It now looks like China has at least 6 months of raw material stockpiles on hand and that continues to grow. So how do resource companies like BHP, RIO, FMG, Vale et al make a case for continued expansion when demand is collapsing at an ever increasing rate?

“Inventories at the ports also seem adequate for now, and steel mills probably have all the ore they need to get through to the end of the year,” said UBS analyst Tom Price.

http://www.foxbusiness.com/news/2012/07/20/iron-ore-price-lowest-since-nov-as-chinese-demand-sags/

China import Iron Ore Fines 62% FE spot (CFR Tianjin port), US Dollars per Metric Ton
…..as of today it’s now down to $125/dmt.

Ore (and coal) prices have matched or trended down with the worsening global economic situation. I don’t see any sort of trigger that will halt this decline until things eventually break globally. It’s going to be a pretty bad time for anyone holding property in resource towns. Not only will mining expansion projects collapse but so will mining production. The exception is likely to be precious metals miners and oil and gas projects. An educated guess suggests the pressure on accommodation will virtually disappear in a very short period once we hit this juncture.

When will we hit the wall is the question on many analysts minds but most think we are within 12 months. The demand/price picture is likely to look like it was 8 – 10 years ago if not longer.

So Much For “Housing Has Bottomed” – Shadow Housing Inventory Resumes Upward Climb
Once one takes the number of homeowners 30- to 90-days late on their mortgage payments and includes the likely default of those that have negative equity on their homes, there is a strong possibility more than 6.5 million additional foreclosures will enter the pipeline. The addition of homes that banks may be holding back suggests a much larger number. Laurie Goodman of Amherst Securities Group has testified before Congress that it could be as high as between 8 and 10 million.


http://www.zerohedge.com/news/so-much-housing-has-bottomed-shadow-housing-inventory-resumes-upward-climb

This is the kind of scenerio I’ve been prattling on about. Bottoms aren’t always about price. Volumes have to be considered as well.

In saying that though I think the US property market has a few more black rabbits to pull outta the hat yet. The hedge funds will drop a toe in the water but I predict they will pull back as market conditions drift and in some cases continue down. That will make them nervous but more likely I think they will find it difficult to make a business case to risk clients funds in a fragile market. I doubt they can sustain this without extensive help from industry players like Jay and Alex. Even then I think HF’s will struggle. The most successful HF operators have been shutting up shop in recent times. Who does that leave?? The also-rans with questionable performance stats. I kinda feel that HF’s playing in the property market is a sign of desperation. I get a bad vibe when any business decides to play in industry it has no experience in.

Personally I think the US property market is still in phase 1 of a 3-4 phase cycle even though we’ve had in excess of 5 years of decline. When the middle class market starts to crash and burn then I think it will be entering the next phase. There are signs this is close as the US economy grinds into an official recession.

I can’t take anyone seriously who believes MSM offer any sort of credible industry information even when reporting info from credible sources. They all like to put their own spin on things and/or support their masters interests. Whether that be media barons, corporates or political connections/affiliations. Then you simply have journalists who couldn’t tell the back door from the front but like to rattle on like the resident property guru.

They’re exploration rights. Standard stuff for the likes of BHP. FMG has a fair chunk of WA sown up so expanding their interest around a major investment like Olympic dam makes sense. You’re talking years to decades here so I wouldn’t get too excited. They have to find something worth mining first. Even then they could take forever to do anything about it.

I’ve just left Hedland after 4 years there. 4 Years ago rents were half of what they are now. BHP where doubling their rail capacity and FMG was just starting to ship ore. While there was demand on housing, accommodation was fairly easy to obtain then. Nothing like now.

Putting today into perspective BHP, FMG, Rio and a small miner Atlas are simultaneously in the process of almost doubling capacity. That’s unprecedented in Aus mining history. Every scrap of accommodation is being snapped up at ludicrous prices.

Globally ore prices are dropping along with demand as the world retrenches. By the time this expansion is finished in around 2 years I expect to see substantial over capacity in Pilbara iron ore mining operations. Given the global economic situation I see little to no expansion in the Pilbara for decades. Mining will still continue but I expect to see only the most profitable mines still operating while others will either close or go into care and maintenance.

