A Hard Landing Down Under
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'
- In Tuesday's Papers: Economic Work Conference Starts in Capital, Officials Will Be Graded on More than Economy
- Industry Waits to See Whether China Mobile and Apple Will Finally Make a Deal
- Why the PBOC Took the Regulatory Lead on Bitcoins
- Closer Look: Lunar Rover Is One Small Step Forward for China's Space Program
- The Week in Photos: November 30 – December 6
- Without a Home
- An Interesting Ride in the Year of the Horse
- TCM Still Struggling to Find Cure for Its FDA Woes
- In Monday's Papers: Russian Ruble Can Be Freely Used in Border City, Central Bank Permits Interbank Trading of CDs
- Alibaba to Invest over HK$ 2.8 Billion in Haier Subsidiaries
- Sign up to receive our free daily newsletter
- Yi Gang: China's Forward-Thinking Forex Chief
- As U.S. Refuses a Dirty Fuel, China Only Too Ready to Increase Imports
- Coal Industry Finds Itself at a Crossroads
- Tough Timing
- Evergrande Partners with Harvard to Build Hospital in China
- Ruins of Urbanization
- In Friday's Papers: China, U.S. to Enhance Cooperation on Shale Gas; Wang Qishan 'May Only Serve Five Years'
- Closer Look: Visit by Cameron Focuses on Trade and Investment
- Yi Gang: China's Man for Market Logic
- Caixin Explains: New Rules for IPOs Let Market Forces Do the Talking