Over the last 10 years, lead has been traded between $400 and $4000 per tonne on the London Metal Exchange (LME). Because of its toxicity, lead usage restrictions have been decided in different places in the world, which should have weighed on prices. However, lead was the best performing metal on the markets in 2007 because of the huge Chinese demand of batteries and because the market is controlled by a few big groups (72% of world lead consumption is dedicated to batteries for automotive and industry sectors).

In 6 months in 2007 prices doubled. They have been multiplied by 7 in 4 years, with an historical high price on October 15 last year at $3,980 a tonne. However they have been experiencing a large decline since this date. They lost more than70% of their value as a low has been posted in late October this year at $1,140.

The last two weeks, the price action has rebounded by 33% after it has hit the support line (point D on the chart) of the bearish trend started last year. Indeed, this support line goes through the lower lows that have been posted since August 2007 (points A, B and C).

Click to Enlarge

The indicators are bullish as the MACD and the technical Momentum indicator are well-oriented and argue for a further rebound.

However traders like to complete trends before generating a new medium to long-term trend in the opposite way. The bearish completion would occur here if prices fall to $825, which correspond to the low posted in 2005 and would act as a new support basis. Rebounds have already occurred in the past (points B and C especially) but failed to reverse the bearish trend. That’s why it is likely to be one more time a technical rebound that may not end the current long-term decline.

In this scenario the two first resistances will be a test for the current rebound. The first one is just there, around $1,550, as it was the previous low posted in early July (point C). It could be the new high now as traders often fill the gap and then move back in the other direction. The other resistance is around $1,700, for the same reasons: it was the low posted in August.

If the price action fails to breakout those levels, a pull-back towards $1,000 then to $825 is probable.

Despite all the market excitement, some things never change. On Monday the Australian Bureau of Agricultural and Resource Economics (ABARE) released its September quarter commodities report.

It further strengthens our reasoning for not caring about what happens in the US. Of course, if the US does go into a steep recession it will have an impact on global markets and economies. But the influence of the US is becoming less important as time goes on.

When we take a step back and look at what is happening in Asia and the rich Arab emirates in the Middle East it becomes even more apparent that Australia does not need to be too concerned about the US Congress taking on USD$700 billion of additional debt.

Why? Because it is all still ticking along nicely in the commodities markets.

For the most part anyway. There is the odd story floating around of capital raisings being postponed due to tighter credit markets, but they appear to be in the minority.

The report from ABARE tells us that although “world economic growth is assumed to decline from 5 per cent in 2007 to around 3.9 per cent in 2008 and 3.8 per cent in 2009″ Australia’s “commodity export earnings are forecast to increase to a record $214 billion in 2008-09.”

Australian Resources Exports to Increase by 48%
That represents an increase of 40% over the previous year. Even better than that is that energy and minerals exports are forecast to increase by 48% to $178 billion.

Putting those figures into perspective, the entire value of all exports for the year until May 2008 was $216 billion.

In other words, based on forecasts (which may or may not be reliable) the resources sector alone will export this amount alone.

And what market share does the United States contribute to our exports? Last year it totaled $10.3 billion, that’s less than half of what was exported to China. And only a third of the exports to Japan.

Look to Asia for Profit Growth
Compare the economic growth rates of the major OECD economies…

… with those in Asia.

We know things can change. And we also know that many of these Asian countries rely on the US as an export market. But increasingly, the new economies in Asia are growing to an extent that is making the ‘Old World’ economies less important.

 

A leading Chinese company has been given approval to lift its shareholding in Murchison Metals. The Federal government’s decision will see Murchison shares jump today on the ASX. Murchison shares jumped 10.9% in Friday’s big surge to close up 12c at $1.22. They had been weak for the last few weeks as investors have gone cold on resource stocks and Sinosteel moved to mop up Midwest. Now it can switch its attention to Murchison. Sinosteel has a 2.6% stake in Murchison, but close to 20% is controlled by the Harbinger hedge fund of the US. It delivered control of Midwest to Sinosteel last week by reversing its opposition to the Midwest bid and accepting the Sinosteel cash offer. There was no mention of board representation for Sinosteel on Murchison in the event it gets to 49.9%, the maximum allowed under the Government’s decision, revealed yesterday. That maximum level is also a hindrance because it can’t get to that level by making a full bid. It can acquire it gradually, but that could take years. But the Government’s decision means Sinosteel has also been allowed to tighten its control on the Mid-west iron ore province east of Geraldton in Western Australia. The Federal Government has green-lighted an application by Sinosteel Corporation of China to acquire up to 49.9% of Murchison Metals, but not control, according to a statement from the Federal Treasurer, Wayne Swan yesterday. Mr Swan said that he made the ruling under the Foreign Acquisitions and Takeovers Act 1975. It had been expected for some time and came less than a week after Sinosteel secured control of rival Midwest Corporation and moved to compulsorily acquire the outstanding shares in Midwest. Sinosteel had previously sought to acquire up to 100% of Murchison, which was the subject of an Interim Order under the Act. Sinosteel withdrew that application after some opposition was voiced. Mr Swan said that “there have been significant developments since the original application was made.

 

“The Western Australian Government recently awarded rights to construct new port facilities at Oakajee to a joint venture between Murchison and Mitsubishi Corporation.

“It is also considering proposals to build new railway lines to link the iron ore deposits in the Mid West region to the port.

“Sinosteel has recently acquired more than 97% of Midwest Corporation Limited which has iron ore deposits adjacent to Murchison’s.

“Midwest and Murchison have previously sought to merge their operations by takeover proposals that did not proceed.

“The Government welcomes foreign investment in Australia and I will continue to ensure that investments are consistent with Australia’s national interest.

“The Mid-West region may ultimately become a significant new source of iron ore exports to the north Asian iron and steel markets.

“Murchison is an emerging iron ore miner with deposits in the region.’

Mr Swan that that “In determining this application, I have determined that a shareholding of up to 49.9% in Murchison will maintain diversity of ownership within the Mid West region.

“The Government considers the development of such potentially significant new resource areas should occur through arrangements that are open to multiple investors.

“This approach is consistent with the national interest principles we released in February and with the approach I have outlined previously, including in discussions with my Chinese counterparts.

“The Government’s objective is that development of our considerable natural resource endowment occurs in a manner that allows Australia to remain a reliable supplier in the future to all current and potential trading partners.

“This ensures the maximum development of our resources and a fair return to all of the Australian community.”

Sinosteel had offered $6.38 a share offer for Midwest.

The acquisition was the first successful hostile Chinese takeover of an Australian company and became possible after Murchison’s former Midwest deputy chairman David Law and US investor Philip Falcone (Harbinger) agreed to the offer at the last minute early last week.