Even the proposed gas hub at Broome, one of the largest in the world, won’t make up for any downturn in mining activity. Hedland is a an export port hub primarily for iron ore but also includes manganese and copper. It’s the only port facility (in the region) for large inbound infrastructure components, cement, fuel and nitrate.

Strip out construction and the Pilbara especially Hedland looses around 80% of its work force. A large percentage of that 80% are FIFO’s. It’s hard to quantify how many resident personell would disappear if construction stops. I tend to think we’ll go back to pre boom (early 00’s) prices and rents fairly quickly.

What people need to understand is that Hedland does not accommodate miners. They live on mine sites and fly in and out from mine airstrips. The closest mine to Hedland is 300km’s away.

The problem with mining in WA and consequently property investment is that statewide there is this unprecedented rush to expand simultaneously. That doesn’t jive with global economic conditions and a continuing deterioration in demand. That’s led to a gold rush moment where property has suddenly become scarce and consequently expensive. For the PI the returns are tantalizing but with all high return investments comes a concomitant rise in risk.

Personally I believe we are at the peak of mining activity now. I think we will probably hold this peak for another 6 – 12 months (barring a GFC like event) and then we will see an unwinding of mining related activity over the following 12 -18 months. However, in saying that I see the potential for a sudden collapsed in mining activity at any time if a GFC event unfolds. At the moment I see that as 50/50 rising to 80/20 over the next 6 months.

Jay, I’d have to say Sydney traffic is up there with the worst in the world. Rush hour starts around 1530 and goes through to around 1930. Forget trying to get anywhere at that time. It’s bumper to bumper. God help you if there’s a pile up.

We got caught in city central on approach to the harbour bridge going north one time. There was a pile up on our side that closed all lanes north bound. It took us 2 hrs to get across the CBD (a matter of a few miles) to get on the harbour tunnel approach. Took 5 hrs to get home that night and we only went a matter of about 15km

Aagh ha an iPad dude…. all is revealed..

Dude Ozzy is a strange place sometimes. I was driving back from a small country town some years ago. We were about 5 miles out of town I suppose when we come across a row of about 10 terrace houses in the middle of nowhere. Go figure. More room that you can poke a stick at and they want to live on top of each other. I’ve been trying to figure this place out for 10 years and still can’t get my head around it.

A fact that might interest you;

…governments control 72% of the land in Australia, aboriginals 13% and 15% is held in private freehold.
http://www.ourcivilisation.com/cooray/rights/chap813.htm

Emma, every PI should print that post and stick it on their fridge door. Probably one of the most lucid posts on strategy I’ve seen here regarding how to plan for a market downturn.

Jay I kinda agree and disagree. I don’t think money’s going to pour into the market and I’m pretty sure super funds aren’t going to lead the way. A couple of reasons or three. Super funds need some sort of vehicle so fund managers can get their wack. ETF’s are usually their kind of play and commercial/agriculture not residential are the preferred markets I believe. There’s a whole lot of regulatory BS around super fund investing that makes an RE play too complex for these guys. Anyway the govt is eyeballing SF’s. It wants their loot for their own funding shortfalls. Here in Oz they’re trying to make it mandatory for SF’s to invest in public infrastructure.

Where do you invest when every sector of the market and every demographic level is under pressure. Super through hedge funds is generally not the way its done either. HF’s are and have been taking a battering over the last few years, Since 2006 117 funds at 71 HF companies have died. Many are simply going out of business because they can’t see opportunity in current markets and these are successful fund managers with great track records over the past, Arnold, Voros, Soros et al.

I think property could see money leave the market in another downturn. The current expectation is that we’re at the bottom and now’s the time to jump in. I think we’re seeing false market signals backed by poor fundamentals. The US is heading into the next recessionary phase of this crash. As conditions worsen I expect to see hot money flows reverse and US PI market start to stall then decline over the next 12 months. If the US economic situation continues to worsen after that (and I expect it to) I would think any gains made over the last 2 years are likely to be lost.

The argument that people always need somewhere to live is a false one. People will only live in a dwelling if they can afford it. Once affordability is gone then you either live in a car, a tent, a shelter, a derelict building, a cave, the footpath or you squat.

