COLUMN-This commodity boom isn't dead, just resting: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Aug 24 (Reuters) - Calling an end to the commodity boom is problematic because the definition of what constitutes the boom depends on who you are.
Since BHP Billiton shelved $40 billion of mining projects in Australia when announcing lower profits on Wednesday, the nation has been engaged in an exercise of navel-gazing and mud-slinging as to what has or hasn't gone wrong.
For Reserve Bank of Australia Governor Glenn Stevens the boom is far from over, with the economy growing at potential and inflation contained.
It's not a problem for Stevens that some of the resource projects under consideration won't go ahead because of cost pressures, as there is still a large pipeline for the next two years.
Even when the capital investment phase of the boom runs out, it will be replaced by the actual export of commodities from the new mines' liquefied natural gas plants, Stevens reckons.
For Rio Tinto Chief Executive Tom Albanese there never was a commodity boom in the first place, and the long-term bullish outlook for commodity prices remains intact, even if they are down currently due to a low point in China's cycle.
And Australia's politicians are having a field day, with Resources Minister Martin Ferguson first proclaiming the resources boom is over, much to the horror of his fellow ministers in the Labor Party-led minority government, who have staked their credibility on using revenues from commodities to pay for generous welfare entitlements.
He later rowed back saying he meant that commodity prices had peaked but the investments in multi-billion dollar projects will continue.
Of course, opposition Liberal Party leader Tony Abbott, whom the polls say would oust Prime Minister Julia Gillard if an election were held today, tried to blame the end of the boom on the government's new carbon and mineral resource rent taxes.
He's mainly wrong on that count as the new taxes wouldn't have made the slightest difference to BHP's Olympic Dam copper mine expansion, but he was on the right theme in a roundabout way, namely that higher costs are pressuring projects.
So, before we can pronounce on the vital signs of the commodity boom, it's important to decide exactly what we are talking about.
To my mind there are two main elements to the equation.
Firstly, there is the growth in volumes of commodities being consumed worldwide, led by rapid industrialisation and urbanisation in China and India.
Secondly, there is the increase in prices of commodities as a result of the first factor driving demand harder than supply can keep up.
The first part of the boom saw prices climb far more rapidly than supply, a process that was abruptly ended by the 2008 global financial crisis.
The second phase is where we are currently, with investors starting to worry that the supply response by resource companies such as BHP and Rio is going to outrun gains in demand, especially in an environment of slower growth in China, recession in Europe and turgid recovery in the United States.
One of the key failings of humans is to assume that the conditions they currently find themselves in will continue to exist indefinitely, with minds as great as former U.S. Federal Reserve chairman Alan Greenspan among those guilty of this.
It's also important to note that no boom is ever a straight line upwards, there are always periods of weakness followed by recovery.
So, looking at the volume equation of commodity demand first.
Does anybody seriously believe that China and India are about to stop industrialising and urbanizing?
No, therefore there is every chance that global demand for key commodities such as crude oil, copper, iron ore and coal will continue to rise for many years to come.
To be sure, they may not post double-digit growth rates similar to those achieved by seaborne iron ore in the past eight years bar one, but as any economist can tell you, even smaller percentage increases on larger initial bases means large gains in actual volumes.
The question then becomes whether the supply response has been overdone, and here the evidence is debatable.
In the short term most major commodities seem adequately supplied, especially if Chinese demand does ease, which it hasn't done yet despite the softening of industrial output growth rates in recent months.
But assuming China and India do continue to grow their economies at an average 8 percent per year over the next few years, this will result in large increases in commodity demand, and the slowing of investment in new mining and energy projects may result in a shortfall.
It's this longer-term outlook that is behind the upbeat assessment of Australia's central bank boss and the CEOs of major resource companies.
But in the current environment companies like BHP and Rio would be punished by investors if they were being seen to be spending too much capital on projects where demand is yet to be 100 percent assured.
There is also a message for Australia in BHP's move to delay investment decisions, namely that the easy times are over and now it will be harder to attract capital projects.
The strong local dollar, high labour costs, the myriad red and green tape, the poisonous attitude of senior Labor politicians including Treasurer Wayne Swan to mining billionaires and constant new tax bites by both state and federal governments will make getting investments approved that much more difficult.
But this doesn't mean the commodity boom is over, it's just taking a well-earned break.
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