Did you see that China’s CNOOC is getting involved a $3 billion coal-to-liquids (CTL) project in South Australia? Tiny little Altona Resources Plc (LON: ANR), listed on London’s small cap market, has signed what it calls an ‘in-principle agreement’ with CNOOC Energy Investment Co Ltd to cooperate in the development of a project Altona has in the Ackaringa Basin of SA.

It’s an ambitious project too. The project includes a 10 million barrel per year (30kbpd) open cut mine and a 560 megawatt power plant. Altona Chairman Chris Lambert told investors the project could provide both base-load power to SA and diesel fuel. He says SA has, “a significant looming power deficiency and currently imports all of its distillate requirements.”

Nuclear, geothermal, coal, solar-thermal…what’s it going to be Australia? The energy to run Australian industry has to come from somewhere. And that somewhere is going to be influenced by whatever the price of carbon ends up being once the government gets its scheme in place.

Meanwhile, perhaps following Worley Parson’s (ASX:WOR) lead from last week, West Australian Premier Alan Carpenter said, “Us too!!” yesterday in announcing plans for an electric power grid in the Pilbara. The plan calls for 6,000 megawatts of capacity to be installed by 2015. It would replace the current on-site and private system whereby mining firms provide their own energy from diesel generators or dis-integrated power plants.

Source: CNOOC Signs Agreement With Altona (LON: ANR) for Coal to Liquids Project

Worley Parsons says it wants to build 34 250-megawatt power stations in Australia by 2020. Now that is real vision! The goal is to provide alternative power to industrial customers in WA, who are currently vulnerable to any disruptions from the natural terminal at Varanus.

Australia is the buckle on the global sun belt

Source: Worley Parsons

As you can see from the image above (taken from Worley’s presentation to investors on its plan) Australia is in the world’s “Sun Belt.” As we’ve said in this space before, getting more energy from sun is one of the key challenges of Peak Oil.

By the way, our technical analyst Gabriel Andre, who has studied energy and engineering (along with currencies and trading) tells us that the X axis is the longitude (in degrees West and in degrees East from Greenwich meridian, while the Y axis is the latitude (in degrees North and South from the Equator). For the data in colours, what you see is solar radiation per annum, in KW/H per M2, which is the total amount of beam radiation that you receive from the sun on a particular area.

Got that?

One more note on this. Worley Parsons wants to use solar thermal technology, not solar panels. It’s a subject we’ve covered in the Australian Small Cap Investigator (although the best Aussie company at it is now doing business in America and is not publicly listed). It’s part of the “portfolio of energy experiments” we’ll need to produce energy in the future.

The trouble with silicon based photovoltaic panels is that there’s a limit to how much of the sun’s light they can convert into electricity. Experiments in thin film solar panels and in materials science (a kind of artificial photosynthesis that converts more light into energy) are designed to improve the efficiencies of photovoltaics. But progress is slow.

Solar thermal produces electricity, but uses sunlight to produce heat, which then produces electricity. Solar thermal concentrates the sun’s rays to superheat a fluid, which is then used to drive a turbine to produce electricity. The nice thing about it is that the superheated fluid can be stored, which means a solar thermal power station can operate at night, when the sun is not shining. It’s a great idea, and great to see Worley Parsons moving on it.

P.S. Solar investors may also want to check out J. Christoph Amberger’s ReneSola (NYSE:SOL) recommendation. He says strong quarterly earnings for Chinese solar maker LDK Solar (NYSE:LDK) indicate an immenent run-up for ReneSola…

Source: Worley Parsons (ASX: WOR) Announces Pilbara Solar Energy Project

“Analysts rate Westpac (ASX: WBC) a buy,” says Andrew Carswell in today’s Daily Telegraph. The bank told investors on Friday that it expected profit for the financial year to rise between six and eight percent. Let’s call it seven. But wait. It gets better.

Analysts at UBS raised the price target on the stock to $25, which is about thirty-one cents below where it trades today. Bold! Merrill Lynch (NYSE:MER) says Westpac has the lowest risk, highest quality assets in the Aussie banking sector. It rates the shares a buy too. Zig.

But why not zag?

