10.25.2012 18:21

A Hard Landing Down Under

Australia's bubble is built on China's, and with no major stimulus in the offing, it may suffer a financial crisis in 2013
By Andy Xie

Mining has been a boom-bust industry throughout its history. The reason is the long development process of a mining asset. When demand pushes up prices for minerals, supplies take time to respond. Hence, prices can go very high in the initial phase of a demand boom. The eye-popping profitability draws all kinds of people into speculating for new mines, massively increasing the supply capacity years down the road. When the demand boom cools and prices decline, supply capacity keeps rising rapidly, which throws the industry into a depression with severe repercussions for its financiers.
A decade ago, some Australian investors came to my office for advice on how to invest in China. I told them to go home and buy shares of Australian companies in the mining industry. Bellwether stocks like BHP have appreciated ten times since. The story began with China joining the WTO. This change would increase China's share of global trade. As China's expenditure is heavily weighed towards fixed-asset investment, this redistribution of income would increase the demand for mineral resources. Hence, I believed that the industry would have good times ahead.
As the prices of minerals like iron ore surged, the super profitability attracted all sorts of people into prospecting all over the world. Numerous investors went into African jungles and Mongolian grassland to strike it rich. Even though risks for investing there very high, like getting one's head chopped off by upset locals, the fantastic margins pumped up these people's courage. Unfortunately, if and when these assets become productive, the margins are gone. Most stories about chasing riches in faraway lands end like this. Some smart people have sold undeveloped assets to others through IPOs in Hong Kong. Those who haven't sold are stuck.
'There Are Such Opportunities'

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