Resources slump as bulls run out of fuel
Australia's share market has been held up in recent weeks by optimism in the resources sector, but with the rise of the Australian dollar it seems that the bull run in resources may have run its course.
Since April last year the overall market index, the All Ordinaries, has increased by more than 2 per cent while the All Resources Index has added about 7 per cent to its value. Over the same period, industrial stocks have performed poorly with the Diversified Industrial Index shedding about 1 per cent.
Predictions that the All Ordinaries would test its peak of 2,340 points have been dashed, with the index dropping to 2,261.
The market has found its strength in resources, particularly the gold sector, where optimism that an increase in global growth would underpin a rise in commodity prices has firmed the prices of leading resource stocks.
Before the bull ran out of enthusiasm in Australian resources earlier this week, some of the leading stocks such as Western Mining and RTZ's Australian partner CRA reached their highest share price levels.
Since last Friday, however, resource stocks have come in for their share of punishment, with the Australian dollar, enjoying a four-year high, affecting the profit forecasts of leading mining companies. In the coal industry, producers estimate that aone US cent gain in the local currency cuts about A$100 million from annual export income.
'It doesn't seem to matter that everyone thinks the local currency is overvalued. Despite that it seems set to stay above 80 US cents for a while and that's not good for exporting miners,' one broker said.
'What you are now seeing is profit-taking, with investors feeling there is some cream there on the top of some resource stocks and why shouldn't they take a bit off the top.' The depreciation in the value of the South African rand, which has fallen about 20 per cent since February, also has been bad news for Australian resource stocks, making South Africa exports more competitive against Australian minerals. While the Australian resources sector is being subtly influenced downwards by factors offshore, the outlook for leading industrials continues to be bleak.
More than 15 leading listed industrial companies have now announced their profits this year will not match last year's performance. The most spectacular dips have come from Pacific Dunlop, which announced its profit would fall 35 per cent on last year with dividends more than halved, and building group Boral, which is expecting a 30 per cent decline.