Very quietly compared to all the noise about the big bailout proposal from the US Government and the other move for the Fed to offer a lifeline to struggling mutual cash management funds, new steps to relieve distressed commodities markets were launched Friday by US regulators after Lehman and AIG woes triggered a wave of selling and emergency actions by exchanges earlier in the week.

The Commodity Futures Trading Commission, the main regulator of US commodity markets, said it was ”prepared to provide temporary and conditioned hedge exemption relief for firms taking on swap positions from distressed companies”.

The move would allow Wall Street’s investment banks and trading companies to take over some large commodities’ positions held by Lehman Brothers and AIG, known as swaps, without surpassing limits set by the regulator and the exchanges on speculative limits.

”This will allow for continued risk management and orderly functioning of the markets,” the CFTC said in the statement.

That means in particular the huge oil market will be stable.

AIG acts as a counterparty to a substantial portion of the $US30 billion invested in the DJ-AIG commodity index, the second most popular benchmark in the asset class. Lehman Brothers was also a significant player in commodities markets.

The CFTC added that it was coordinating with commodity futures exchanges to facilitate rare block trading, which allow the transfer of large positions. That would allow the people liquidating Lehman and winding up AIG’s speculative positions to handle large groups of deals with the same counterparties.

“CFTC staff is engaged in heightened monitoring and surveillance of financial company single-stock futures traded on futures exchanges – in coordination with the SEC’s emergency action on short selling and in our collective effort to prevent manipulation of financial stocks,” the Commission said.

That will be significant as already there are traders developing ways of circumventing the ban on short selling: one is sell the S&P500, then hedge the stocks you don’t want; in effect you short sell the stocks remaining in the position unheeded.

The move links to the one on Friday where cash funds were guaranteed. Many mutual funds have commodity based offerings and investors use the associated money market fund when moving their money from fund to fund..

The US Treasury on Friday rushed to the aid of ailing money market funds, saying it would guarantee the holdings of funds as it attempted to prevent the spillover of the financial crisis to the $US3.4 trillion business.

In establishing the temporary guarantee program for the US money market mutual fund industry, the Treasury tapped the Exchange Stabilisation Fund, which was established by the Gold Reserve Act of 1934 in response to the Great Depression. The support will be done via the Fed.

The move to shore up the fund is designed to allow the Treasury to insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

It came after the Reserve Fund was forced to reveal it was ‘breaking the buck’ in paying investors 97c in the dollar and not the usual $1 in redemptions after being exposed to $800 million worth of Lehman Brothers debt that is facing big losses.

 

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Crude oil rose Friday in New York, capping the biggest three-day rally in almost a decade, on speculation government measures to resolve the bank crisis will spur the economy and bolster petroleum demand.

That’s the theory, the reality is that there will be no impact on the US economy and oil prices will start sliding very quickly.

Oil rose 6.8% on Friday as output disruptions from hurricanes in the US and attacks in Nigeria’s main oil producing region continued to have as much impact on price and sentiment as what was happening in the sharemarkets and credit system.

October crude futures jumped $US6.67 to settle at $US104.55 a barrel in New York after rising 7.4% to touch a day’s high of $US105.25 a barrel.

Oil prices rose 15% last week, the biggest three-day rally since December 1998 as shorts scrambled to cover short positions.

That lifted the week’s performance to a 3.3% gain, the first weekly rise since mid August. It’s still down 29% from the high of $US147.27 reached on July 11.

The October contract expires tonight, our time, so when the Fed and the US Government moved on the mega bailout, traders decided to cover their positions.

Inventory positions in the US in the wake of twin Hurricanes Gustav and Ike will be key figures for the market this week.

Energy companies have resumed about 12% of oil production and a quarter of natural-gas output in the Gulf of Mexico after shutting almost all of it before the hurricanes.

The Gulf accounts for about 26% of American oil output and around 14% of gas production.

In Nigeria, Shell warned that the recent escalation in militant attacks would hurt earnings. The country has lost about 280,000 barrels a day from the violence on top of production already shut-in, according to government officials.

November Brent crude rose $US4.42, or 4.6%, to $US99.61 a barrel in London.

 

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Gold futures dropped sharply on Friday to end a very volatile week.

But it still had its biggest weekly gain in almost nine years on the turmoil in the financial markets.

Comex December gold futures fell $US32.30, or 3.6%, to $US864.70 an ounce in New York, but the metal jumped 13% over the week, up $US100.20, the best since October 1999.

Comex December silver futures dropped 22.5 USc, or 1.8%, to $US12.475 an ounce on Friday. That left it up 16%, the best since early 1987.

Gold is now up 3.2% so far this year, while silver has dropped 16%.

Comex Gold for immediate delivery rose $US18.26, or 2.2%, to $US869.23 on Friday.

 

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Copper had its best day in a month after the US bailout was revealed.

Comex December copper futures rose 11.05 USc, or 3.6%, to $US3.1765 a pound in New York. But that still left the metal down half a per cent over the week.

On the London Metal Exchange, three month copper rose $US311, or 4.6%, to $US7,060 a tonne, or $US3.20 a pound. The price is up 5.8% this year.

Nickel however had its biggest weekly drop in almost four years as stocks of the metal rose to a nine-year high, signalling weak demand from consumers, led by stainless steel producers.

London Metals Exchange stock rose 0.9% to 52,326 tonnes, the highest since July 1999.

That was after a 0.6% dip in second quarter stainless steel output this year, compared to the same quarter of 2007.

Three month nickel ended at $US16, 843 a tonne. The fall was more than 12% for the week, the biggest since October 2004.

The International Nickel Study Group said the world’s nickel surplus rose for a third month in July as consumption of the metal dropped to a nine month low.

The INSG said nickel production of the metal exceeded demand by 9,900 tonnes tons in July, compared with a surplus of 7,700 tonnes in June.

 

 

 

It sounds like more of the same from the past few weeks: sharemarkets rattled, financial stocks rattled and commodities on the slide. 

Well, it was up till Friday when it suddenly became a very different story.

And this morning, a switchback, with oil under the $US100 a barrel mark in New York trading early today as damage from Hurricane Ike wasn’t as bad as feared.

The US dollar fell Friday as the slide in the euro came to an end; the Australian dollar bounced a couple of cents; gold, copper and several other commodities rose and Hurricane Ike was the big influence.

But the big question was whether Friday’s bounce was due to Ike coming ashore and apparently not leaving too much damage to the oil and gas producing, refining and distribution facilities along the Texas coast between Houston and Galveston.

At least 13 refineries in Texas were shut for the passage of Ike.

