Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Invest in Sydney/Brisbane property markets, or for media/public speaking requests, email pete@allenwargent.com

Wednesday, 5 November 2014

Port Hedland smashes iron ore cargo shipping records yet again

Are mining town properties EVER a safe bet?

It’s possible, yes, if investors buy an asset using an appropriately financed deal, for the right price, at the right stage in the cycle, provided there is some tolerance for price volatility and possible vacancies.

Generally speaking, an investor or speculator buys property in a mining town in anticipation of a new project passing through its feasibility studies and progressing to the construction stage, bringing new labour into town and a higher demand for housing.

With the China boom really having taken off over the past decade, commodity prices went wildly skyward (iron ore prices between 2007 and 2010, for example, doubled and then more than doubled again) and Australia embarked on a vast and unprecedented frenzy of mining construction.

The next phase in the cycle...

But the commodities sector naturally cycles, and take a look at the macroeconomic picture as it stands today in late 2014.

We have now transitioned into the less labour-intensive production phase of the boom, and as the new producers really begin to hit their straps there is a tremendous glut of supply hitting global commodities markets, placing seemingly relentless downwards pressure on commodity prices.

Fewer and fewer significant projects will now pass feasibility, particularly copper/silver/gold mining projects, and in the bulk commodity sectors of coal and iron ore.

In short, mining construction activity will drop off a cliff over the next three years, especially in Queensland, Western Australia and, to a lesser extent, New South Wales. 

The states which benefited so greatly from the construction boom will now be pulling against a multi-year drag in engineering activity.


Port Hedland smashes shipping records in October

In this context, it was interesting to note from the Pilbara Port Authority that iron ore cargo shipped in the month of October once again smashed its way into the record books, with 37.5Mt of iron ore departing Pilbara shores.

That's an increase in iron ore tonnage shipped of 30 percent over the past year and an extraordinary 72 percent over the past two years! 

These are incredible volumes which, quite literally, need to be seen to be believed (if you get the chance...visit!).

In this light, it is perhaps unsurprising that iron ore spot prices have tanked back towards from whence they came, with spot prices now well under US$80 tonne and tracking at the levels we saw "on the way up" way back around June/July 2009.

Note how an incredible 86 percent of that iron ore is heading for China and the Chinese province of Taiwan. 

Wowsers.


Sure there's a vein of copper here, a smidgeon of manganese ore there, and just a sprinkling of salt cargo being shipped off to Korea, Japan, India and Indonesia.

But make no mistake this is basically an enormous leveraged bet on China and iron ore, and not a lot else.

Marginal producers to be squeezed out?

With such high stakes on the table, cargo shipping records will keep falling at Port Hedland, although perhaps not in November, since if I remember my childhood mnemonic rhymes correctly, there aren't quite as many days in this month.

The big question is when or whether this relentless flood of supply will begin to squeeze marginal and higher cost producers to the wall and out of the game.

The Reserve Bank's research showed that, unlike in the deeply troubled coal sector, Australian iron ore producers generally sit at the lower end of the cost curve and should in theory be able to soldier on through the pain until global competitors fail, mothball or wind back production.

But the RBA's conclusions all seemed rather vague, in truth, and somewhat worryingly reliant on figures and information from China - and who really believes China's data any more anyway?

Services pounded - interest rates to fall

Last up for today, a diabolical 14 month low reading on the AIG Performance of Services Index of 43.6 merely compounds a slew of rubbish data of recent weeks.

Perhaps there will be some respite from the volatile Labour Force survey tomorrow - forecasts indicate that moderate employment growth is possible - but although cash rate futures markets don't yet agree with me, we could only be one weak weak CPI print away from a 2015 cut.

A browse through market action in Interbank Cash Rate Futures contracts shows that support for this view has gradually been gathering some support over the past month.

A calculation of implied yields by month shows that an interest rate cut on December 2 appears to remain a remote possibility with only a 6 percent chance priced in, and futures markets cannot yet bring themselves to price in a further cut in this easing cycle.

Nevertheless, the implied curve is holding its inverted shape for a heck of long time, right into Q2 2016! 

The balanced view is probably that the cash rate is likely to stay on hold approximately forever...