boom?
The article quotes AMP Capital’s chief economist Shane Oliver saying risks to the commodity boom have increased and that the market is seeing a commodities correction. He raises the broader question of whether this marks the top of the long-running resources boom — a question investors are now weighing as prices and cash flows soften.
What should everyday investors watch next based on the article’s analysis?
Based on the article, investors should monitor commodity price trends (for example the CRB index), China’s growth and policy signals, developments in the eurozone (and any banking or political stress like the Greek withdrawals cited), company cash‑flow and project decisions (such as BHP’s investment plans), and broader market indicators like the S&P/ASX200 and the Australian dollar.
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