22-07-2014, 06:59 AM
Oversupply threatens resources sector
• THE AUSTRALIAN
• JULY 22, 2014 12:00AM
Rowan Callick
Asia Pacific Editor
Melbourne
Australian dollar chart Source: TheAustralian
THE chief challenge for Australia’s growth-driving resources sector is coming not from demand but from potential oversupply, warns HSBC’s co-head of Asian economic research, Frederic Neumann.
He also told The Australian during a visit to Australia yesterday that China and Japan, Australia’s top economic partners, were facing similar challenges — their leaders are determined to restructure their economies but they are facing tough conservative opponents in their countries’ public and private sectors respectively.
“China’s demand for commodities will continue to grow robustly,” Dr Neumann said.
“But the supply response to the boom over the last 10 years has come at a cost.”
Australia, he said, was “lucky because of your competitive ability to produce cheaply”.
But many projects were now coming on stream around the world, he said, especially in Africa and Latin America.
“A lot of commodity cycles suffer from an over-investment in extraction during the good years.
“Now it’s a question of whether the supply side will lead to ¬prices falling at some point.”
Australia, however, could benefit immensely, he said, “if India follows in China’s footsteps” after the election of the new government in the country led by Narendra Modi.
“India is a different animal, with a more laborious policy making process,” he said.
“But it will become the most populous country in the world in a few years, and if it can step economic growth up to 8-9 per cent and keep it there for a decade,” that would in itself keep global commodity prices high.
Dr Neumann said that Australia’s underlying currency strength was being driven by Japan’s financial easing, which is also a key stabilising feature for Indonesia and other countries in Asia.
This started with record mergers and acquisitions activity, and had continued, he said, with new bank lending.
“Japan now has among the best capitalised banks in the world, and they have no loan growth at home,” Dr Neumann said.
Quantitative easing had landed them with massive excess cash reserves, now 12 per cent of total assets, rising to 16 per cent by the end of the year, he said.
That 16 per cent is earning just 0.1 per cent from the Bank of Japan, while Australian 10-year yields are realising 3 per cent, hence the attraction of Australian bonds.
The Japanese government was also encouraging firms to invest abroad, he said, because the unemployment rate was at a 16-year low, there were labour shortages, and domestic capacity could not be expanded.
Geo-strategic rivalry with China provides a further impetus for Japanese eagerness to invest in the region, including in energy and in agriculture.
He said that “corporate Japan is often written off as being behind the curve. But it still has a lot of good companies” — including global leaders in cameras, electronics and cars, for instance.
Dr Neumann said that there were “quite striking parallels” between Japan’s Prime Minister Shinzo Abe and China’s President Xi Jinping, both reformist “princelings” with political-establishment backgrounds, and both facing tough opposition — in Japan chiefly from private cor¬por¬ations, in China from state owned enterprises.
In China, he said, President Xi was grappling with local governments, “to get them to do his bidding”.
In Japan, Mr Abe was struggling with “politicians and bureaucracies in the ministries”.
“A functional element of President Xi’s anti-corruption drive is his need to reduce opposition to reform, to send a message including to SOEs (state-owned enterprises) that he is serious about cracking the whip,” Dr Neumann said. “A lot of local governments in China have done whatever they wanted to do in the last decade, for instance ignoring calls to shut down overcapacity in the steel sector.”
In Hebei province — which surrounds Beijing — furnaces were shut down, he said, but then bigger ones were built next door.
The key to restructuring the economy to drive consumption and services, he said, was to unleash market forces through deregulation, forcing SOEs — not just the 112 central corporations but the 120,000 local SOEs — to compete on a level playing field with the emerging private sector.
Meanwhile, Mr Abe was tackling his private sector challenge through enforcing new corporate governance requirements at the core of his “third arrow” structural reform program, he said, forcing companies to become more active and more accountable.
• THE AUSTRALIAN
• JULY 22, 2014 12:00AM
Rowan Callick
Asia Pacific Editor
Melbourne
Australian dollar chart Source: TheAustralian
THE chief challenge for Australia’s growth-driving resources sector is coming not from demand but from potential oversupply, warns HSBC’s co-head of Asian economic research, Frederic Neumann.
He also told The Australian during a visit to Australia yesterday that China and Japan, Australia’s top economic partners, were facing similar challenges — their leaders are determined to restructure their economies but they are facing tough conservative opponents in their countries’ public and private sectors respectively.
“China’s demand for commodities will continue to grow robustly,” Dr Neumann said.
“But the supply response to the boom over the last 10 years has come at a cost.”
Australia, he said, was “lucky because of your competitive ability to produce cheaply”.
But many projects were now coming on stream around the world, he said, especially in Africa and Latin America.
“A lot of commodity cycles suffer from an over-investment in extraction during the good years.
“Now it’s a question of whether the supply side will lead to ¬prices falling at some point.”
Australia, however, could benefit immensely, he said, “if India follows in China’s footsteps” after the election of the new government in the country led by Narendra Modi.
“India is a different animal, with a more laborious policy making process,” he said.
“But it will become the most populous country in the world in a few years, and if it can step economic growth up to 8-9 per cent and keep it there for a decade,” that would in itself keep global commodity prices high.
Dr Neumann said that Australia’s underlying currency strength was being driven by Japan’s financial easing, which is also a key stabilising feature for Indonesia and other countries in Asia.
This started with record mergers and acquisitions activity, and had continued, he said, with new bank lending.
“Japan now has among the best capitalised banks in the world, and they have no loan growth at home,” Dr Neumann said.
Quantitative easing had landed them with massive excess cash reserves, now 12 per cent of total assets, rising to 16 per cent by the end of the year, he said.
That 16 per cent is earning just 0.1 per cent from the Bank of Japan, while Australian 10-year yields are realising 3 per cent, hence the attraction of Australian bonds.
The Japanese government was also encouraging firms to invest abroad, he said, because the unemployment rate was at a 16-year low, there were labour shortages, and domestic capacity could not be expanded.
Geo-strategic rivalry with China provides a further impetus for Japanese eagerness to invest in the region, including in energy and in agriculture.
He said that “corporate Japan is often written off as being behind the curve. But it still has a lot of good companies” — including global leaders in cameras, electronics and cars, for instance.
Dr Neumann said that there were “quite striking parallels” between Japan’s Prime Minister Shinzo Abe and China’s President Xi Jinping, both reformist “princelings” with political-establishment backgrounds, and both facing tough opposition — in Japan chiefly from private cor¬por¬ations, in China from state owned enterprises.
In China, he said, President Xi was grappling with local governments, “to get them to do his bidding”.
In Japan, Mr Abe was struggling with “politicians and bureaucracies in the ministries”.
“A functional element of President Xi’s anti-corruption drive is his need to reduce opposition to reform, to send a message including to SOEs (state-owned enterprises) that he is serious about cracking the whip,” Dr Neumann said. “A lot of local governments in China have done whatever they wanted to do in the last decade, for instance ignoring calls to shut down overcapacity in the steel sector.”
In Hebei province — which surrounds Beijing — furnaces were shut down, he said, but then bigger ones were built next door.
The key to restructuring the economy to drive consumption and services, he said, was to unleash market forces through deregulation, forcing SOEs — not just the 112 central corporations but the 120,000 local SOEs — to compete on a level playing field with the emerging private sector.
Meanwhile, Mr Abe was tackling his private sector challenge through enforcing new corporate governance requirements at the core of his “third arrow” structural reform program, he said, forcing companies to become more active and more accountable.