That was 3.64 million barrels a day of refining capacity.

But as we have seen after storms in the past month, once the situation is clarified, then the prices of oil, petrol and gas will ease quite quickly.

And that’s what seems to have happened after Ike as oil fell in early electronic trading in new York to $US99.25 after dropping to $US98.75 a barrel early this morning, our time.

The October New York contract briefly dipped to $US99.99 on Friday, falling under the $US100 level for the first time since April 1.

But Nymex crude in New York rose 31c to close at $US101.18 a barrel.

In London, October Brent North Sea crude eased 6c to settle at $US97.58 a barrel.

Oil prices are down $US47.29 a barrel since the peak of $US147.47 on July 11.

For all the sound and fury of Ike, the real story remains the continuing dip in American consumption of oil-based energy products.

US energy consumption is down 3.8% over the past four weeks compared with the same period in 2007, while petrol consumption is down 2.1%.

 

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On the Chicago grain markets, the emphasis is shifting as the harvest gets underway and the yields of wheat, corn, soybean and other crops becomes clearer.

The United States Department of Agriculture said on Friday that the hugely important corn harvest won’t be as big as thought because of widespread dry, warm weather last month.

The USDA said farmers will harvest 1.8% less corn than forecast last month, while the soybean harvest will be down 1.3%, but wheat output will be higher in both the US and globally.

The USDA forecasts steeper increases in corn and soybean prices, which have eased from the record levels set earlier in the year.

December corn rose 30 USc, or 5.6% on Friday to $US5.6325 a bushel in Chicago. That pushed prices up 2.7% this week. That left the price of the most active contract down 30% from the all time high of $US7.9925 in late June.

November soybean futures rose 26c, or 2.2%, to $US12.02 a bushel in Chicago. The price rose 2.1% last week. Beans are down 27% from the all time high of $US16.3675 hit in early July

The USDA said the average cash corn prices in the crop year that began September1 were $US5.50 a bushel, compared with $US5.40 estimated in August and $US4.20 in the most recent year.

The Department said cash soybean prices will average $US12.35 a bushel this crop year (which started on September 1), up from last month’s estimate of $US2.25 and up from $US10.15 in the previous year.

 

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Wheat was the odd one out with prices falling for a third straight week after the USDA made no change in its estimate of US domestic stocks in the coming year, suggesting that there might be more grain than the market thought.

The USDA said it expects US carryover stocks on May 31 (the end of the wheat crop year) will be around 574 million bushels, while exports will total 1 billion bushels, matching the forecasts made in August by the USDA.

December wheat futures fell 7c to $US7.1925 a bushel on Friday, down 4.3% over the week and 19% this year.

The USDA also increased its estimate of global production to a record 676.3 million tonnes, up from last month’s forecast of 670.8 million tonnes.

Canadian farmers will harvest 25.4 million tonnes, up slightly from the August forecast of 25 million tonnes; European Union output will be 147.2 million tonnes, up from 143.2 million tonnes in the August forecast and these will offset declines in Australia and Argentina: Australia will produce 22 million tonnes, down from the 25 million tonnes in the August forecast and Argentina growers may harvest 12.5 million tonnes, 1 million tonnes down on the August estimate.

According to the USDA’s forecast, the US is expected to be the largest exporter of wheat, followed by Canada, Russia, Australia, Ukraine and Argentina.

 

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Copper had its best week in three, rising sharply on Friday as the US dollar lost ground against the euro.

Comex December copper futures added 7.15 USc, or 2.3%, to $US3.194 a pound. The price was up 3.1% last week

The metal climbed from Wednesday-Friday, as signs of declining mine output increased concerns that supplies may be tight next year. Some analysts, especially at Citigroup, are forecasting demand to run ahead of production next year.

Copper was also supported Friday by a fall in Chinese stocks.

Stocks overseen by the Shanghai Futures Exchange dropped 29% to 13,554 tonnes, the lowest level since 2003.

On the London Metal Exchange, three month copper rose $US192, or 2.8%, to $US7,122 a tonne, or $US3.23 a pound.

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Gold jumped Friday, ending a nine-day losing streak, thanks to the US dollar’s fall against the euro.

The euro rose as much as 1.5% against greenback, but ended off 0.3% for the week.

The Australian dollar finished at $US82.36 in New York, up from $US80.48 in Sydney on Friday afternoon and $US81.64 in Sydney the week before.

It was a rare gain for the currency, the first for a month or more over the week and the strongest daily performance for weeks.

Gold fell 4.8% over the week, despite a $US19 dollar an ounce rise on the day.

Comex December gold rose $US19, or 2.5% to $US764.50 an ounce in New York. The metal had fallen 11% from the end of August to last Thursday

Silver also had a rare rise, finishing up 24c, or 2.3%, to $US10.795 an ounce for the December contract. The metal still dropped 12% last week and is down 28% this year.

Gold is down 26% from the record $US1,033.90 reached in March and is off 8.8% in 2008.

 

 .

Price developments change very quickly on commodities markets these days. For instance, copper. In our last update, on August 15, we said, “the technical indicators are still bearish. The previous intermediary support (around 7,850) could be the immediate resistance for the current new rebound. Investors would then be tempted to test the long-term support of the triangle and pull the price back towards 7,200 or 7,100.”

Less than one month later, the price has cleared the long-term support line on the downside (that goes through points A and B on the chart). As a result, the bearish sentiment strengthens and will probably drive the price even lower in the coming weeks. The price closed at $6,860 a tonne 2 days ago on the London Metal Exchange (LME).

Click to Enlarge

What is going on?

Copper has fallen 22 percent from the peak of $8,775 posted on June 30, as increasing stockpiles signalled weaker demand. Imports of copper and copper products by China fell 4% in August compared with July.

Another element that has an impact globally on commodities markets is the recovery of the US Dollar. Remember that despite the exchange being based in London, copper is priced in US Dollars. A rebound of the Greenback therefore reduces the dollar-priced investments.

The price had moved within a long-term indecision triangle pattern. The basis line of this triangle was the long-term support line that backs the bullish trend started in late 2003. It had been tested and validated in February and December 2007 (points A and B on the chart) where the price bounced back strongly.

The upside of the indecision triangle pattern was the resistance line that goes through the highs posted in May 2006, and in March and April this year. This resistance zone was set around $US 8,900.

The last retracement level (61.8%) of the sharp bullish trend occurred between last December and last March (between points B and D). This had been the opportunity for a small rebound (point H) but it failed to cross above the 38.2% level (point K).

Since the beginning of this month, both the 61.8% level and the long-term support have been broken on the downside. This means the negative trend still goes on.

