Canaries in the Coal Mines (Among Others)

Earlier this week, I ranted a bit on how countries like Australia and Canada have only been able to keep their housing/banking sectors over-inflated throughout this whole global mess by the good graces of artificially high commodity prices. These high prices keep their mining industries profitably expanding and producing jobs, bringing in overseas capital investment, supporting the export sector, generating tax revenues, and, of course, propping up a very fragile banking system. The latter occurs indirectly through the buffering of otherwise saturated demand in property markets, as well as directly through investments in the mining sector.

Sites like TAE, aided by the insights of analysts like Australian economist Dr. Steve Keen, have said that these trends cannot last for much longer. In an era of systemic credit contraction, every industry will eventually suffer, no matter how resilient it has seemed to be in the past. It now seems like the world’s largest mining company, BHP Billiton (based in Australia), also agrees that the ever-important mining industry will come under a lot of pressure in the near future as commodity prices bounce off against their peaks, due to plummeting demand in Europe and slightly-less plummeting demand in China (the largest source of demand).

What that implies for the fate of the massive housing bubble in Australia and associated banks/businesses/households is, in short, NOT good. Without all those jobs, investment capital, revenues and taxes flowing in and through the economy, there is nothing left to insulate the Australians from the Big Bad Credit Monster. And if you don’t trust the word of a megalithic corporation such as BHP, I don’t really blame you, but you can still see these concerns clearly reflected in their actions. James Regan reports for Reuters:

BHP warns commodity markets to cool further

 

BHP Billiton (BHP.AX) (BLT.L) said it expects commodity markets to cool further and that investors have lost confidence in the longer-term health of the global economy, in the most cautious comments yet from the world’s biggest miner.

 

BHP also put the brakes on a plan announced by Chief Executive Marius Kloppers in 2011 to spend $80 billion over five years to expand its iron ore, coal, energy and base metals divisions, banking on continuing high demand from its main market, China.

 

“It is all about appropriate allocation of capital. When Marius (Kloppers) talked about the $80 billion, the environment was different,” Chairman Jacques Nasser told reporters after a Sydney business lunch on Wednesday.

 

“We should pause, take a deep breath and wait and see where the pieces fall around the world,” he said, stopping short of announcing a spending cut.

 

The company was re-thinking its expansion plans “every day,” Nasser said.

 

Asked if BHP would spend $80 billion over five years, he replied: “No.”

 

“It’s a sign that their view is that commodity prices are not going to go up from here, and in that sort of scenario, you can’t be spending $24 billion to $25 billion a year,” said Hayden Bairstow, an analyst at CLSA.

 

BHP shares tumbled 4 percent to the lowest since July 2009, while the broader market .AXJO fell 2.2 percent. The Australian dollar slid to its lowest since December.

 

UNDER PRESSURE

 

“Now that commodity prices have plateaued in the medium term, there is pressure on companies with the costs going up,” said Ric Ronge, fund manager at Pengana Global resources Fund, which owns BHP shares.

 

“We are seeing a cycle within a super cycle largely because of the macro events in Europe and to a lesser degree in China.”

 

The Reuters-Jefferies CRB index .CRB, a closely followed indicator for commodities, has slumped more than 11 percent since hitting a five-month peak in late February amid a broader sell-off in financial markets.

 

“The tail winds of high commodity prices have contributed to record growth in the sector. Now we have a period where those tail winds are moderating and we expect further easing over time,” said Nasser, a former president of Ford Motor Co. (F.N).

 

Much of BHP’s earnings hinges on demand growth in China, the biggest importer of iron ore, copper, nickel and other industrial staples needed to support mass urbanization underway in the world’s No. 2 economy.

 

Chinese data last week showed the country’s economic expansion was cooling more than expected. Industrial output growth slowed sharply in April and fixed asset investment, a key driver of the economy, hit its lowest level in nearly a decade.

 

A Reuters poll after the data showed economists expect economic expansion in the second quarter to slip to 7.9 percent, which would mark the sixth consecutive quarter of weakening growth.

 

In March, BHP said it saw signs demand for iron ore in China was flattening, though a longer-term outlook was upbeat.