Dutch Disease, The Unlucky Country and The Boom is Over. These have been some of the more eye-opening headlines on the prospects for the Australian economy in recent times. While the tone may be brighter following the European Central Bank’s ‘Outright Monetary Transactions’ announcement, the mood in Australia has been starkly sombre of late.
Investors have headed for the exits, citing poor economic data from China, tumbling commodity prices and the deferment of some large mining projects. As such, resource companies have taken a battering. The price of iron ore was supposed to have a floor of about $120/ton, yet is currently wallowing in the basement. Coupled with rising costs, weak-earnings guidance has not helped sentiment either. Whether this is the end of the boom remains to be seen, but with resource companies dominating the local market, investors should look globally for diverse opportunities. Shale of the centuryWhile low commodity prices may be hurting some Australian companies, cheap and abundant energy could create a sustainable competitive advantage for industry in the United States. Technical developments in extracting hydrocarbons, such as horizontal drilling, have seen a significant increase in the domestic production of oil and gas. Indeed, gas is so plentiful that the price in the US is significantly lower than global prices. Chemical companies such as Dow and DuPont will be beneficiaries of lower ethane and propane feedstock costs. Dow has already grasped the opportunity and announced plans to fully integrate and grow its North American businesses with shale-gas liquids. When announcing a $4-billion investment on the coast of the Gulf of Mexico in April this year, Dow chief executive Andrew Liveris noted “for the first time in over a decade, US natural-gas prices are affordable and relatively stable, attracting new industry investments and growth and putting us on the threshold of an American manufacturing resurgence”. Companies such as Union Pacific Railroad are also benefitting from this theme. Its second-quarter earnings were up 32 per cent, the company’s best ever results, and were driven in part by strong revenue increases in its chemicals and industrial products hauling divisions. In 2011, Union Pacific reported it had moved 25,000 carloads of crude oil originating from the Bakken and Eagle Ford shale formations in North Dakota and South Texas, respectively, and that it expects this business to increase by over 400 per cent in 2012 From Oz to USThe importance of energy has taken a back seat in recent times as the world continues to grapple with the aftermath of the credit crisis. While some commodity prices appear hostage to the machinations of policy decisions, the importance of cheap and reliable energy in the US should not be underestimated. Investors worried about the end of Australia’s boom could benefit from the industrial renaissance taking place in the US. Patrick Noble is a senior investment strategist at Zurich Investments.
By Patrick Noble
10th September 2012
Source: Professional Planner http://www.professionalplanner.com.au
13th-October-2012 | 
