This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/is-the-aussie-economy-about-to-get-a-surprise-boost-from-commodities-234122379.html
Is the Aussie economy about to get a surprise boost from commodities?
The commodity price cycle is turning into a major upside risk to the Australian economy into 2017. Since the low point at the start of the 2016, in US dollar terms, the iron ore price has risen 60 per cent, coking coal is up over 100 per cent, thermal coal up 45 per cent and even copper up 35 per cent and natural gas is up 10 per cent.
It is s boost that translates straight through to the bottom line profit of the mining companies, given that the Australian dollar is broadly unchanged in a broad 72 cents to 78 cents for the bulk of the year. This is despite the commodity price surge.
While most commodity prices remain well below the crazy peak levels around 2010 to 2012, the rise, if sustained or even built upon, the income flow and inflation effects will be strong.
Not only will the slump in national income be quickly reversed, but the government will be basking in ‘upside surprises’ to its revenue and will be rapidly moving to budget surplus, without lifting a policy finger to trim spending or adjust tax scales.
For mining companies and their share prices, the effect could be strong. During the last few years of dreadfully low commodity prices, many miners have trimmed or slashed their cost base. Their unit cost of production has fallen into what is now a climate of rising prices. A win-win as they say.
It is still early in this cycle, to be sure. Markets are fickle and China, the main source of demand of global commodities, is still negotiating its way through its economic problems.
There is, nonetheless a strong possibility that capital expenditure will find a floor and some previously postponed mining projects will all of a sudden be viable again. If this were to occur, it would be unlikely to show up in the next year – it is too soon.
It is an issue that if commodity prices continue to rise, it will impact mining investment in 2018 and beyond. For the RBA, the scenario is clear. The recent low inflation rate screams “rate cut”, but with commodity prices lifting this way, it may be cautious.
The commodity price upswing is certainly an issue that will always be a vital driver of a significant part of the business cycle in Australia.
Just as next to no one saw the start of the commodity boom in the early 2000s, the situation now is one where the price rises are frequently being discounted as a blip, an anomaly or a quirk based on stockpile levels or some other thing.
If China can turn its economy around, the US can lock in growth with a focus on infrastructure building and even the Eurozone, which is strengthening nicely, can sustain a more favourable growth outlook, demand for mining output will be strong and with that, prices surprisingly high.
We may not be there yet, but the recent price signals on a whole range of commodity prices suggest something is stirring.