our budget to get a coal fired boost....

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    Our Budget to get a coal-fired boost

    Article from: Sunday Herald Sun

    Terry McCrann

    April 13, 2008 12:00am

    CHINA gave Australia a $25 billion present last week. No, it wasn't in grateful thanks to Kevin Rudd for delivering his speech in Beijing in Mandarin. Or for the fact that he didn't go in harder on Tibet. But simple economic reality.

    That's how much extra we are going to earn on coking coal exports next year. Give or take the odd billion or two either way between friends.

    About $6 billion-$8 billion of that will then flow straight into Wayne Swan's budget in higher company tax receipts. Give or take the odd billion or two that might disappear in "deductions" between friends. And clever tax accountants.

    * Video: Watch Terry McCrann's wrap of the business week

    Put that next to the $10 billion or so extra we are going to get for our iron ore exports -- and another $2 billion or so extra into Swan's budget -- and every Australian should learn how to say thank you in Mandarin.

    All of this is just from higher prices.

    We don't have to ship a tonne more coal or iron ore to get than extra $35 billion-or-so. But we will ship more -- so that will deliver even more money.

    The funny thing about the coal bonanza is that China doesn't actually buy much of our coking coal.

    Last year we shipped more than 130 million tonnes of the stuff -- only a little more than two million tonnes went to China. But the global price surge is all about China.

    Coking coal feeds into steel making; and China is easily the world's biggest steelmaker and getting bigger literally almost every week. That's sparked a global shortage of coking coal.

    Even more dramatic than the demand for the iron ore that goes with it in steel making. The price rises for coal announced during the week were actually struck with our biggest customer, Japan, and third biggest, Korea. Incidentally our second biggest is India -- the "next China", so far as demand for our resources is concerned.

    And what were these rises? Between 200 per cent and 240 per cent. That's right. Staggering figures. It makes the 70 per cent-80 per cent increase which we will get for iron ore look small.

    Now the other, even more extraordinary, side of the coin is that the stuff we buy back from China (and, again, other similar places) that's made out of this increasingly expensive raw material is actually getting cheaper. Consumer goods.

    At least it has in the past and up to now. For example, plasma TVs have dropped in price by 25 per cent-30 per cent, just since Christmas.

    This is doing dramatic and strange things across the economy.

    Those falling prices are of course cutting inflation. But also making it harder for the Reserve Bank to cut consumer spending with those interest rate rises.

    What it wants to achieve is to cut inflation even more, because of all the other pressures forcing up prices.

    And while the surge in export incomes will help cut our foreign deficit, we'll just boost it with further imports of all those consumer goods. While the combination of those higher prices and our high interest rates is attracting foreign money -- that's pushing up the value of the Aussie dollar.

    It seems only a matter of time before we hit parity with the greenback.

    All this has huge and complex effects on the economy. Despite what Swan says, he's going to have a huge surge in budget revenues next year. It also makes for a very complex investment horizon.

    The US economy is sliding into recession. But China should remain strong and those higher prices will be locked in at least for the next year.

    Profits of our resources companies will rocket. Other companies will be hit by the higher dollar.

    The best advice to investors is to tread carefully, but not to retreat. It will be a very good time to put in place a structured long-term portfolio.

    Cheers markco2
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