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    Saturday, April 22, 2006


    Resource boom can't go on, warns Costello

    Peter Costello, the Australian treasurer, has warned that the resource boom can't go on. (see,20867,18877827-2702,00.html).

    "But Peter Costello yesterday warned investors who loaded up on mining stocks - like those who dived on dotcom stocks in the late 1990s - could be burnt when the boom grinds to a halt. "
    "We think there's a couple of years left, but it will not be permanent," he said. "The resource boom won't last for ever. If you put all your eggs in the resource company basket, you'll be in as bad a situation in a couple of years as all those who put all their eggs in the tech basket in 2000."

    What he doesn't understand ( and if he did understand he wouldn't be a politician he'd be a rich investor) is that there is almost no similarity between resources and tech in terms of valuation. In the end a bubble is all about valuation and major metal companies and oil companies trading well below the market multiple IS NOT A BUBBLE. A company with no plan to ever be profitable raising $300M is a bubble. A company earning a few million dollars, selling for billions is a bubble. Companies trading at 50 or a 100 times earnings is a bubble. A company trading at 10 times earnings is NOT. Was the treasurer forecasting the end of the tech boom in 2000???

    Mr Costello said he did not foresee any faltering in China's economic development.

    "I don't see any reduction in demand or global growth rates. The Chinese boom has a way to run. I think what may change the situation, however, is supply."

    This is actually somewhat sensible but mostly wrong. Orthodox economics says rising prices bring on supply. What isn't factored in is that new mines can take many years 5 - 10 to come to production. With all the environmental controls, wacky governments etc it is hard to bring supply to market for most of the world. Furthermore, there are not massive supplies sitting in the ground waiting to come out; on the whole the easy resources have been found.

    What is nearly always ignored in talking about China's energy consumption, however, is that it is right now very inefficient in its use of oil, but is expected to become much more efficient very quickly. The Chinese government is serious about energy conservation. Because they are so inefficient now, it will be relatively easy and cheap for China to show substantial efficiency gains. I have even read some predictions that increased energy efficiency in China will mean barely increasing levels of oil consumption there over the next few years.

    China Law
    Well the good news for those invested in oil and the bad news for everyone else is that your scenario still means higher oil prices. With supply and demand so finely balanced, the world doesn't need 3,4,5% demand increases to maintain such high prices or even to see increases. With other BRIC and baby BRIC countries increasing their demand, China can stand still and oil still becomes more valuable.
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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