I think the mistake everyone is making is comparing the coming crash to 2008. The GFC was a torpedoe in the side of a rusty worn out overloaded freighter. Since then they’ve manged to stop most of the flooding and stabalise the ship but they know it’s only temporary. Without a major overhaul (regulation) and off loading of cargo (debt) this ship is gonna sink.

But putting things in context. Even though the ship may sink not everyone will drown. The trick will be how do I make sure I survive and still hold onto my wealth. Emma’s got it sussed I think.

Well I hear the illegals are heading the other way these days, maybe it’s already started. I’ll put a tent up in the back yard for ya

Kidding aside I don’t think the HF’s are going to get time to really get to grips with the PI market. A few will wet their feet but my guess is many are still in the evaluation phase and trying to figure out how things are going to work with big numbers and who they’re going to have to partner with to make this work.

Over the last month I’ve been researching in depth looking for the smoking gun that will set off the next big crash. The straw that breaks the camels back so to speak. Most people are watching Europe and expecting bank failures there to ignite things but I’m coming to the conclusion that maybe it’s the US via JPMorgan that will set this ball rolling.

Two guys I follow, Tyler Durden and Jim Willie, have a track record of making some pretty incisive calls over the years. While they’re in the minority and not a lot of economists/analysts agree with them on everything they non the less make a good case to support their conclusions.

Two interesting articles from Jim Willie – heavy reading but up your ally Jay
http://www.marketoracle.co.uk/Article34819.html

http://news.goldseek.com/GoldenJackass/1339012800.php

Eighteen months ago you could read analysts/economists opinions and their was a general mood of ‘this is salvageable’. The contrarian’s didn’t believe so and were in the minority. Few were prepared to put careers on the line and take a contrarian stance. It’s too much for some of these guys. A bit like a priest admitting maybe there’s no God. Anyway that now appears to be changing rapidly. Not only is there a significant hint that things probably aren’t going to be fixed but that things are going to get a lot worse near term. Even MSM is starting to report hints of economic reality. To me that’s a paradigm shift in thinking from the mainstream.

The kind of things I’m seeing now suggest to me that we are very close to breaking point. I’m thinking weeks to months. However, I don’t underestimate the powers that be from delaying this thing a little longer. When central banks hit the print button en masse I think we’ve reached that point.

So how does that affect the property market?

JP Morgan is one of 5 super banks in the US. Their (more like ours) problem is they are all cross collateralised with each other to the tune of some $600T in derivatives. Willie and Durden speculate that JPM could be in the hole to the tune of a Trillion after its “IRSwap hedge gone wrong”event recently. That’s still playing out. Willie mentions a European Banker inside source who suggests that;

…a trigger having gone off in a chain reaction that is not stoppable, which will bring down the USTreasury Bond market and topple the USDollar.

US dollar conjecture aside I get the distinct feeling that things are unraveling at an accelerating pace.

The problem with these 5 super banks is that they’re not too big to fail they’re too big to rescue even though the US government has said it will backstop their derivative trades. That leads to Europe where they get something like 46% of their loans from US banks. Euro banks collapse instantly if US banks hit the wall. It would require massive central bank intervention to hold things together and that means massive printing. You basically have a Euro US banking system that is both insolvent and illiquid without CB support

I’m a dumb rookie when it comes to economics but even I can see that an implosion at just one of the big 5 will suck all of them down the plug hole and that leaves no single or even group of entities big enough to stop it. Forget the 2008 GFC that’s just a minor glitch compared to the next melt down.

I know you guys like to get all patriotic and think the US is big bad and beautiful enough to dig itself out of any mess but I’m afraid this one is going to be a bridge too far even for the US economic machine.

If even half this speculation comes to be I would expect to see the RE market take a hit at all levels and across the board initially. I think many renters are going to turn into squatters. The guy who is under on his mortgage and not paying is effectively a squatter now. By the time he gets to renting he’ll be well versed in the art.

Absentee international investors are going to get hammered big time. My guess is that 80% of PI’s are incompetent at best. In a melt down they will be the initial risk as they fold or panic. They won’t become an opportunity until the market emerges out the other side.

This is how I summarise the US market; a lot of people doing deals and treating things as a relatively normal business cycle albeit more volatile than normal. They just don’t realise they’re on the Titanic