The MACD has just triggered a new bearish signal, and the Momentum indicator and the RSI are also negatively oriented. In this bearish scenario the next important target is the level of the previous long-term low which is the low posted in December last year (point B), around $6,300.

When commodity prices are tanking, no one wants to know about mines, grades or new discoveries. Attention is on sliding share prices, falling prices for the commodity themselves, so rarely do investors concentrate on the underlying growth or ideas behind a company’s decision to do something. The only time heads pop up and look around when there’s some corporate activity: the chance to exit an investment because someone else has popped along with what seems to be a great offer in a falling market. That’s the greater herd theory at work: value can only be found in what the mob sees as a good idea or investment. And when times are tough and investors are scarce, interesting and intriguing news from the mining sector can slip past, almost unnoticed. In the past week or so we saw a couple of examples of this with Kagara Ltd revealing a very rich nickel strike in Western Australia, to go with mining plans for a big deposit it has outlined elsewhere in WA and Western Areas also revealing an upgrade to its Spotted Quoll prospect, which is in the same area (along the same strike zone actually) near Forrestania in Western Australia. Kagara last Wednesday had its shares suspended pending an announcement about the quality of the strike at its romantically named Lounge Lizard prospect in WA. That was done and the shares remained off the boards until Friday when it revealed that the strike was a very attractive grade of nickel (two years ago the shares would have gone mad). Kagara, which is a zinc and copper producer said it had found an intersection of “massive and semi-massive” nickel sulphides at the Lounge Lizard deposit in West Australia. “Kagara Ltd is pleased to announce a record intersection of massive and semi massive nickel sulphides in hole LFPD18W2W1 at the Lounge Lizard deposit in West Australia. The intersection is comprised of three zones of massive sulphide with an aggregate drilled width of 33.46 metres within a 76.50 metre section. “The intersection lies approximately 150 metres up dip of the previously announced indicated resource of 5.7 million tonnes at 1.08 % nickel which includes an indicated high grade resource of 263,000 tonnes at 6.42% nickel “To Kagara’s knowledge this intersection is the best in terms of contained nickel drilled, either historically or in recent times, in the Forrestania region and will result in a significant increase in the Lounge Lizard resource,” it said. But Kagara shares have been weak and are down sharply in the past week. They finished at $2.50 yesterday, down from $3.15 a week ago on Tuesday. They hit a 52 week low of $2.39 this week, breaching the previous low of $2.63. That’s a fall of around 19% in a week. The sharp fall in commodity prices has been the driver as no one wants to know anything about new metal discoveries. Copper, nickel, lead and zinc remain under pressure, and so does the Kagara share price The Kagara strike is north in the same area of Western Area’s Spotted Quoll nickel discoveries, which that company reported on earlier this month. It too has a very significant nickel discovery, but the market doesn’t want to know. Shareholders will be hoping for more at the AGM in Perth later today (Friday) The shares closed at $8.60, down 98 in the past two days. Investors are treating it like all other mining companies. No talk of a ‘boom’ here these days. Here’s part of what Western Areas said last week. “The Board of Western Areas is pleased to announce a 118% increase in the high grade mineral resource at Spotted Quoll.

 

“The revised mineral resource estimate at Spotted Quoll now comprises a total 1,045,900 tonnes at an average grade of 7.2% nickel for 75,140 tonnes contained nickel to only 300 metre vertical depth.

“The majority of the mineral resource (88%) is in the high confidence Indicated Mineral Resource category.

“This excellent result confirms the potential for a major underground mine below the proposed open pit. Western Areas is already considering early development of an underground mine which could produce ore concurrently with the latter stages of the open pit.

“In this event, production could significantly exceed the target 8,000 tpa nickel from Spotted Quoll. A mining proposal for the Spotted Quoll open pit has been lodged and, assuming this is approved by the end of 2008, ore production is expected to commence in the Sept Q 2009.

“The revised mineral resource rates Spotted Quoll as one of the world’s highest grade and most continuous nickel deposits, less than 12 months since its discovery in October 2007.

“Importantly, Spotted Quoll remains open at depth and open along strike. Further mineral resource upgrades are likely as drilling continues between 300m and 600m vertical depth.”

A map on page two of this announcement on Friday from Kagara shows the proximity of the two companies’ big strikes.

This was the second bit of good news from Kagara in recent weeks.

On August 22 it revealed more details about the deposit it was working on at Admiralty Bay with discussion about a possible mine. The shares rose after that, but that was very much different to the reaction to Friday’s announcement.

“Kagara is pleased to announce an initial resource estimate for the Admiral Bay deposit containing an Inferred resource of 72 million tonnes at a grade of 3.1% zinc, 2.9% lead, 18 grams per tonne silver and 11% barium reported at a nominal 2% zinc equivalent cutoff.

“This is a subset of a larger Inferred resource containing 97 million tonnes at a grade of 2.4% zinc (2.3 million tonnes of zinc), 2.9% lead (2.8 million tonnes of lead), 16 grams per tonne silver (48 million ounces of silver) and 16% barium also reported at a nominal 2% zinc equivalent cutoff.

“The model has been restricted to a 2.1 kilometre section of an 18 kilometre strike length of known mineralisation and the resource remains open to the east and west along strike.

“$35 million has been spent over the past 18 months at Admiral Bay and confirmed Admiral Bay as a deposit of world significance.

The company said the resource remains open to the west where the closest drill hole is located 2 kilometres along strike and which encountered a 13 metre intersection grading 4.3% zinc, 3.1% lead, 29 g/t silver and 9% barium and also encountered 25 metres grading 4.5% zinc, 0.8% lead, 23 g/t silver and 3% barium. Intersections of up to 20 metres at 8.3% zinc, 4.9% lead, 36 g/t silver and 21 barium from within the resource, have demonstrated the potential for higher grade zones within the overall resource.

“Scoping studies using the resource grades and contemplating a 10 million tonne per year underground operation have shown that the operation has the potential to produce 300,000 tonnes of zinc, 250,000 tonnes of lead and 4.5 million ounces of silver annually.

“Metallurgical test work has shown that coarse grained very high quality lead and zinc concentrates will be produced at recoveries in excess of 95% into very high quality concentrates.

“The cost of production is expected to be in the lowest quartile of cash costs worldwide.

“Metallurgical test work is continuing on the recoverability of barite to a saleable product and it is expected that a proportion of the 2 million tonnes of barite processed annually will be recovered which will further reduce the cash cost of production.

“A number of development options are currently being considered for taking the project forward.

“Drilling over the past 12 months has shown that defining a reserve from surface drilling is currently cost prohibitive and an exploration shaft with 2.5 kilometres of lateral development will be required to bring the project to a bankable status. At present, a diamond drilling program to obtain geotechnical information in preparation for the sinking of a shaft is nearing completion.”

