Here’s a riddle for you…
What gets bigger the deeper you dig?
Without mining, Australia’s economy would be a lot different. And probably a lot poorer.
Now, I’m no fossil fuel cheerleader or mining shill.
Indeed, my personal belief is that Australia must get cracking on things like renewable technology ASAP.
Climate change politics aside, it’s a simple matter of hedging your bets.
Because if the world does go fully to renewables — as is happening in Europe and the US — and we’re not innovating too, then our whole continent could turn into one huge stranded mining asset.
We’ll have collapsed into a proverbial economic hole.
That said, the fact of the matter is, that today, the mining industry is keeping our economy afloat.
Seven of our top 10 exports are in the mining industry:
Australia’s deal is this: we ship the world everything we can dig up and they send us that list you can see above under ‘imports’.
The staples of everyday life — cars, boats, phones, computers, medicines; we get all this in return for our mining goods.
Adam Smith would’ve approved.
But our reliance on just one industry leaves us fairly exposed. If demand for mining goods slows down, the domino effect on all our economy would be very bad indeed.
It’s why you should be tracking the mining industry very carefully.
Which brings me to a pleasing signal in our biggest export — iron ore…
The RBA says buy
Iron ore makes up a whopping 15% of our total exports by value.
For the past 12 months, iron ore — and hence Australia’s budget and economy — has led a charmed life.
In this instance our luck, unfortunately, came from others’ misfortune.
A disaster in Brazil, in a pit owned by Vale SA, caused an ongoing unexpected supply disruption (as well as 240 deaths) as the government shut down mines nationwide until full investigations could take place.
Australia’s iron ore miners have made a mint this year as a result.
The price of iron ore surged as high as US$120 before falling back down to US$88 where it now sits.
But the RBA sees a good chance of higher prices on the horizon. They reckon there’s little investment happening in new mines, meaning any higher prices will be soaked up by existing producers.
And they explain the flow-on effect this will have on the country in a recent report:
‘While higher iron ore prices are therefore unlikely to have much direct effect on domestic mining sector activity, mining firms’ profits could be significantly higher, which will have some indirect effects on the broader economy.
‘In the first instance, recent higher prices will boost state and federal government revenues, through mining royalties and company income tax payments.’
Like I said at the start, like it or loathe it, mining is our country’s bread and butter industry as it stands.
Which is why this is good news…
I just came across another signal that suggests the iron ore price rebound could be sooner rather than later too.
Check out this chart:
This chart shows Chinese inventory levels of steel are at cyclical lows. Even while rebar steel production is at cyclical highs.
As it shows in this chart:
This suggests some good demand for steel in China right now and hence a future need for iron ore from us.
Add it all up and it might be time to start searching out some good iron ore stocks?
You could look at the big three of Rio Tinto Ltd [ASX:RIO], BHP Group Ltd [ASX:BHP], and Fortescue Metals Group Ltd [ASX:FMG] of course.
Then there’s also Grange Resources Ltd [ASX:GRR], for anyone who wants to look for a small-cap iron ore producer.
All are worth a look…
An even better opportunity
Now my friend Shae Russell over at the Daily Reckoning thinks there’s an even better opportunity in mining right now.
But she has a shinier substance in mind.
Namely our second biggest commodity export — gold.
She says this chart here appears to give a signal to buy:
Curious as to what it means?
I’ll explain more tomorrow…
Editor, Money Morning