Today’s Daily Reckoning Australia can’t help but arrive in your inbox with an air of excitement.
Natural resources are going to heat up the Aussie market as analysts start upgrading earnings estimates for mining stocks.
How could they not?
Take coking coal, for example. Six months ago the Queensland government forecast the price to average US$123 a tonne.
In fact, the price is actually going to be US$161 for fiscal year 2019 — staying above US$130 a tonne for another four years — if the latest estimates are on the money.
It’s incredibly exciting for Queensland, which produces nearly half of the world’s seaborne coking coal.
But it’s not just Queensland benefitting from the resources boom. The outlook across the whole commodity sector looks bullish…
Notable fund manager Ben Griffiths noted in yesterday’s Australian that commodities demand is strong and supply diminished after years of underinvestment.
Griffiths also says that a mass of investment capital is going to flow out of global bond markets and seek shelter in natural resources.
One reason for this is that raw materials are undervalued relative to stocks and bonds.
A second is that they offer protection from the inflationary pressures building:
Truckers in both China and Brazil have protested in recent weeks over high gasoline and diesel prices…
One of the world’s largest shipping companies has put a 20% surcharge on customers to cover its increased fuel bill…
And unemployment is generally at record lows, and especially so in the United States. In fact, US inflation is now at a six-year high.
Then you have the government playing its part.
Take Queensland as an example.
Instead of using the unexpected windfall from higher coal and LNG prices to pay down the state’s monstrous debt, the Queensland government is going to spend it all — with even more borrowing — to boost the local economy.
This large infrastructure spending will come to over $45 billion over four years, according to the latest budget. This value will be captured in the local real estate market, setting the stage for the next property hotspot in Australia: South East Queensland.
Of course, as you know, banks are tightening lending practices. Investor loans are off the boil. But there are plenty of non-bank sources of cash for developers, and the ‘fractional’ property investment platforms are still gearing up for the mum and dad buyers wanting in on the action.
Aussie property might cool for a while, but I don’t think there’s a massive drop-off in prices on the horizon. After all, the resurgent mining sector is going to help out some of the worst-performing property markets in recent years.
The federal government is also writing cheques across the country. This gives the economy and stock market broad support, allowing you to get on with the business of finding great stocks to buy.
The good news is that mining upswings can last a very long time. They usually take years to play out. You cannot just switch on more supply of any particular commodity.
That’s because it takes a long time to bring new mines online. If you own stock in companies producing now, they’ll benefit from the higher prices and time-lag before competition comes in to erode margins.
We can see this playing out right now in copper.
At the start of the year I said that drawing up a watchlist of copper stocks was a must because of the supply and demand fundamentals. And copper stocks haven’t disappointed…
Two of Australia’s biggest producers — Sandfire Resources NL [ASX:SFR] and OZ Minerals Ltd [ASX:OZL] — are up 43% and 16% respectively.
Oil at $100?
I’ve made the point previouslythat the Aussie dollar is highly correlated to commodity prices. This could put upward pressure on the exchange rate.
That might not be welcome at the Reserve Bank, but it may come in handy when it comes to filling up the car with petrol.
Over in the UK, drivers are bleeding because a weak pound and massive taxes mean they pay the equivalent of over $100 to fill up a 55-litre tank.
Should they expect some relief anytime soon? Not according to energy expert Fereidun Fesharaki, the head of a London energy consultancy.
On a speaking tour in Australia right now, Fesharaki says that oil demand is racing along and could ‘easily’ hit US$100 a barrel. The chief of major energy group Total recently said the same thing.
It backs up what I’ve been saying all along: Now’s the time to be accumulating stocks as this commodity surge potentially sends the Aussie stock market to new highs.
This article was originally published by The Daily Reckoning Australia