(HeraldSun, Oct 28, 2006) As Access Economics points out in its excellent Minerals Monitor, in recent cycles mineral prices have turned down after two years, but in this cycle sustained world growth has seen prices keep rising for four years.

Since 2002 China has contributed 80 per cent or more of the increase in world demand for nickel, tin, lead and zinc.

World growth may slow next year as central banks raise interest rates and mineral supply at last responds to high prices. But mineral demand will not collapse as long as Chinese growth stays strong.

Australia should have solid increases this year in output of steaming and coking coal, iron ore, alumina and copper.

Forecasters expect most mineral prices to peak in 2006 or 2007 and then fall sharply.

Nickel prices in US dollars are expected to halve by 2009 and many base metals are predicted to fall 30 per cent.

Surprisingly, forecasters do not expect the Australian dollar to decline as well, so the downturn in US-dollar prices is not softened by a weaker Australian dollar.

At present Australia is benefiting from both high export prices and booming resource investment.

The latest Access Economics Investment Monitor shows definite projects under construction or committed have risen 16 per cent in the past year to $150 billion.

All of the increase is due to resource projects. Projects in planning but not yet committed have also risen strongly over the past year.

However, Access Economics warns that much of the recent increase in the value of projects is due to cost increases, rather than new projects.

The increase in the number of private projects in the last quarter was the lowest in four years.

There have been substantial cost blow-outs in the PNG to Queensland gas pipeline, the fifth train of the North West Shelf, the Ravensthorpe nickel mine, the Worsley, Wagerup and Nabalco alumina refineries, the Parramatta to Chatswood rail link and the Brisbane northern road and rail link. These cost increases are causing project deferrals.

The long lead-time in large resource projects means investment activity will remain strong for some time. Most companies use much lower mineral prices to determine whether to proceed with projects. So a downturn in spot prices may have little short-term impact on new investment by larger companies.

Smaller companies may be more affected if mineral and share prices fall, as they rely on cash flow and new equity raisings to finance new investment.

The recent drop in oil prices will have little impact on investment as most companies use oil prices of $US40 a barrel or less to decide on project economics and the futures market has prices over $US60 a barrel for some time.

Even with minerals whose prices are expected to fall, current prices need to drop a long way to get back to the marginal cost of new production. Production should keep rising until there are very large falls in current prices.

The mining boom is not yet over, with high investment and rising output likely to accompany lower prices for some years.
source:HeraldSun