So Admiralty Bay has a lot of potential, but there are higher costs than first thought in getting to them and getting them out.

But as attractive as they are, the market has gone right off resources and mining stocks in particular. It’s an old story for miners about the fickleness of the herd.

Yes, 2007-08 was a record year for mining and mining exports, but the sinking Australian dollar has thrown in a big spanner into prospects for 2009. That 2008 outcome indicates we remain the lucky country, despite the slump in most metal and oil prices now. If it hadn’t been for that great inflationary surge from March onwards, with gold, oil copper, plus iron ore and coal all rising, we would have seen lower export income for 2008. Total earnings from Australia’s mineral resource exports rose 11% to $116 billion in 2007-08, but it could have been a lot more, given the stronger dollar during the year. ABARE (the Australian Bureau of Agricultural and Resource Economics) said this rise reflected the combination of higher prices for energy and some mineral commodities and growth in export volumes for most commodities and these factors more than offset the effect of a 14% appreciation of the Australian dollar. But with the Australian dollar now down more than 19% in the past seven weeks, and running around the levels of August 2007, the value of 2009 exports will be much harder to work out because most commodities have experienced very sharp falls in price in recent week (and a bit longer in the case of some of the metals). Our currency fell under 80 US cents yesterday and the trade weighted index is also down, indicating we have lost ground across the board. It hit a low of 79.12 US cents in New York and ended around 79.65. In fact the 11% rise in export income for minerals came as a result of soaring prices for oil and related products, and the jump in iron ore, coking and thermal coal export receipts because of big price rises applying from April 1. Higher gold and copper prices (it hit an all time high in May, gold’s all time high was in March, Oil’s was in July). In fact it was that rise in the June quarter which completely changed the picture so far as the question of export revenues for the 2007-08 financial year is concerned. Lucky country indeed, and that surge in revenue showed up in a 13.6% rise in our terms of trade in the June quarter. ABARE figures for the March quarter show the impact of slumping prices, especially for metals. “In the March quarter 2008, the index of export prices of Australian mineral resources (export unit returns) increased marginally by 0.5 per cent compared with the December quarter 2007, as higher energy prices were almost fully off set by lower prices for metals and other minerals. “Strong oil and coal prices supported a 5 per cent increase in prices for energy minerals.  “Compared with the March quarter 2007, the index of export prices was nearly 4 per cent lower, with higher energy prices (up nearly 8 per cent) more than offset by a decline in prices for metals and other minerals (down 10 per cent). “Prices for metals and other minerals have declined over the past 12 months, largely as a result of increased supply for some commodities and weaker demand growth driven by the uncertainty surrounding the outlook for the US economy.” But in its review of 2008 this week, the Bureau showed a very different picture on pricing to that at the end of March. “In 2007-08, the index of export prices of Australian mineral resources (export unit returns) increased by 25 per cent compared with 2006-07. “Record price increases for energy minerals during the year, such as oil (53 per cent), thermal coal (19 per cent) and liquefied natural gas (LNG) (16 per cent), underpinned this rise, with the index of energy export prices increasing by 54 per cent. “Prices for metals and other minerals also increased by nearly 8 per cent as higher world prices for gold, silver, lead and copper offset price declines for zinc, nickel and aluminium. “A significant proportion of the growth in the index of export prices occurred in the June quarter with total mineral export prices increasing by 21 per cent compared with 4 per cent in the previous quarter.

 

So the 4% drop in march had changed to a 4% rise with revisions, and then risen again in the June quarter to record levels.

The growth in the June quarter reflects the increase in contract prices of metallurgical and thermal coal, and iron ore, which took effect from April, as well as higher crude oil and gold prices.”

More interestingly, our production of energy and minerals was steady in 2007-08, with higher production of metallic metals broadly offsetting lower production of energy minerals.

So if the prices that had ruled during the March quarter had continued into the final quarter of the year, we would have been looking at a noticeable fall in earnings from mineral exports.

Looking at various industries, ABARE said:

In 2007-08, there were significant increases in export earnings for: iron ore, up $4.8 billion (31 per cent) to $20 billion; crude oil and condensate, up $2.2 billion (26 per cent) to $10.5 billion; thermal coal, up $1.6 million (23 per cent) to $8.3 billion; manganese ore, up $1.1 billion (218 per cent) to $1.5 billion; metallurgical coal, up $755 million (5 per cent) to $15.8 billion; LNG, up $632 million (12 per cent) to $5.9 billion; refined gold, up $582 million (6 per cent) to $10.9 billion and uranium, up $227 million (34 per cent) to $887 million.

Apart from gold, LNG and lead, which recorded declining export volumes, higher export values for the other commodities reflect both increased volumes shipped and higher export prices.

Commodities which recorded a decline in export earnings in 2007-08 include: nickel, down $2.1 billion (33 per cent) to $4.2 billion; zinc, down $932 million (22 per cent) to $3.4 billion; aluminium, down $679 million (12 per cent) to $5 billion; and alumina, down $432 million (7 per cent) to $5.8 billion.

The decline in the export values for zinc, aluminium and alumina reflect lower prices more than offsetting higher export volumes, while the fall in the value of nickel earnings is the result of both lower export volumes and lower world prices.

Commodities for which production increased included: lead bullion (33 per cent), rutile concentrate (19 per cent), zinc ores and concentrates (14 per cent), iron ore (13 per cent) and silver ores and concentrates (12 per cent).

Lead bullion production increased in 2007-08 as recent expansions to the Mt Isa zinc-lead concentrator in Queensland and the mining of higher grade ores increased smelter output.

Rutile concentrate production was also higher as a result of increased production at Consolidated Rutile and Iluka’s Queensland Douglas operation, offsetting lower production at Iluka’s Western Australian operations.

Silver ores and concentrates production recovered in 2007-08, as annual production at BHP Billiton’s Cannington mine in Queensland returned to capacity following maintenance in 2006-07.

Zinc production was higher as a result of one-off production at Perilya’s Beltana mine in South Australia and increased production at Century, Cannington and Mt Isa mines in Queensland.

Iron ore production was also higher as BHP Billiton, Rio Tinto and Fortescue Minerals increased output from new mines in Western Australia.

Commodities which recorded a decline in production included: refined tin (100 per cent), diamonds (33 per cent), intermediate nickel (22 per cent), crude oil and condensate (10 per cent) and mined gold (9 per cent).

Production from Australia’s only refined tin project, Sons of Gwalia’s Greenbushes project in Western Australia, ceased in early 2007 when the company’s administrators closed the mine. This meant no refined tin was produced in Australia in 2007-08.

