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Gold prices are within $US60 to $US70 an ounce of the 27 year high of $US730 an ounce reached just over a year ago.

China has further moved to try and rein in the overheating economy we highlighted last week with another interest rate, another increase in reserve ratios for banks and a widening of the float band for its currency.

Last week China revealed plans to allow more money to be invested in overseas markets, starting with Hong Kong.

US petrol prices reached a seventh straight record on Saturday as prices across the country converged on or moved past $US3 a gallon.

There’s a whiff of nervousness about the copper market.

But while exploration spending is at record levels, it has to find or prove up resources capable of being exploited in projects developed at existing operations or in new locations.

And that is the most impressive thing about the ABARE report.

The sheer health of the industry can be seen from the following two paragraphs.

“There are 43 projects (both advanced and less advanced) that are new to ABARE’s list since October 2006,” ABARE said..

“In the two year period from the end of April 2005 to the end of April 2007, over 166 projects have been added to ABARE’s project list.

“The number of newly listed projects in this timespan is unprecedented and is another indication of the current high level of investment interest in the mineral resources sector.

“Of the 43 projects added to the list, nine are either committed or already under construction.”

ABARE remarked that In line with previous project listings, the current investment intentions in the Australian mineral resources sector, as reflected in the large number and record value of minerals and energy projects committed to or under construction, “continue to bode well for the sector’s growth over the next few years.

“The 91 advanced projects as at April 2007 indicate continued expansion across most of the minerals and energy industry spectrum. Of the record 279 projects in ABARE’s April 2007 projects list, 67 per cent (188 projects) remain uncommitted.

“However, most of the projects that will ultimately proceed to development in the medium term are included in ABARE’s current list of 188 less advanced projects.”

The spending levels are at times mind boggling in their growth.

In 2004-05 around $10 billion was spent on new capital projects according to the Australian Bureau of Statistics and ABARE.

That jumped 80 per cent in 2005-06 to $18.6 billion, which according to the report was “more than double the average annual expenditure in real terms (2006-07 dollars) for the past 25 years.

“Surveys of industry intentions indicate the possibility of further increases to almost $23 billion in 2006-07 and over $30 billion in 2007-08.”

According to ABARE, if the capital expenditure in 2006-07 and 2007-08 is realised, this would represent increases of 22 per cent and 61 per cent respectively from the record expenditure in 2005-06.

“The expected continued high level of capital expenditure in the mining industry in the near future is consistent with the development trends shown in the full list of major mineral and energy projects.”

The metals industry is the only one to show a slowing in spending.

“Capital expenditure in the metals products sector, which includes the minerals processing activities covered in ABARE’s projects list, was $4.8 billion in 2005-06, 41 per cent above expenditure in 2004- 05.

“Paralleling the result in mining, real expenditure in the metal products sector in 2005-06 is the highest on record and more than double the 25 year annual average of $2.5 billion (in 2006-07 dollars).

“However, surveyed industry intentions suggest that metal products expenditure could fall in 2006-07 to about $4.1 billion and $3.2 billion in 2007-08.

“The possible decreases in metal products capital expenditure reflect the imminent completion of some large projects and the lack of commitment to any large metal processing projects in the past twelve months.”

Looking at the six months since the last report in October 2006, ABARE said that 23 major minerals and energy projects, with a total capital expenditure of $3.36 billion, were completed.

“The completion of these projects will result in increased production and export capacity for a range of commodities, including coal, natural gas, bauxite, base metals, gold, iron ore, mineral sands and nickel.

“The total number of projects completed in the six months ended April 2007 was one less than for the six months ended October 2006 and just below the record number (27) completed in the six months to April 2006.

“However, the total capital cost was significantly less than in the six months ended April 2006 and October 2006.

“The average value of projects completed in the six month period to April 2007 was $144 million, down from the historical nominal average over the past nine years of around $234 million.”

Looking ahead, ABARE’s list of projects suggests that the rate of project completions is likely to increase in the short term, with over 45 advanced projects scheduled for completion in the second half of 2007.

“However, there is the possibility that some of these projects will not meet announced scheduled completion dates or cost budgets, reflecting strong industry-wide competition for skilled labour and equipment.

“In addition, progress on a number of projects has been hampered by unfavourable weather conditions, particularly in Western Australia.”

At the end of April 2007, there were 91 projects at advanced stages of development included in ABARE’s projects list – these projects are either committed or under construction.

This was three fewer than the number of advanced projects included in the October 2006 list.

Despite the slight reduction in the number of advanced projects in the April 2007 list, there were still around 18 projects either newly committed or entered the list at an advanced stage in that six month period.