Is it not obvious by now – one year into the credit crisis – that banking is a terrible business when you strip away the fancy suits and big ties? It is subject to massive blowups and failures. When run prudently, of course, this does not happen. Banks are discrete in their loan-making, maintain adequate capital, and pay investors a dividend for their risk.

For banks to deliver faster earnings growth, they have to take more lending risks. This leads, especially at the tail end of a manic credit boom, directly to the situation you most want to avoid, banks that lower lending standards to grow the portfolio. It also leads, inevitably, higher rates of default.

Why on earth would anyone want to own a business that is structurally exposed to black swan events that destroy shareholder capital? Anyone? Beuller?

The ‘zag’ strategy would be to forget shares altogether until the banking crisis is sorted out globally, in which case you’d be primarily in cash. Or, you could buy shares of companies that are less prone to negative black swans but equally (if not more so) beaten down. Here we have companies like Worley Parsons (ASX:WOR) in mind.

Worley Parsons reported a 53% rise in full year profit today. It’s Australia’s best engineering firm. It’s got business in four different booms: energy, infrastructure, mining, and power. It has clients all over the planet. And as far as beaten down value, it’s down 33% year-to-date.

Here’s what we’d say for the moment: the beat down in the resource market is going to give you the best chance since 2003 to buy a portfolio of world-class projects at very good values. By the end of the year, a smart investor could end up with a buy-and-hold ten-year portfolio of the best resource and energy firms in the world. It’s an opportunity that probably won’t come again for quite some time.

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Sources: Buy Resources, Not Banks

Take bananas a few years ago. One day you could walk into a store and buy them cheap. A few cyclones in Queensland later, and banana prices were through the roof. For most share investors, this wasn’t an opportunity. It just made bananas and banana bread more expensive.

But in other markets – especially resource and energy markets – a sudden change in the availability of basic resources can change everything. A commodity can go from abundant to scarce relatively quickly. Its price can go from cheap to expensive quickly as well. Naturally, the share prices of companies that produce volatile commodities can change quickly too. We’re counting on that this month.

The Leading Edge of the Energy Storm

The high cost of energy – especially coal and oil – is directly impacting resource production in two countries: South Africa and China. As energy prices grind higher – or even hold where they are – this will force the production of certain base metals to lower-cost countries. It will also change the supply-demand dynamic for these base metals, creating new investment opportunities in the process. A good example is South Africa.

You have no doubt read about the power crisis in South Africa. South Africa has a booming resource economy like Australia’s. It’s driven by gold, palladium, platinum, coal, diamonds and other resources.

The trouble is, South Africa’s economy is growing faster than its electrical industry. Contrary to all the gloomy reports, we found the place pretty positive when we visited in late February (mostly Johannesburg). Like any fast growing country starting from widespread poverty, you’re going to have a lot of chaos, crime and uncertainty.

But one of the few things you want to be able to count on is the power. You flick a light switch, the lights go on. That’s so basic that you and I take it for granted. Not so in South Africa. The folks who run South Africa’s only large power company told the government years ago that it would have to invest more in power to keep up with the economy’s growth. The government didn’t listen.

The result is what you have today: rolling blackouts and “load shedding” by the power provider. Demand for power has grown much faster than the available supply. This is not make-believe land. When demand exceeds supply something has to give, and in South Africa, that means power must be cut to someone.

Energy-Intensive Industrial Users on the Chopping Block

The government’s first response to the power crisis was to cut supply to the places that used the most of it, namely the suburban business parks where most of Johannesburg’s business community has relocated in the last yen years. That makes sense. You can only cut power to people who are using it. But cutting power during the middle of the business day unexpectedly is not exactly good for business, or for people’s state of mind.

The government decided to look at industrial users of power. And once it did that, it wasn’t going to be long before South Africa realised – like China is now realising – that there is one particular industrial process that uses much more energy than any other: aluminium.

You make aluminium in several steps. First, you have to refine bauxite ore into alumina. Then, you turn alumina into aluminium by adding generous amounts of electricity in an established process. I won’t go into the details. But the basic ingredients are what we want to focus on: bauxite and energy.

Bauxite is plentiful. You can find it all over the world. Australia happens to have plenty of the stuff. But it is not alone.