Diamond production was lower as a result of variability in mine production at Rio Tinto’s Argyle mine in Western Australia where the open pit operation is approaching the end of its life and the company continues its transition toward an underground operation.

Production at Argyle was also affected by cyclone activity in the March quarter which increased water levels at the mine, restricting access to higher grade ores.

Intermediate nickel production was lower as a result of reduced output from the Kalgoorlie nickel refinery in Western Australia. Production of crude oil and LPG declined in 2007-08 because of technical difficulties at a number of oil fields and natural field decline.

Gold production was also lower as a result of the closure of a number of gold operations with lower production also reflecting the mining of lower grade ores. Gold output was the lowest since 1989, according to ABARE.

Gold prices fell below $US750 an ounce overnight Thursday to take the fall in 2008 to 28%. very hard to see another year of solid export earnings from gold on that basis.

The issue of short-selling has come back on to the agenda in the last few days with news that Fortescue Metals [ASX:FMG] CEO Andrew Forrest has led an all-out attack on funds that he believes have been short selling Fortescue shares.

For the uninitiated, short-selling is where your broker borrows shares from an institution and gives them to you so that you can sell them on the stock market. The intention being that you believe the share price is going to fall. Once it has fallen, you buy the shares on the market and give them back to your broker who in turn gives them back to the institution.

It’s a fairly simple concept, but it is largely the domain of institutional investors rather than private investors. There are many people in the investing community who see short-selling as heresy or immoral, others argue that it all helps to improve price discovery in the market and reduce volatility.

Personally we don’t really care either way. However, there are a couple of issues that should be considered. First is the issue of transparency. The Australian Securities Exchange is forever trumpeting on about how wonderful it is and how transparent all dealings with the ASX are, yet despite this, it is unable to provide any vaguely accurate statistics to investors about how much short-selling there is in particular shares.

The crazy thing is that it would not be that difficult for the ASX to do this. Quite simply all it would have to do is remove the process of stock lending from the broking firms and instead place that responsibility with the ASX. The broker would then simply place a “Short Sell” order in their system which is then highlighted as such by the ASX. Those institutions whose business it is to lend out stock (such as NAB and ANZ) would still have a role to play, only they would be lending stock to the ASX rather than individual brokers.

It isn’t hard; it’s just whether there is the will.

Jekyll & Hyde Fund Managers
The other issue that we do find a bit puzzling with short selling is why an institution or anyone for that fact would want to lend their stock out in the first place. Most stock that is being lent out is typically held by fund managers who have invested in those shares on behalf of investors. You would think that they have a vested interest in the share price rising - you would think.

It seems bizarre then, why they would lend stock out to another institution in full knowledge that the shares are to be short-sold, potentially (although not always) having a negative impact on the share price.

Get Your Aussie Dollar While It’s Cheap
It has almost happened in the blink of an eye. As we write this morning, the Aussie dollar is trading below 82 cents. The performance of the Aussie dollar is a perfect example of how financial markets are constantly looking forward.

What happened last week, last year or today is almost irrelevant compared to the consensus market view of what is going to happen in the future. Exchange rates can be impacted by a wide range of things, but one of the most important is interest rates.

Since the Aussie traded almost at par with the US dollar back in July it has fallen by nearly 20%. What has happened to interest rates during that time? Not much as it happens, apart from the 0.25% cut by the RBA this week. The big difference now is the expectations for further interest rate cuts in Australia and possibly rising interest rates in the US which will reduce the interest rate differential between the two countries.

As with many markets, investors do have a tendency to overshoot both on the upside and the downside. Has this happened with the Aussie? We’ll get our resident technical guru Gabriel Andre to have a look at that for us on Monday.

Well here’s the good news. The Australian economy has gone for 17 years without a recession. That’s a pretty impressive growth spurt. But if the economy were a teenager, you’d wonder how much growth was left.

–The economy is not a teenager, of course. Australia’s $1 trillion economy is much more complicated than the mind of a 17-year old, probably. But for the record, growth in the second quarter was just 0.3%. Year over year, Aussie GDP grew by 2.7%, which is better than the U.S. (2.2%), the U.K. (1.4%), and Germany (1.7%).

–Former U.S. Senator Everett Dirksen allegedly once said that the main purpose of GDP is to make everything else look small by comparison. And really, who goes around and ads up the value of all the transactions in the economy in any given quarter? Aren’t these numbers a bit of a fraud? And isn’t the obsession with them based on another fraud, that the economy is finely tuned machine that can be tweaked, prodded, and manipulated by policy makers?

–In any event, the share market was not sufficiently cheered by Australia’s relative out-performance in GDP terms. Shares got shellacked. Even the decision by the Reserve Bank to cut the cash rate to 7% was not enough to kick start the market higher. And the decision actually kicked the Aussie dollar down its lowest levels in a year.

–So has anything really changed this week? It sure doesn’t look like it. Buried in the GDP data is the fact that Aussie household spending fell. What did you expect? We are starting to find out how much consumption in the economy was financed with credit cards or borrowing on other assets like cares or shares.

–In terms of personal virtue, more saving and less spending is probably good for a man. In the aggregate, it leads to lower GDP growth. But if the growth comes at the price of debt, well, perhaps we should try doing without for a few quarters. You’d get a different kind of economy over time, but it might be more productive and less indebted.

–Here in America, it’s all politics all the time. It’s enough to make a man sick to his stomach, which is how your editor has been for the last few days. It could be the jet lag. But we reckon it’s the spectacle of tens of millions of people who sincerely believe that it’s possible to live at one another’s expense. Yeesh.

–In the markets, all the action is in the currencies, which is in turn setting of reactions in oil, gold, and commodities. The U.S. dollar has started to look like the least ugly currency on the market lately. The British pound is reeling under the staggering incompetence of Gordon Brown and Alistair Darling (and Britain’s housing and debt bubbles.).

–You know what we think of the greenback over the long haul. But the dollar rally may have some legs, especially if you keep seeing increased political risks in Asian markets (Japan, Thailand, Indonesia). We had lunch with an old colleague yesterday who said it looked like shades of 1998 and the currency crisis, but with a few variations.

–What variations? Well, in 1998, the U.S. was coming off a rare (and truth be told fictitious annual budget surplus). Tax profits were pouring into Federal coffers faster than the Federal government could dole it back out. The dot.com boom was entering its irrational phase, and the dollar looked like a King.

–Today, U.S. Federal finances are not nearly so rosy. The government is going to run an annual deficit of nearly half a trillion dollars. But still, in the game of global fiat currency competitive devaluation, other countries are following what the Fed began last year.