The announced capital expenditure of the 91 advanced projects at the end of April 2007 sums to $43.4 billion.

However, ABARE said it should be noted that even projects that have reached the committed stage may be deferred, modified or even cancelled if economic or competitive circumstances change sufficiently.

Among the more notable large scale projects in ABARE’s April 2007 list that are still undergoing feasibility studies are seven proposed LNG developments that, collectively, co

Any fears the resources boom might not last or might quickly vanish have been answered by the results of the latest survey of investment and spending from the Federal Government’s main resources adviser.

Prepared by the Australian Bureau of Agricultural and Resource Economics (ABARE), the report looks at spending on mining developments, past, now and planned, as well as the amount spent on exploration.

In all cases, bar the metal industry, spending is at record or near record levels and based on the conservative estimates contained in the report, the boom could last for quite a while yet, thanks to the China boom.

That fits in with the thinking in a recent paper from the Reserve Bank on the boom and its sources and differences with past resources booms.

ABARE says that mining companies are planning a record $43.4 billion of new projects, thanks to higher demand and rising prices.

In a report published on its website yesterday ABARE said the value of advanced projects to build mines and oil and gas fields has risen 24 per cent from the $34.9 billion reported last October in the previous survey.

The bulk of the increased spending came from the approval of three new iron ore projects valued at $7 billion, according to the bureau.

ABARE said there was a record 279 major projects planned, with 91 considered to be ‘advanced’. A further 188 projects were at less advanced stages or undergoing feasibility studies, the Bureau said.

A feature of the report was the sharp rise in exploration spending that has happened, despite industry fears money was not being spent.

ABARE said exploration spending on minerals in Australia is estimated to total over $4 billion in 2006-07, an increase of over 56 per cent on exploration expenditure in 2005-06. In real terms (2006-07 dollars).

It said the spending in the 2007 financial year on exploration “will be the highest on record and around 72 per cent higher than the average annual expenditure on exploration over the past 25 years.

“While exploration expenditure has increased recently, it cannot be determined from ABS data what proportion of the increased expenditure is related to increased exploration activity or attributable to higher costs of inputs, such as labour and equipment.

In the first half of this decade, exploration expenditure in Australia, in real terms, was well below the annual average of the past 25 years.

“Brownfields exploration around known deposits – has made up an increased proportion of total exploration expenditure.

“This can be partly explained by the current trend of developing projects with larger production capacities, which generally require larger resource delineation programs.

“In addition, mining companies are reassessing reserves at current and depleted mining areas, with the view of extracting additional reserves that are now considered to be economic at current high commodity prices.

“Mining at or around existing deposits is attractive for companies because projects can be started sooner and generally have a lower capital expenditure because often there is existing infrastructure in place.

“In 2006-07, exploration expenditure is expected to increase across all major commodities.

“Petroleum exploration is estimated to increase to $2.14 billion, an increase of 64 per cent from 2005-06. Petroleum exploration expenditure in 2006-07 is likely to be the highest (in real terms) since 1982-83 and 74 per cent higher than the annual average over the past 25 years.

“Increased petroleum exploration has been encouraged by historically high global oil prices. With world oil prices forecast to remain relatively high in the short term, exploration expenditure can be expected to remain historically high.

“Iron ore exploration expenditure in 2006-07 is estimated to almost double to $320 million.

“A number of successive annual contract price rises and the prospect of continued strong Chinese demand for iron over the medium term are important drivers behind the significant increase in expenditure.

“Since 2003-04, gold exploration expenditure in real terms has remained relatively stable at around $400 million a year.

“In 2006-07, however, gold exploration expenditure is estimated to increase by 25 per cent to $515 million.

“The increase in gold exploration activity is attributable to the increase in Australian dollar gold prices, which in 2006 averaged $800 an ounce, an increase of 37 per cent from 2005.

“Base metals exploration expenditure in 2006-07 is estimated to total $560 million, an increase of 52 per cent from 2005-06.

“This increase is mainly attributable to strong rises in expenditure on copper, nickel and silver-lead-zinc exploration, reflecting substantial rises in global prices for these commodities.

“For example, in 2006, copper prices increased by over 80 per cent, while nickel prices rose by more than 65 per cent.

“In real terms, exploration expenditure on base metals in 2006-07 is expected to be more than double the 25 year average ($260 million) and the highest on record.”

Could we be on the verge of a significant shake-up in the global auto industry?

Copper prices are up, so that will mean a positive start for the dream team merger twins, Rio Tinto and BHP Billiton, today.

So if inflation remains under control,does that mean the US economy is not facing a period of stagflation but is merely stagnating?

