Come Waltzing Matilda

Don't feel bad for the Aussies.

Sure, they've just managed to suffer a humiliating defeat against their bitter English rivals in the classic "Ashes" cricket series, but apart from this little spot of sporting disappointment things are pretty well "bonzer" Down Under.

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Seems the Chinese have a lot to do with this, as their seemingly insatiable desire for all things Australian like coal, iron ore and copper, has essentially rescued that dusty little island in the South Pacific from the ravages of the global recession. Things are apparently so buoyant in "Oz" that their central bankers might be the first off the mark among the developed nations to raise interest rates. Strewth!

China's Stimulus Plan Boosts Australia's Economy as Well
Australia's speedy return to boom times is a direct spinoff from China's earlier decision to launch a $585 billion domestic stimulus package. This pump-priming exercise has apparently worked better than expected boosting China's economic growth to 7.9% in the second quarter, well up from the 6.1% pace recorded during the first three months of the year. And with China's Premier Wen Jiabao having just declared that the government intends to maintain its stimulative stance, it now fairly certain that Chinese economic growth will continue to accelerate during the balance of this year and on into 2010.

Continued Chinese Growth Bullish for Aussie Commodity Producers
All this is music to the ears of the big Aussie mining companies like BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP), as the prospect of continued strong economic growth in China should push.

Chinese demand for key Australian export commodities like coal and iron ore even higher and undermine ongoing attempts by the Chinese state purchasing agency to extract major price cuts on these key imports. Iron ore prices have more than doubled in the past year and the Chinese have been demanding a 40% discount from these lofty spot prices on long-term supply contracts. Negotiations have stalled and were further disrupted by Chinese allegations of industrial spying on the part of Rio Tinto representatives there prompting the arrest of several people. The whole rumpus looks increasingly like a negotiating ploy to secure a better price.

China Vs. the Iron Ore Monopolists

It's a strategic trade issue for China as it now consumes about 80% of Australia's iron ore exports - up from about 20% at the beginning of the decade. The triumvirate of BHP, Rio, and Brazilian mining giant Vale (NYSE:VALE) basically have a near monopoly lock on global iron markets. Back in 2007, in an effort to further control the market, BHP had made a hostile bid for Rio, but the credit crisis the following year scuppered the deal. Then, seeing an opportunity to break the monopoly, the Aluminum Corp. Of China (NYSE:ACH) offered Rio $20 billion in exchange for upping its stake in the company to 18% . But that deal also collapsed just this last June when Rio opted to raise much needed capital via a rights issue and also announced a 50/50 Joint venture with rival BHP. Needless to say, the Chinese were not impressed.

The Bottom Line
Negotiations between China and the iron ore producers are "eye-ball to eye-ball" at this point and it looks like rising demand for the commodity prompted largely by China's own stimulus spending will force them to blink on this one. Rio, BHP and Vale shares are likely to maintain their upward trajectory on into next year. (For additional reading, check out our article Investing In China)


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