China-Australia axis turns on mining, to the benefit of both

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: means it could take decades for the country’s commodities demand to slacken, he says.

Iron ore prices have tripled in the past five years. Gas prices are rising too. In September, PetroChina Co, the world’s biggest oil company, said it would buy as much as $60 billion of Australian LNG at prices estimated to be three times those China’s Cnooc Ltd agreed to pay in 2002.

Previous predictions of a super cycle haven’t always proven correct. Australian resources fuelled Japan’s industrialisation in the 1960s and ’70s. Amid the euphoria, stocks such as Poseidon Nickel Ltd soared to (Aus) $280 in February 1970 before plunging to Aus $39 the same year, when the company turned out to have less nickel than anticipated. “It was a manic phase,” says Hans Kunnen, 53, who helps manage the equivalent of $117 billion in equities at Sydney-based Colonial First State Global Asset Management, recalling that earlier boom. “This time, the question is, Is it a super cycle or just another cycle that will end in tears?” Some Australians are already suffering. Inflation hit 3.1% in 2007—above the Reserve Bank of Australia’s mandated ceiling of 3%. The benchmark interest rate, meanwhile, jumped to 6.75% from 5.25% in the first quarter of 2005, boosting the cost of home mortgages. The average Australian family has to spend 36.6% of its income to keep a roof over its head, behind only New Zealand and the Netherlands among members of the Organisation for Economic Cooperation and Development.

The rise in interest rates was one reason voters dumped the country’s prime minister of 11 years, John Howard, 68, in a November 24 general election and chose Labour Party leader Kevin Rudd instead. Rudd, 50, a former diplomat who speaks fluent Chinese, portrayed himself as better equipped to keep inflation and interest rates under control.

China, already Australia’s No 1 minerals’ customer, has become its fourth-largest foreign investor as well, with (Aus) $42 billion of projects. Chinese companies have also expressed interest in buying Australian mining firms. On December 7, Sinosteel Corp, China’s second-biggest iron ore trader, launched a (Aus) $1.2 billion bid for Perth-based Midwest Corp, trumping an earlier bid by Murchison Metals Ltd, a company backed by Japanese and Korean rivals. If successful, it would be the biggest overseas metals acquisition by a Chinese company.