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Sunday, April 03, 2011

Australian dollar lives up to expectations

For a number of years I have been very bullish on the Australian dollar. The reasons are clear for a person with an understanding of currency markets and mining. I have both. So when you witness the activity going on, and you read headlines like the following - one becomes sharply optimistic:
"HSBC estimates the total value of Australian mining and resource projects proposed or under construction at $777 billion, or about 60 per cent of gross domestic product".
The implication of this is that in a few years there is going to be mining operations contributing about $150 billion in wealth to the Australian economy, i.e. about 15% of GDP is going to be added to the Australian economy. We need to be careful here because:
1. Not all these projects are committed
2. These are capital costs - but we might expect conservatively a 4 year payback on these projects
3. These projects will have variable mine lives, anywhere from 3 years (for smaller gold mines) to t0 20-30 years for a gasfield, to 50 years (for iron ore mining projects)
4. Resources are still being discovered
5. Mineral prices are still rising, and can be expected to keep rising so long as the global labour market place keeps liberalising.
6. A mining project can take anywhere from 2-10 years to commission.

Based on this information, we might expect around half of this investment to be earning export dollars in the next 3 years (i.e. 25% of 30% of GDP) offering 7.5% growth in GDP. i.e. Mining is adding about 2.5% growth to GDP. But then we need to acknowledge that this is just part of the economy, and this ignores the capital inflows to fund this investment.

This is why it is good to be Australia. Well actually there are a lot of reasons. In fact, I can only think of one bad one. We have a government - 2nd only to Mussolini in terms of is fascist foundation for governance. Australians are unwittingly vulnerable given they are just basking in jobs, high pay and excess sun.

This is obviously a problem because people will start spending, raising foreign debt levels, people will stop working, reducing workforce participation, and thus economic efficiencies tend to creep in. That is when government starts importing labour...which brings you to Australia. The land of milk and honey..and bad government. A miners paradise. Clearly there is some vulnerability to global events; most particularly global metal prices. I actually think we can expect some vulnerability as a result of an oil price spike in the Middle East, as revolutions broaden in scope.
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Andrew Sheldon www.sheldonthinks.com

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