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Michael Pascoe
April 17, 2009 – 10:18AM

The commodities boom isn’t dead – it’s just resting. The commodities bubble is dead – and that’s a good thing. And just to make it a little confusing, China is playing a couple of curious hands in its long-term game of achieving resources security.

And that leaves the chances of the Australian economy suffering only a mild recession hanging tantalisingly over Wayne Swan’s head as he drafts next month’s budget.

There’s no shortage of headlines proclaiming not just that the commodities boom is over, but that we now have a dismal commodities crash. Plunging manganese prices are the latest exhibit, hard on the heels of lower coking coal prices and the on-going speculation about whether the key BHP and Rio iron ore contracts will settle 30 or 40% down on the 2008 year.

(Copper is proving a little problematical with its bounce of 40 to 49% from its lows, depending on what day you choose, but the pessimists are quick to say the price is still well below last year’s highs.)

But there’s a simple process that pricks the doomsayers bubble. First ask if Australia was enjoying a commodities boom in 2007 – the answer is “yes”. Then ask how the boom can be dead, extinct, kaput, an ex-boom, if prices in 2009 are above those of 2007.

That remains the furiously overlooked reality. The real story isn’t the collapse of prices in 2009, it’s that prices rode a ridiculous bubble in 2008 and have now returned to something more like healthy and normal.

The bubble was a lot of fun for those wanting to float an exploration company, the hedge funds that helped push up commodity prices and those who liked to play I-can-forecast-a-higher-oil-price-than-you-can, but it was a nonsense, by definition a bubble.

There were a clutch of projects and hopes built on the bubble being sustainable and they have been inevitably dashed. That happens with every bubble. But now some of the resources pessimism is in danger of being as equally nonsensical as last year’s optimism.

Certainly China is not behaving as if it believes the resources boom was all over red rover. If it did, it wouldn’t be suffering the hassles of whining Rio shareholders and nervous foreign investment review bodies, never mind the odour of propping up corrupt and criminal third world despots. And heavens knows there are easier ways to spy on Woomera.

China, like BHP, still has its eye on the long game – regaining what it sees as its rightful place at the centre of the universe. That requires on-going massive urbanisation – and raw materials.

Other emerging nations have their own ambitions that also require plenty of natural resources, but they lack China’s present ability and need to put their foot on them.

While today’s headlines might be about a dip in China’s latest quarterly GDP growth, Beijing remains on track to achieve greater growth in the long, medium and not-very-distant-at-all terms.

Along the way there is some confusion and plenty of room for speculation about what’s happening with raw material stockpiles as Chinese buying has been at odds with the GDP figures.

Copper the stand-out

Copper is the present stand-out metal, the extent of its bounce sending analysts in search of greater meaning. A UK Telegraph story canvases the possibility that the Middle Kingdom might be just buying commodities as an alternative to the fragile US dollar.

The paper quotes growing analyst opinion that there’s more to the Reds’ love of red metal than the present demand for copper wire.

The head of a Taiwanese commodities firm, Nobu Su, is quoted as saying the splurge is about Beijing trying to extricate itself from dollar dependency as fast as it can: “China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact and can cover their infrastructure for 50 years.

“The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources.”

I’d argue there’s nothing subtle about it at all.

The Telegraph also quotes Macquarie Bank and UBS commodity chiefs as supporting the currency and US Treasury diversification story and references the interest of the head of China’s central bank in establishing a world currency based on a basket of 30 commodities.

That’s getting rather exotic for a world order not capable of really doing much at the London G20 despite the seriousness of the immediate crisis, but it’s another interesting card to place upon the table.

The immediate interest for Australia are the green bamboo shoots beyond China’s latest GDP figures. The Reserve Bank governor alluded to them after his last board meeting. Reports of record vehicle sales in China last month along with the commodities demand and bank lending are enough to keep Wayne hoping that the commodities boom that underwrote the past few budgets will indeed be there next year.

And no wonder Kevin wants a fibre optic rollout – we may not be able to afford copper.

Michael Pascoe is a BusinessDay contributing editor.

http://business.theage.com.au/business/chinas-metal-riddle–boom-not-dead-20090417-a9ab.html?page=-1

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