–The stronger dollar will put a lid on oil and gold, and probably deal a few more kicks to the mining companies, and the morale of resource investors. We wouldn’t be foolhardy and average down. But you should still keep a careful list of good resource projects with excellent mineral deposits. And then try to buy them on sale.

Fletcher Building Limited (ASX:FBU) is involved with building products, concrete, steel, construction, property and housing and distribution.

The long-term chart of FBU is quite simple. From 2001 to July 2007, the stock experienced a long-term bullish trend that drove the price from $1.75 to $12. It’s a 585% gain in 6 years.

However the stock has been retracing a large part of this gain. From July 2007 and the historical high price posted at $12, it has declined by 61% to reach a recent low at $4.66 on July 16 this year.

The stock has found some support there and has already bounced back. We think there is more to come. As this stock is trendy and is obviously uncorrelated with indices, the momentum indicators suit well its technical analysis.

Those indicators are well oriented. They turned bullish in the first fortnight of July and strengthened during the past few weeks. Therefore there is a conjunction of signals that argue for a further price development on the upside.

Click to Enlarge

The MACD has already crossed above its signal line. It has also crossed above the zero line, which is a confirmation that there is a medium-term bullish trend. Why does it strengthen the existing bullish signal?

Well, traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. Consequently the zero line often acts as an area of support and resistance for the indicator.

The Momentum indicator which is a measure of the velocity of price movement is also positive. It bottomed in July, turned upward and has been rising since, crossing above its 100-level signal line in the first fortnight of August. The trend is there, and it may remain your friend as the overbought configuration has not been reached yet (according to the RSI). It means that the trend is likely to continue before any potential significant corrective pull back.

Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or “noise”, that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average crosses above a longer-term average. Last month, the 10-day moving average (in blue) crossed above the 50-day moving average (in red). Today this 10-day moving average acts as the first support to the price action.

The current correction of the one-year bearish trend is expected to continue on medium-term perspective. The first intermediary resistance line is the 23.6% Fibonacci retracement level around $6.4 (since the stock has been bouncing back the high posted is $6.19). If the trend goes on, the most important levels to watch will be $7.4 and $8.3, which correspond to the 38.2% and 50% ratios.

The downturn in commodities since the middle of July has been pretty vicious and this week it seemed to be made more tense by the way the market fell across the board as Hurricane Gustav squibbed it and didn’t prove to be the major destroying storm that many had feared. The way, oil, gold, copper and other metals, plus major grain prices fell after the passing of Gustav indicates that the old fear about supply shortages no longer dominates thinking in these commodity markets. Most commodities were weaker to  steady overnight Wednesday, but it was more of a holding pattern than any sort of recovery. For Australia, as we start enjoying the fruits of the boom, it’s a timely reminder that more needs to be done here to make the economy more efficient and more productive. We are at present relying on higher receipts for our coal and iron ore exports and not much more as prices for other resources have titled downwards since the slump started. If anything should slow China’s economy in the next year or so to a much lower level of growth, then we will be exposed to a much sharper slump in activity than we saw with yesterday’s GDP numbers. The Reuters-Jefferies CRB index, a global benchmark for commodities prices, has fallen 18.9% since June 30, to a six-and-a-half-month low, after surging in the first half by almost 30%. July was in fact the worst month for many commodity indexes for 30 years or so because mainly of the steep drop in oil prices. Prices are still higher than they were a year ago, but as we move through the rest of 2008 and into 2009 that premium will either simply disappear with each month’s comparison, or will show up in more price falls to the point where the comparison is negative. We have to assume that just as commodities probably overshot and went to high from March through mid-July that prices will overshoot on the way down and fall to unsustainably low levels.  But some analysts warn that because their financial investors involved there could be a much steeper fall than expected simply because of the impact of momentum. Oil is trading closer to $US100 a barrel than it has for more than five months, gold eyed and eased under $US800 an ounce, copper, is glancing towards the $US3 a pound level and wheat, soybeans and corn futures prices are busy retracing former price rises. Gold was trading at $US799.90/800.90 an ounce in Asia late yesterday, down from $US804.90/806.25 an ounce late in New York Tuesday, when it fell as low as $US790.40 after oil dropped and the dollar rallied. It traded just above $US800 an ounce in New Yortk overnight.Gold struck a nine-month low around $US773 in mid-August. Oil traded around $US109 a barrel in New York. This sharp sell off in commodities, led by oil seems to have had its first notable victim among investors with a multi-billion dollar hedge fund imploding and now facing being broken up. Bloomberg has reported that this slump had ensnared Ospraie Management of the US which is going to close its biggest after it fell almost 27% in August and 38.6% from the start of 2008. It’s 20% owned by the struggling Lehman Bros investment bank. Bloomberg said the Fund had a value of $US2.8 billion at the start of last month, so the loss would have been in the order of $US750 million in the month. Bloomberg said a letter from founder, Dwight Anderson, to investors explained that the Ospraie Fund lost 26.7% in August, after a “substantial sell-off in a number of our energy, mining and resource equity holdings.” “I am extremely disappointed with this result and the fund’s sudden reversal in performance. After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.” The Ospraie Fund was started in 1999.

 

Bloomberg said that the closure of the Ospraie Fund leaves the New York-based firm overseeing three remaining funds with more than $US4 billion in assets, down from $9 billion in March.

Commodity market indexes fell by around 10% in August, and are off 20% since the slump started in Mid-July as investors switched out of mining and resource investments and into mainly US shares because of expectations the US wouldn’t slump as much as Europe, Asia the UK or Japan would.

It sold out of Iluka in recent days, according to a statement to the ASX from the beach sands miner and processor yesterday evening

Oil closed at around $US115.46 a barrel in New York on Friday before the holiday long weekend. At one stage overnight the price was down around $US105 a barrel.

Copper plunged as well, losing nearly 11 US cents a pound in New York to close at $US3.29 a pound (a seven month low) while gold fell by around $US24 to $US810 an ounce.

The Australian dollar weakened, falling to a day’s low of 82.70 US cents, that’s also the lowest for around a year. It then recovered back over 83 US cents.

While that followed the Reserve Bank’s 0.25% rate cut yesterday, it wasn’t the major reason. The rate cut had been widely expected and was in the price of the currency: it was the sharp drop in oil, copper and other commodities that hit resource-based currencies including the Aussie overnight.

The futures prices for wheat, corn and soybeans all fell sharply as well as Gustav faded.

It was a significant slump across the board for commodity prices. Metals in London, led by lead also fell sharply.

Markets were tossed around as investors wondered about whether this rapid correction would finish.

