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Ever since investors started panicking about a Chinese hard landing, analysts started warning about troubles in Australia, which supplies so many natural resources to China.In April, Societe Generale’s Dylan Grice summed up concerns about Australia’s economy when he wrote that Australia is “a credit bubble built on a commodity market built on an even bigger Chinese credit bubble.”
And added, “Australia looks like leveraged leverage, a CDO squared.”
Then in August, BHP Billiton the world’s largest miner reported a 35 per cent drop in second half profit, kicking off a storm about the Australian mining bust. Here’s what’s gone wrong in Australia:
- Australia has been riding a mining boom that has helped it avoid a recession for 21 straight years.
- But commodity markets are known for their boom-bust patterns and with a slowdown in China, curbs on the Chinese property sector, and a slowdown in the global economy, demand for crucial Australian exports like coal and iron ore are waning.
- The massive investment in mining for coal has overlooked the shale gas boom in the U.S., according to Grice. While, Bank of America’s Bin Gao and Ethan Mou write that the increase in U.S. exports of coal to China have eaten into Australia’s share of the Chinese coal market.
- Australia has a property bubble with Sydney, Melbourne, Adelaide, Brisbane, and Perth being some of the world’s most expensive cities, according to SocGen’s Albert Edwards.
- The Aussie dollar continues to be stronger than the U.S. dollar despite the softening in commodity prices.
- Australian stock price moves are closely correlated with China. Given the dismal performance of Chinese equities the Australian stocks are overpriced according to SocGen’s proprietary model. SocGen’s analysts write, “The strength of Australia is particularly hard to explain, given the recent weakness in figures like the housing data.”
- Australia’s resource minister Martin Ferguson recently said (via The Telegraph): “You’ve got to understand, the resources boom is over. We’ve done well – A$270 billion in investment – the envy of the world. …It has got tougher in the last six to 12 months. Look at Europe, the state of the European and global economy. Think about the difficulties in China. The commodity price boom is over and anyone with half a brain knows that.”
- Last week, Deutsche Bank’s Adam Boyton and Phil Odonaghoe warned of the end of the investment boom and a 2013 recession in Australia. “It does seem to us that there is some complacency surrounding the prospect of a sizeable decline in the terms of trade – and some over-confidence that the investment pipeline is ‘locked in’. While there may be reasons as to why this time is different …history would counsel some caution on the investment outlook. Indeed, an average response to a circa 15% decline in the terms of trade would see business investment falling in year over year terms by early 2013.”
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Update: The piece was updated to include SocGen’s views on Australian stocks.