Australia is the Saudi Arabia of Bauxite

“Is China preying on BHP Billiton (ASX: BHP)? Or is BHP preying on Rio? Who are the barracudas and who are the minnows?” asks Dan Denning of the Daily Reckoning Australia.

Steel prices are up by about 10% this year already.

First, the big fish. “With iron ore prices rising explosively,” says China’s National Development Reform Commission (NDRC), “many domestic firms are very enthusiastic about investing in overseas mines, which needs strengthened macro guidance from the country.”

Macro guidance is about what you’d expect from a nation that has methodically and with stunning success, pulled itself from centrally planned poverty to centrally planned prosperity (at least for some). But what does ‘macro guidance’ mean? GPS? RFID?

–Today’s Australian has all the intriguing details on China’s Grand Strategy towards Australia in a story titled, “Beijing takes over BHP raid plans.” The comments from the NDRC are a fascinating take on how at least some Chinese officials think capitalism works. “Globally, iron ore mines that are of high quality and easy to exploit are basically in the hands of major multinational companies. Our firms need to pay a high cost to mine iron ore resources abroad. Their exploitation risks and costs are increasing.”

–Is it really ‘exploitation’ to pay the market price for natural resources? Or is that just the language of socialism? Perhaps a crash course on free market economics is in order for the NDRC.

–Not to sound too condescending (this coming from someone who uses the royal We), but you have to wonder if there is some wishful thinking going on in Beijing. Or maybe, after having lost money in Blackstone and Bear Stearns, state backed firms are wary of buying equity chunks in public companies. Maybe they want a different arrangement.

–Either way, it is clear the Chinese have woken up to the fact that the century is theirs for the taking. But there seems to be some confusion about what rules the century is going to operate under: will it be mostly free market rules…or other rules. The market price for the resources China wants is rising. So it would prefer to not pay the market price.

–By the way, we reckon free markets are headed for a bit of a bear market. Globalisation, in the bastard form we find it (where trade isn’t really free and currencies are manipulated regularly) has produced US$114 oil, massive inflation, the worst credit crisis since 1929, food riots, and a growing popular backlash. Expect more direct government intervention and regulation in financial markets and, perhaps, resource markets. That should play right into China’s hands, actually.

–This latest line of probing rhetoric coming from China is not exactly a new line of attack. After all, the resources are there for the taking on the public markets. There’s no need to attack at all. But it does feel like an attempt to flush out Australia’s politicians and get them more involved in China’s plans for Australian resources. The government is already involved, of course, with the Takeovers panel quashing the bid by Shougang Steel and APAC resources to take a 40% stake in iron ore up-and-comer Mt. Gibson (ASX:MGX).

–Let’s put this whole affair in the context of steel and GDP. We found the chart below yesterday while preparing for a radio interview with a Canadian business show. The host wanted to know how steel companies could afford to pay a 300% increase in coking coal prices and a 75% increase in iron ore prices. We asked him to picture the chart below.

Steel and GDP, Marching Hand in Hand

Source: Mining and commodities exports, Angelia Grant,
John Hawkins and Lachlan Shaw, 2006

–The chart shows that world steel production leapt ahead of GDP growth during the two big periods of Asian industrialisation of the last 50 years, in Japan and Korea. With China now industrialising, and coming off a much lower base in steel production, a period of growth in steel production that exceeded world GDP would be quite the spectacle. It would also mean China’s consumption of base metals is just now hitting high gear.

–From an Australian perspective, what’s so flabbergasting about the chart is that both Korea and Japan have been devoted customers of the black coal from the Bowen Basin that is so well suited for coking. They’ve also been tied up for years as customers of Rio Tinto and BHP for the iron ore that comes from the Pilbara. Now you add China to the queue.

–Despite its surge to the top in terms of global steel production, China’s individual steel firms are still smaller, at least according to the latest figures from the International Iron and Steel Institute, than Japan and Korea. Nippon Steel, Posco, and JFE are all bigger producers than Baosteel. Keep in mind, however, that as recently as 2002, China was a net steel importer. It’s now a net exporter.

Source: International Iron and Steel Institute