It's been a tough few years for investors in Australian natural resource companies. The price of coal has halved in a few short years, as has the price of iron ore. Even the price of "black gold" — crude oil — is down by roughly half in under a year.
If these price falls have served any purpose, it's to remind us of the risks faced by those who invest their retirement savings in mining, oil and gas companies.
Here's the kicker: that may well be you…
Most superannuation funds tend to invest in a broad selection of companies that approximate the index, such as the All Ordinaries, which covers the larger companies on the ASX. They do this because there is little incentive to run the risk of vastly underperforming the market as a whole, since that is generally the benchmark to which they are compared.
It won't come as a surprise to discover that includes significant portions of big mining companies like BHP Billiton, Rio Tinto, Woodside, Oil Search, Santos and Fortescue Metals Group. In fact, these companies make up about 11% of the market. On average, those 6 companies are down 24% over the last year.
Falling prices are usually either a buying opportunity, or signs of worse to come. While many are buying, it it might be safer stay away. And if some of the structural problems, below, come to pass, it certainly isn't the place for buy and hold investors to be looking.
The end of a commodities boom…
What most Australians don't question — but should — is whether this is just the start of a very long term trend. While Chinese demand for our iron ore might seem almost endless, but signs are that it is waning. That's because China has an oversupply of built (but uninhabited) apartments, as well as steelmaking overcapacity. There's a real risk that Chinese demand for Australian iron ore will stagnate.
And due to the hazardous air pollution caused by burning coal, China is increasingly focussed on transitioning to more efficient plants, and cleaner sources of power. Yet plenty of Australians haven't yet gotten the message — indeed, our own Prime Minister pronounced just last year that, "For the foreseeable future, coal is the foundation of prosperity."
But this kind of view isn't just hazardous to Chinese lungs and low-lying Pacific islands: it's hazardous to your wealth. Bloomberg recently reported that Beijing would close the last of four large coal power plants by next year, and stated categorically that "coal use is declining or slowing in China as policy makers encourage broader use of hydroelectric power, solar and wind."
And in developed countries like the USA, coal plants are being closed at a rate of knots — replaced by wind, solar and cheap gas.
Speaking of which, LNG was — until recently — the one major Australian commodity that looked set generate solid returns in our superannuation funds. Yet suddenly, it doesn't look so attractive. That's because the price for LNG — which Australia has only just begun to export — is usually linked to the price of oil, which has plummeted. On top of that, rural communities are opposing the mining of coal seam gas used in the LNG plants, leading to increasing regulatory risks.
