Australia's record-breaking mining exports hint of new sector boom
Comment of the Day

February 03 2017

Commentary by Eoin Treacy

Australia's record-breaking mining exports hint of new sector boom

This article by Cecilia Jamasmie for may be of interest to subscribers. Here is a section:

The encouraging data sharply contrasts with the record deficit of $4.3 billion the country recorded only 12 months ago.

HSBC chief economist Paul Bloxham told AAP the export boom should considerably boost company profits, dividend payments, share prices and wages in the mining sector.

?His comments will be tested beginning next week, as some of Australia's top mining companies including Rio Tinto (ASX, LON:RIO), BHP Billiton (ASX:BHP), Newcrest Mining (ASX:NCM) and South32 (ASX:S32) are set to start reporting their 2016 results.

This is only the second monthly trade surplus Australia has recorded in nearly three years, which evidences once again the country’s continued reliance on and vulnerability to changes in commodities markets.

The news comes on the back of a report from the Department of Industry, Innovation and Science, which predicted that Australia’s mining and energy export earnings would jump by 30% between 2016 and 2017, hitting a small yet encouraging record of $204 billion.

Eoin Treacy's view

Australia exported more than a billion tons of iron ore last year for the first time. At the same time prices broke out of a more than yearlong base so higher volumes were greeted with higher prices which has certainly helped to improve the country’s trade balance. The surge in coking coal prices due to temporary shortages will also have acted as a short-term boost. However with coking coal now well off its peak it is less likely to represent the same positive influence on trade this year. 

Australia is now also a major natural gas exporter with many contracts tied to the price of oil. It is hard to make a medium-term bullish case for oil prices getting back to levels seen prior to the 2014 breakdown but the recovery rally remains intact and we do not yet know at what point supply will be reasserted. 

Having pulled back from M&A activity and myriad expansion plans investors will now be hoping the resources sector is more amenable to paying dividends. Considering how poor mining executives’ records of acquiring companies at exactly the wrong time are, it is to be hoped they are content to resist the temptation to spend their windfalls on vanity projects. 

The S&P/ASX Resources Index is somewhat over extended relative to the trend mean at present and potential for a reversion has increased. A break in the medium-term progression of higher reaction lows, currently near 3200, would be required to question medium-term scope for continued upside. 

The FTSE-350 Mining Index also looks susceptible to some consolidation of recent gains. 
It is possible that the Chinese decision to tighten monetary policy, albeit modestly, in an attempt to support the yuan, may act as a drag on domestic sentiment leading to a moderating of demand for commodities following last year’s strong gains. 

Copper for example pulled back sharply today to confirm near-term resistance in the region of the upper side of its developing short-term range. It will need to sustain a move above $2.75 to signal a return to demand dominance. 

The Australian Dollar is now testing the upper side of an almost yearlong range and will need to sustain a move above 78¢ to confirm a return to demand dominance beyond the short-term. 

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