Not helping was a gloomy assessment of the current state of the world’s major economies that helped ended the whoopee over oil prices.

The Organisation for Economic Cooperation and Development warned that overall, “the picture for the major economies is of a particularly weak second half”.

It saw a growth uptick for the US, but the eurozone and UK economies will “barely creep forward” in the second half of this year.

The OECD suggested that global financial turmoil might be entering a “new phase” with the stream of bad news reported by banks now reflecting generally economic weakness rather than direct effects of the credit squeeze.

The OECD revised up significantly its forecast for US growth this year, after significantly stronger-than-expected second quarter data. It expected 1.8% growth, compared with its previous forecast of 1.2%.

But surveys out yesterday showed a sharper than expected fall in US construction spending and a contraction in manufacturing, led by a drop in forward orders, employment and inventories. Exports were up and inflation eased.

The OECD gave itself an out by warning that there was a lot of uncertainty about how quickly the effects of the US fiscal stimulus package would fade.

The OECD was worried about inflation in Europe and overnight those concerns were given some additional impetus with news that producer prices in the 15 country eurozone rose 1.1% in July, compared with 1% in June. That made for an annual rate of 9% (not much different to the US) in the year to July.

European retail sales fell 2.1% in July compared with July 2007, after a record 3.1% drop in June.

That won’t be enough to get the ECB to cut rates tonight, while the Bank of England’s next move is unclear, despite the overwhelming weight of gloomy news about the British economy. Its decision will come tonight, our time

A desperate Labour Government has attempted to boost the sinking housing sector by significantly expanding the stamp duty exemption on house purchases of homes worth up to 175,000 pounds from 125,000 pounds. It will cost near $A2 billion in a budget already heavily in deficit.

Money will also go to helping people avoid repossession (nearly $A400 million). But the British pound continued its worst fall in 16 years.

 

 

It’s nice to be able to report on some good news: The commodity boom is still happening, and we are now seeing the first real signs that the boom is transforming our trade performance. Figures for the June quarter showed the first real tangible fruits of the resources boom in producing a $7 billion improvement in our trade performance and cutting the overall current account deficit for the quarter to its lower level for three years. Powered principally by the 86% rise in iron ore export prices and a doubling in the value of thermal coal exports and a 200%-plus rise in the value of coking coal contracts with steel mills around the world, the current account deficit was the best since the June quarter of 2007. Economists said it was the largest single biggest improvement in the current account deficit in the history of the data since 1959. Export values increased by around 13.6%, while imports were up only 0.5% in the quarter, so our terms of trade improved by just over 13% (which again is the point the RBA has been making about the rise in national income expected this year). The news won’t influence the Reserve Bank’s decision to cut interest rates today by at least 0.25%.  The improvement is what the Reserve Bank has been cautioning us about the surge of income expected from the improvement in our terms of trade this year. The solid trade performance and associated rise in corporate profits (the boost coming from resources) could see the RBA cut today and then sit for a month or three. Another sharp fall in world oil prices overnight to around $US111 million after Hurricane Gustav missed New Orleans, might also encourage a cut and hold strategy. The latest ABS figures could very well be adjusted further as more information comes to light. There have already been significant positive revisions in the monthly figures from the Australian Bureau of Statistics. The figures on trade, as well as inventories, profits, wages and salaries and sales do not show an economy that collapsed in the June quarter, but the pace of activity did slow. Figures released yesterday from the ABS show that the current account deficit, seasonally adjusted, fell $7.068 billion or a huge 36% to $12.774 billion in the June quarter. That was around $1 billion above some estimates, but that could be easily changed by future revisions. More stunning was the improvement in the trade account: the ABS reported that surplus (not the usual deficit!) on balance of goods and services of $559 million was a turnaround of $7,872 million on the $7,313 million deficit of the March quarter 2008. That was the first trade surplus since the March quarter of 2002. It was the largest current account surplus since the big $2.2 billion back in the June quarter of 1997. The income deficit increased 6% or $797 million to a still too large $13.284 billion. Our net foreign debt fell 1% to $599.935 billion, thanks mostly to the valuation effect from the strong Australian dollar. That will probably be the low point for a while, given the slump in the dollar since then. It traded around 85.48 US cents this morning, having lost around 8.5% in August against the greenback.

 

The ABS estimated that the dramatic improvement in our trade performance would detract 0.1% from the Gross Domestic Product numbers when released on Wednesday.

That in itself is also a significant improvement as the poor trade performance in the March quarter chopped 0.7% from growth in the quarter. 

That is a little less than the 0.2% positive contribution estimated from the markets, but economists say that the ABS figure is only an early estimate.

March GDP grew 0.6% for an annual rate of 3.6%. The latest news means that growth may be a bit higher than thought by some: perhaps around 0.3% to 0.4%, which would bring the annual rate down to around 2.8%.

But complicating matters were solid figures for business inventories, up 0.3% in the quarter in seasonally adjusted and wages and salaries, up 2.3%, while company profits (or the gross operating surplus) rose sharply off the back of the resources boom especially BHP Billiton and Rio Tinto.

Australian businesses posted their largest increase in annual profit growth for almost seven years as the mining boom ripples through the economy.

Company gross operating profits, seasonally adjusted, rose 21.5% in the year to June. It was the biggest percentage rise since December 2001.

Profits rose by 14.3%, seasonally adjusted, for the June quarter, more than five times the market forecast of 2.8%. This was the largest quarterly growth in company profits since March 2001.

But this won’t translate into a big boost for growth in tomorrow’s GDP numbers as the ABS will apply a deflator to reduce that figure to eliminate the impact of inflation.

Sales of goods and services were estimated to have risen 0.4% in seasonally adjusted terms for manufacturing and 1.1% for wholesale.

That there was no sharp rise in inventories could mean that retailers managed not to be caught long unsold stocks by the retailing slump from February-March onwards.

And there was some relatively good news on inflation with the TD Securities/Melbourne Institute Monthly inflation gauge showing a slowing in the rate of price growth to just 0.1% in August from 0.4% in July: the annual rate was still a high 4.2%.

The August figure was a 15 month low because of the fall in petrol prices. Without petrol prices the rise would have been 0.6%, but without petrol prices the rate of increase up to August would have been very much lower than the 4.8% the gauge peaked at.

Rising food, home fuel costs and insurance held the annual inflation reading at 4.2% for the year to August, down from 4.6 last month.

And we saw a small contraction in manufacturing in August for a third month.

The performance of manufacturing index rose 0.1 points to 47 from July, when it fell 0.1 points, PricewaterhouseCoopers and the Australian Industry Group said in a report released in Canberra.

The index was below 50 for a third month, signaling manufacturing is shrinking.