ANALYSIS

The new resources boom - is the party over already?

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Before we all get too excited about an emerging commodities boom Mark 2 - be aware that the smart money is already calling it over.

In the last week, headlines screamed about the deficit-improving, economic-boosting prospects that we will enjoy thanks to surging prices for our minerals. But don't bank on the resources stock dividend trickle turning to a flood just yet.

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Of Australia's major export commodities the only ones to have received a significant price rocket this year have been the coals - coking coal wins first prize after soaring almost 180 per cent followed by thermal coal which shot up by around 75 per cent.

The other commodity whose price really makes a difference to our economy and to those investors in our big resource stocks, BHP Billiton, Rio Tinto and Fortescue, is iron ore.

Commodities have entered a bull market.
Commodities have entered a bull market.  Photo: Rob Homer

Sure it's had a good run this year - up around 25 per cent. But even at its current levels this is by no means a boom-time price.

(And the gains have been reflected to varying degrees in the share prices of major mining stocks, BHP Billiton, Rio Tinto and Fortescue which have all had stellar increases this calendar year)

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But those now thinking of jumping on the commodities recovery train, it could have already left the station. There are now a number of investment banks including, UBS and Citi, that have the party as being over and downgraded their recommendations for the likes of BHP and Rio.

The case for urging caution on commodity prices and the companies that produce them got stronger a few days ago when Chinese export data for September came in far weaker than expected.

The emerging view is that iron has had its moment in the sun.
The emerging view is that iron has had its moment in the sun. Photo: Nick Cubbin

After a healthy start to the year, iron ore is certainly now at a more comfortable level than it was nine months ago - when the $US37 a tonne price had had some bearish economists predicting it would move to $US30 or lower by the end of 2016. Even the optimists who at the start of the year were predicting iron ore would sit around $US45 were caught off guard by its gradual improvement this year.

What these experts didn't count on was a steady increase in demand for iron ore from Chinese steelmakers - mostly on the back of some extra stimulus measures from the Chinese government and supply restrictions.

(It was an understandable miscalculation from the commodities economists given the Chinese government has engaged in numerous stimulus measures over the past few years and many of them didn't do much to move the price of commodities it uses for raw materials.)

Now, the emerging view is that iron has had its moment in the sun - that the improvement since the start of the year is not part of a longer lasting rally and that in 2017 and 2018 its price will on average be lower than it is now. This year's gains in these bulk commodities now looks like it was a welcome reprieve not the start of a major upward swing in the cycle.

The view on coal runs similarly in terms of price. There is a growing chorus of opinion that phenomenal gains this year are over.

The gains in the coal price this year were also the result of decisions made by the Chinese government to reduce the number of coal production days - thus reducing supply.

While this was the biggest factor influencing supply, the demand side was influenced by the same stimulus that affected the iron ore price.

How long coal stays at these heady levels - not seen for more than three years - depends on the extent to which the Chinese government relaxes these production restrictions.

If prices look sustainable, we could see mothballed mines start producing again which in turn would put downward pressure on the price.

There clearly comes a point for the Chinese government where it would not like to see further price gains in coal - which is a major input for its steel mills.

Given the Chinese government's policy decisions on the pace of the country's own economic growth factors and therefore the demand side of the equation, the commodities analysts' crystal balls can be clouded.