Sunday 24 December 2006

Resources Stocks Set to Crash!

Well, maybe, maybe not. I've seen a few articles about the resources boom that hold the view that when the Chinese economy and World economy takes breather (next year?) commodity prices will drop back down to their pre-boom prices as new production (stimulated by the recent profitability of resources companies) comes on stream.

A contrary view is that exploration and development was at very low levels between 1998 and 2003, so the push for increased production has only just begun. Couple this will a typical lead-time of up to 10 years to get a new mine into production and the picture for commodity prices looks somewhat more rosey.

Today's Australian Financial Review also had some interesting facts about the concentration of commodity production - a handful of big resources companies control the lion's share of production, and therefore are in a good position to maintain high commodity prices in the medium term:

Commodity % output from big-5
Produced in each industry
Platinum 94%
Iron Ore 85%
Nickel 82%
Alumina 55%

I think I'll hold on to my BHP and Rio Tinto stocks for a while longer - especially as they've already come back considerably from the peaks earlier in the year.

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