Pass­ing the 6000 bar­rier the first step, but now it is time to be re­source­ful


The stock­mar­ket has bro­ken its big­gest hur­dle — 6000 points on the ASX 200, with ev­ery chance of go­ing higher — but this time round it’s go­ing to be dif­fer­ent.

This time the re­source sec­tor, which drove the mar­ket to a record 6828 a decade ago — has a dif­fer­ent story to tell.

Coal, oil and even iron ore are now be­holden to en­vi­ron­men­tal leg­is­la­tion, while new op­por­tu­ni­ties shine for nickel, cobalt, lithium and just about any­thing re­lated to clean en­ergy.

Back in 2007, the last time we en­joyed the full glo­ries of an un­re­strained “bull mar­ket”, both bank­ing and min­ing stocks were fir­ing on all cylin­ders.

In the months ahead, few ex­pect bank stocks to fire dra­mati- cally but there is ev­i­dence they will at least not be a drag on the mar­ket’s per­for­mance; in­deed, the strong quar­terly up­date from the Com­mon­wealth this week has an­a­lysts talk­ing of earn­ings up­grades at our big­gest bank.

Sep­a­rately, a large vol­ume of cash is wait­ing to be de­ployed, with most fund man­agers hold­ing dou­ble or triple their usual lev­els of cash on de­posit.

And though broader ex­pec­ta­tions of in­vest­ment yields re­main sup­pressed and China’s econ­omy is largely opaque, the Aus­tralian share­mar­ket, with its 4 per cent div­i­dend yield on the ta­ble be­fore any price in­crease, of­fers real op­por­tu­nity. Some bro­kers — for ex­am­ple Credit Suisse — are call­ing an ASX 6500 by Christ­mas on the ba­sis “mo­men­tum” is now un­leashed. Cer­tainly, his­tory sug­gests we may have some way to go (See the graph, which re­bases the ASX at 100).

But to cap­ture any lift, in­vestors must come to grips with a new for­mat in the re­sources sec­tor.

For guid­ance, look at the sit­u­a­tion in iron ore, our most im­por­tant re­sources sec­tor. There are three ma­jor play­ers: BHP, Rio and Fortes­cue. BHP and Rio have had a re­bound in the sec­ond half of the year, but Fortes­cue is not in the game — the share price is falling.

Why? Be­cause of China’s new pol­lu­tion laws. The way it works in steel mills is that higher grade ore, from BHP and Rio, uses less power than lower grade ore from Fortes­cue. There was al­ways a dis­count for the Fortes­cue prod­uct, but the dif­fer­ence be­tween now and 2007 is that the dis­count is up to four times higher.

In the coal sec­tor many great names of the last cy­cle, such as Glouces­ter and MacArthur, have been taken off the mar­ket. Play­ers that have sur­vived, such as White­haven and New Hope, can still en­joy reg­u­lar ral­lies but labour un­der an un­cer­tain fu­ture as govern­ment and banks move to boy­cott the in­dus­try. Rio, for ex­am­ple, has al­ready sold key coal as­sets in Aus­tralia and may sell more.

For in­vestors in oil — who tra­di­tion­ally fo­cus on three stocks Woodside, San­tos and Oil Search — huge changes are also afoot. No less an au­thor­ity than OPEC — the Saudi-led oil car­tel — pub­lished a re­port this week con­ced­ing we would reach peak oil de­mand in the decade af­ter 2030.

You’ll no­tice that it is not “peak oil” — the con­cept that to­tal oil sales will face struc­tural de­cline in the years ahead. The key ex­pla­na­tion, ac­cord­ing to OPEC, will be the switch to elec­tric cars, which will have be­come com­mon­place within two decades.

But there are al­ways win­ners in the re­sources in­dus­try and a new breed of min­ers — once mar­ginal — may now move to cen­trestage.

Nickel is per­haps the out­stand­ing metal among bet­ter known re­sources. Wit­ness the changed at­ti­tude to­wards Min­cor, a mid­cap player for many years with more than $700 mil­lion in rev­enue. Min­cor has of­ten been seen as a gold­miner with nickel on the side. But in re­cent months that per­cep­tion has re­versed, as has the share price, when Min­cor’s strong nickel hold­ings pushed it higher.

In the hy­per-spec­u­la­tive end of the mar­ket there is tremen­dous in­ter­est in lithium. Both nickel and lithium are used in lithi­u­mion bat­ter­ies. No doubt the term lithium in that bat­tery type has prompted an in­flux of spec­u­la­tors this year into a sway of small caps, but it’s worth not­ing, as Min­cor di­rec­tor Brett Lam­bert points out, that there is eight times as much nickel used in the lithium-ion bat­ter­ies as lithium it­self.

In this next leg of the mar­ket, it’s nuggets of in­tel­li­gence like this that will make the dif­fer­ence to in­vestors play­ing what is shap­ing up to be a much more bullish mar­ket but set against a very dif­fer­ent en­vi­ron­men­tal back­drop.

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