Commodities | May 18 2006
By Chris Shaw (Tokyo)
As Stephen Koukoulas of TD Securities points out it is still far too early to know whether the current shakeout in the commodities sector in particular is just a correction or a sign of the end of the commodities boom.
He does side with the view the risk in the sector has increased, noting there are signs emerging of some supply side response in some commodities at the same time as demand is levelling out as the pace of global economic growth slows.
With the resources sector of the Australian equity market having risen more than 200% in the past three years Koukoulas suggests any correction could be significant, but its effect would extend well beyond just falls in share prices, though this of course would be one result.
If falls of 30-40% were to occur there would also be a wealth impact as many people have made a lot of money as the resources sector has rallied. Corporate profits would also come under pressure, Koukoulas indicating this would have implications for the budget as the expected surpluses from tax revenues may not materialise. This would then limit the scope for further cuts to income tax or other stimulatory measures prior to the election due next year.
He suggests the effect would also flow through into employment and business investment given the impact on corporate profits, an outcome that spells trouble for the economy overall given the resources and related industries have been the drivers of Australia’s economic growth in the past couple of years. As a result, there could be further falls in housing prices and wages, though lower growth would also likely signal lower official interest rates. Indeed, Koukoulas suggests rates would likely be lower now if not for the commodities boom.
A collapse in commodities also spells trouble for the current account deficit, as in his view this would move back towards its record levels of 7% of GDP compared to 6% currently. Any move above such a level would likely be a negative for the currency, which likely would lose some support if commodity prices were to weaken significantly.
While the uncertainty continues there is little to do but watch and wait. Koukoulas recommends investors keep an eye on the commodity indices and resources share prices, as if these continue to head south it would suggest it is time to move funds into Australian bonds and out of the currency, and obviously out of the resources sector.