Any Australian of age would remember the 'mining booms' of the past 2 decades. This was the term referring to several periods over the 2000s and early 2010s when commodity prices were far above historical averages.
Especially iron ore, coal, gold and oil. All commodities that Australia has a fortunate natural abundance of.
Back in 2007 and 2011 especially, it was this 'commodities boom' that many economists have credited for keeping the economy afloat during the global financial crisis. As well as pulling the Australian economy out of the economic slump that followed.
That's why back in 2007, the big ASX resources companies like BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) were smashing all-time highs. In fact, Rio has never been at the heights that it reached in 2008 again. But it is getting awfully close of late.
ASX resources shares have been some of the better performers on the S&P/ASX 200 Index (ASX: XJO) in 2020. Take Fortescue Metals Group Limited (ASX: FMG). It has surged more than 117% in value over 2020 so far. And BHP and Rio are approaching levels we haven't seen in a decade. BHP shares themselves are up almost 183% since February 2015.
Image source: Getty Images
A new ASX resources 'supercycle'?
So what's going on here? Well, reporting in the Australian Financial Review (AFR) this week suggests we could be on the verge of a resources 'supercycle'.
The report states that BHP, Rio and Fortescue are responsible for half the gains of the ASX 200 in December so far, not bad considering the index is up 2.1% since the end of November.
The AFR quotes AMP Limited (ASX: AMP)'s AMP Capital portfolio manager Dermot Ryan as saying: "These guys are making better margins than Louis Vuitton does on his handbags at the moment. The stimulus that's coming in and the global synchronised recovery means we're seeing higher commodity prices right across the board."
Mr Ryan notes that many dividend-hungry ASX investors are expecting bumper shareholder payouts from ASX resources shares in February next year, and are buying in to secure a piece of these cash flows:
"Many of these producers are capable of paying out massive dividends so we're expecting the potential for very large returns from this space. There's potential for off-market buybacks too," the AFR quotes him as stating.
Luke Smith, portfolio manager at Ausbil Investment Management agrees. The AFR quotes him as saying:
We think we're entering the early stages of a multi-year bull cycle for resources and the backdrop is extremely positive… China's economy is clearly very strong at the moment and when you combine that with the rest of the world, which is going to benefit from unprecedented stimulus, the backdrop is looking extremely compelling…
Not only is it a windfall environment for commodities, it's a windfall environment for investors too and the real winners at the moment are the shareholders.
