From a report by Societe General which justifies my concern about Australia’s lack of insurance against a Chinese bust. You may like to read the whole thing.
“Mine production is being ramped up to satisfy a demand assumed to be as voracious in the future as it has been in the recent past (see chart below). But there is a third energy revolution underway. Shale gas. Last week the US railroad company CSX said that it might have to renegotiate its contracts with power utilities because coal demand was drying up. Their shipments of coal to power stations fell 28% last year because power stations are switching to gas. Shale gas will be as disruptive to the global economy as the internet was. Though its predominantly a US story today, its going to go global.
Which I think leaves Australia in a precarious position. If Chinese resource demand holds up everything will probably be fine. But if it doesnt well, everything wont be. In fact, there might be trouble anyway. The improvement in Australias terms of trade (the ratio of its export prices to its import prices) has been spectacular thanks to the bull run in commodities. It should be running large current account surpluses, like Norway. But it isnt. Its running a deficit of 3%. So the AUD is overvalued and vulnerable. For Australians, buying bonds makes some sense to me (despite last years rally, developed market bonds backed by a printing press give a glimpse of the future), while buying gold makes a lot of sense (because gold is very cheap in AUD terms). For foreigners, the AUDs own day of reckoning provides a very good hedge against any great leap backwards in China.”
Tagged: Australia, economics
