Commodity Prices Likely Bottomed, West Australia Says

By Jason Scott and Madelene Pearson

Feb. 11 (Bloomberg) -- Commodity prices, down 62 percent from last year’s record, have probably bottomed as mining companies cut production and stockpiles decrease, said Colin Barnett, premier of Western Australia state.

“There’s some evidence that volume is starting to increase again and prices are starting to edge up,” Barnett, 58, said in an interview in Perth. The state produces 15 percent of the world’s iron ore and nickel, and 10 percent of its gold, he said.

Western Australia accounts for more than half of the nation’s exports to China, where the government’s 4 trillion yuan ($585 billion) spending plan is boosting demand for steel and iron ore. Developing Asian economies will probably expand 5.5 percent this year, according to the International Monetary Fund, as the U.S., Japan and the euro zone combat the first simultaneous recessions since World War II.

“China will lead Western Australia out of this because they still need the resources we’ve got,” said Peter Kenyon, professor of economic policy at Curtin University’s Graduate School of Business. “Whether it’s one year or three, it’s too early to call. The premier’s comments sound pretty optimistic.”

Barnett’s forecast tallies with a prediction from investor Jim Rogers, who has said supply cutbacks will pave the way for a rebound in prices. The supply of everything is going to be in “even worse shape coming out of this,” Rogers said in December.

China’s Stimulus

China, which buys more than 50 percent of Australia’s iron ore exports, has cut the key lending rate five times since September to help boost the world’s third-largest economy. The benchmark stock index climbed to a four-month high on Feb. 9, making the nation’s stocks the world’s best performers this year.

“Asia will continue to grow,” said Barnett, a former resources minister in the state. “The fundamentals of Asia haven’t changed and the Western Australian economy” is heavily entwined with the region, he said yesterday.

The Baltic Dry Index, a measure of commodity-shipping costs has more than doubled this year. Iron ore is recovering from a three-year low, with prices for immediate delivery to China adding 33 percent since October to $84.50 a metric ton.

Raw material prices, measured by the Standard & Poor’s GSCI Index of 24 commodities, plunged from a high reached on July 3 as the global economy slowed. That slump has already taken a toll on Western Australia’s economy as BHP Billiton Ltd., the world’s biggest mining company, closed its $2.2 billion Ravensthorpe nickel mine in the state last month.

Rio Tinto Group, the world’s third-largest miner, halted iron ore mines in the state over Christmas, slashing targeted output 10 percent last year. It may slow or defer $3.9 billion of iron ore expansions in Western Australia, according to UBS AG.

‘Bad News’

“There’s probably been the loss of about 5,000 to 6,000 jobs in the mining industry” in Western Australia, Barnett said. “Most of the bad news for Western Australia will be in the first half of this year. Unemployment will edge up, but remain significantly below the national average.”

There are also signs that the decline in the Australian dollar, which fell 28 percent against the U.S. currency in the past 12 months, will boost investment, Barnett said.

A “small but steady procession of companies looking at major new projects or expansions” has been evident in the past few weeks as the slump in the Australian dollar and commodity prices eases construction and wage costs for companies working in U.S. dollars, he said, without identifying anyone.

The Australian dollar “is a bit low,” he said. “I don’t want it to go higher but I think its true value is 70 to 75 cents because people are undervaluing commodities.” The currency traded at 66.85 U.S. cents Feb. 10.

Western Australia provides more than a third of Australia’s exports to Japan and more than half of those to China, the country’s top two customers, Barnett said.

To contact the reporters on this story: Jason Scott in Perth at Jscott14@bloomberg.net; Madelene Pearson in Melbourne on mpearson1@bloomberg.net