Friday, May 21, 2010

The West must try to age gracefully

HSBC's Stephen King says that the US should age gracefully in his latest book.  He is pointing to the tectonic shifts in global power that are evident in the the current financial crisis in Europe - which he says - just like the US - has borrowed too much money for too long (over 40 years of living on deficit budgets) and supporting an unsustainable way of life.

Will the Western Europeans with money (Scandinavians, Danes,  Dutch and Germans) bail out the rest of their colleagues in the EU if the USD950 billion bailout announced on May 9 by the EU Finance Ministers does not restore confidence in the Euro?  As Time magazine points out (May 24 2010, page 19) - this bailout amounts to a massive 8.2% of the EU Gross Domestic Product.

More voices all saying similar things (refer my earlier post about Standard Chartered Bank's commentary about the future being with countries with cash, commodities and creativity - or at least one of these).

The only countries with cash now are the Gulf States, Russia and the strong emerging nations of East Asia - lead by China.

Indeed, the West - at best - will do well to age gracefully!

Saturday, May 15, 2010

Super Tax - Super Silly?

I was recently in Geraldton - which is a dynamic regional centre about 1 hours flight north of Perth in Western Australia.  The town was historically wealthy from grain farming and fishing, but more recently the local economy is booming with the development of a handful of new mining companies and the commitment by industry and government to build a new deep water bulk commodity export port which will be known as Oakagee.

The sunset is looking over a new children's water playground on the foreshore - taken from my hotel balcony.  I remember staying at the same hotel ten years ago and trying to go to sleep over the sound of grain trains rumbling through the night along this same foreshore.  The town has relocated the railway to a new route behind the town and has created a new beach by trucking thousands of tons of sand to the foreshore - creating a beautiful seaside lifestyle with marinas, coffee shops and apartments.  This is wealth from mining and commodities, and the thing I like about Geraldton is that food production is still powering ahead in a complementary way.  The locals are developing an integrated economy.  And one of Australia's largest wind farm projects is just outside town.

With the financial rumbles in Europe the world is a buzz about Gold  as a store of value.  This is an article about the "Super Pit" gold mine in the town of Kalgoorlie in  Western Australia- which is apparently now one of the largest man made holes in the earth's crust (soon to be 3.6 km long and 650 metres deep) and also one of the world's richest deposits of gold.  Australia is the second largest producer of gold in the world after China and in 2009 Australia earned $17.5 billion dollars in revenue from gold sales.

You can check out the Google Earth Super Pit to see how big it is.

But all this wealth has now attracted the attention of the politicians trying to shore up government revenue streams.   Australian politics is currently dominated by the announcement by the Australian government that they intend to introduce a new "super profit" tax on mining companies in Australia.  This weekend the Australian  mining lobby is  running advertisements saying that if the tax is introduced, Australia will have the highest tax regime on resource extraction in the world at 58%.  And with an election due in Australia within 6 months or less - the main opposition party has responded by saying that it will abolish the "super tax".  The battlelines are drawn and it will be a fascinating contest.  But like all things political - the focus is on the short term and the spin.

My view?  We have the mineral and energy commodities the world needs now and should develop them in a sensible way - but instead of a super tax (which is fundamentally discriminatory and anti competitive) we should provide global best practice tax and capital investment incentives to attract capital investment into sustainable food, water and energy systems and research and development in these areas.

Look at the example of the Middle East Gulf economies - who know they are running out of energy  commodities and are aggressively investing in food, water and sustainable energy assets around the world.

A little town like Geraldton is starting to get its act together - is it too much to hope for our politicians to think past the short term and do the same?

Saturday, May 1, 2010

How lucky are we?

How lucky are we?
I snapped a iPhone photo of this graph from an Australian newspaper (Australian Financial Review) a few weeks ago and am now tracking down the sources cited.  In the meantime - living in Western Australia (WA) and looking at the effective Real Prices quoted - we would have to be thinking - how lucky are we to be sitting on significant quantities of mineral and energy resources and to be so close to the growing power of China and North Asia? The hype is huge and everyone in WA has stories of multi-million dollar contracts being let for roads and infrastructure and stories about rapidly escalating house prices and the congestion at Perth airport.  The share registries of our small and medium resources companies are being pored over by fund managers looking to get exposure to commodities in a politically safe environment.  This investment has included sovereign wealth money from China - similar to Chinese investments in energy and mineral assets in Africa and Latin America.
Yes - we are lucky to be here in this hot spot at this cycle in our history.  However, the problem with having lots of base metals is that other places have them too - and ultimately it is a price game in a market where more supply can be brought on very quickly.  And we have a high cost base compared to Africa and Latin America.
I am much much more excited by the upswing in the red curve - which tracks the rebound in demand for food commodities.  As Asia builds cities over it’s productive coastal agricultural land and starts to run out of water - this is where Australia’s competitive advantage will start to build sustainable value - because Australia is one of the most efficient sources of food production in the world - and without the benefit of government subsidy.  

Food and water assets don't yet excite the stock analysts - but they will.