China to remain top resources sector customer

THE CONFERENCE CALLER: Opening the first day of the Mining 2016 Conference in Brisbane, Morgans senior analyst and equity strategist Tom Sartor provided the audience with a dose of optimism for the immediate future.

Sartor told us that the light at the end of the recent resources sector tunnel is now shining brighter than it has been of late.

“It’s an absolutely fascinating times in markets – there’s a lot going on,” he said.

“The resources hangover, from what was the biggest boom in history, has been long and prolonged and there are several reasons as to why the recovery session has been prolonged.”

Sartor identified one of these reasons to be, what he labelled – “inherent industry optimism”.

“To be a miner you have to be optimistic by nature, and when prices are falling miners do tend to hang on as long as they can, not wanting to curtail supply and support price in an environment that might support their competitors,” he explained.

“The barriers to close production and shut a mine are somewhat prohibitive.

“It can be very costly to pay out contractors, to realise pension responsibilities, to rehabilitate mines and to close offices.”

There are also many factors beyond the domesticity of the Australian economy, which Sartor categorised into three sections.

The Good…where monetary policy settings remain accommodative, recovery of the US economy becomes entrenched, central governments begin doing whatever it takes to get things moving, and spare fiscal capacity in Asia.

The Bad…where we could see a gradual tightening of global credit, tepid global growth and inflation, unknown/unforeseen results from Brexit, speculative asset class bubbles, a high China-focused dependence, and slow Australian reform.

And, the potentially ugly…resulting in a disorderly re-balancing of capital markets, emerging market debt, a deflation threat, an Australian housing bubble, populist political movements, and whatever may emerge from Russia or the Middle East.

“After five years of industry pain we are starting to see a lot of fundamental signals starting to accumulate, but I would say this is very much reliant on your view of China,” Sartor said.

“The Chinese economy has had a couple of tough years, but in March the government enacted a few measures that have provided some stimulus and liquidity – their property market has bounced, and consumers have stepped up to prop up growth, although debt is still a concern.”

Sartor’s confidence in China’s ability to help the resources sector weather the current economic storm was supported by CRU / The Independent Authority consultant Allan Trench.

Trench told punters that although there had been a well-worn story regarding China with the major trends emerging being a rebalancing of the country’s economy, which, according to Trench, is actually a good thing.

“We are still seeing strong investment by the fastest growing consumer in the world…the Chinese consumer,” Trench said.

These combined with various other trends, which Trench highlighted as being:

Ongoing reforms – in matters such as corruption, air quality and state owned enterprises;
Ongoing deregulation & urbanisation;
Fiscal easing to avoid hard-landing;
Industrial slowdown, poor real estate sector, good auto performance;
Stock market volatility driving wider sentiment; and
Hard data ‘vacuum’ and a pessimistic global audience.

“Some of these are performing well at various points in time,” Trench explained.

“I think the challenges for us at times, as economists, is the difficulty of predicting quarter by quarter volatility, but overall we are not foreseeing a hard landing for the Chinese economy, instead we are seeing a smoothing of growth and a general rebalancing of the economy, which is the essence of our forecast going forward.”

With around 45 per cent of world consumption of major metals by China, Trench foresees key deficits in some of the larger markets Australia delivers to its major destination via seaborne trade and exports.

“There is a very rosy future for Australia’s resources sector in that regard, even on a slower head setting for China,” he said.

“Overall we are not out of the woods quite yet, although there are a few bright sparks on the horizon”