Are world oil prices about to repeat last year’s surge to record levels?

China has further loosened controls on overseas investments by Chinese domestic investors, a move that’s likely to trigger a sharp rise in the outflow of funds into markets in Asia and elsewhere.

No matter how you measure it the Chinese stock market is a bubble waiting to go pop.

Warnings have been issued from the government to leading brokers such as Goldman Sachs yesterday, but Chinese investors are not listening.

Investors are having too much fun: the fears of February 28 when the market fell 8.5 per cent in a day on sudden worries of moves to curtail speculation, have been long forgotten.

New share offerings are doubling in value on day one of the IPO listing and shareholder accounts are multiplying at a phenomenal rate, millions a months according to media reports in Hong Kong and international business papers.

So far this year, the domestic currency “A” share market is up 44 per cent and daily turnover exceeds $US30 billion, which is enormous when you consider how much we trade $A4 to $A6 billion on a big day here in Australia.

What to do is the big question for the Chinese Government.

As we have seen with the wider economy, three interest rate rises, a small rise in the Yuan and seven increases in the official reserve ratio which controls bank lending, have not stopped the boom in investment, property and the stockmarket speculation.

The market is rising by almost one per cent a day, sometimes more, so these official measures will have no impact unless interest rates rise very sharply and quickly.

Why would any one keep money in a bank and get at most three per cent or so when by the end of one week’s trading you could have earned five per cent?

For ordinary Chinese it is a no brainer; from the Government’s point of view it is a nightmare because they know that if the market takes fright or suddenly implodes, there will be economic and social unrest, demonstrations and possible worse.

Economic activity and confidence would be damaged. The stakes are high, very high.

It is why we here in Australian enjoying our sweet economy at the moment, should be casting a wary eye northward and starting to wonder if we should be a little more conservative.

…………….

Goldman Sachs’ warning got a lot of play throughout Asia yesterday with all the major news services giving it prominence.

Whether it will be self-fulfilling is another thing but the fact that it has been uttered is interesting because it fits in with the official concern on the mainland.

Goldman Sachs would not have said anything if the Chinese Government and its officials had not already been expressing concern.

Goldman said that China’s shares may face a “correction” as earnings can’t justify the rally that’s made them the world’s star performers this year.

China’s CSI 300 Index, which tracks Yuan-denominated A shares listed on the country’s two exchanges.

It’s the world’s most expensive key stock index, at 42 times reported earnings, more than double the Morgan Stanley Capital International Asia Pacific Index’s at 19 times.

Goldman said yesterday that “Current valuations are demanding and seem to have outpaced the improvement in market fundamentals. The “risk of market euphoria is building up.”

China’s investors opened 385,121 new accounts at brokerages on May 8, that’s the highest daily number since records were first published by the China Securities Depository and Clearing Corp. in June of 2005.

But according to the official Chinese newsagency there were 4.78 million new stock trading accounts opened in China, and 4.5 million in April alone. That’s the best example of how the boom has become a bubble.

As the National Australia Bank completed the interim reporting season for most of our major banks yesterday the industry was casting a worried eye across the Tasman.

Developers like AV Jennings, Australand and a host of their competitors don’t need statistics to tell you how bad the Sydney property market is and NSW for that matter.

Developers are abandoning the state for Victoria and Queensland or de-emphasising the importance of housing in the state while pursuing other projects, such as small shopping centres and commercial properties.

There’s just no certainty in NSW or Sydney, which is hurting the housing industry across the board because the state (and Sydney in particular) is the biggest market in the country (like it is for so many domestic activities)

Sydney’s underperformance is showing up in official figures which measure house price movements.

The Australian Bureau of Statistics (ABS) said yesterday that average house prices grew by an average 1.1 per cent across the country in the first three months of 2007, but Sydney house prices again struggled to the point where they went backwards.

The ABS said its House Price Index, which takes the average of the nation’s eight capital cities, grew 8.6 per cent in the 12 months to March (which nearly matches the growth in the dollar value of retail sales. That’s not an accurate comparison but more confirmation of how sweet the economy is at the moment).

But prices in the nation’s biggest housing market in Sydney fell by an average 0.4 per cent in the first quarter, and grew at just 1.5 per cent over the year to march.

Here’s a perfect example of why accepting a takeover offer early (as many did in Qantas) can be self-defeating.

Hong Kong-based private equity group, Affinity Equity Partners (AEP) says it is offering $6.20 a share for the 16.4 per cent it doesn’t own in Brisbane-based retailer, Colorado Group.

The announcement came late Tuesday night as the country was preoccupied by the Federal Budget. When a trading halt ended yesterday the shares rose $1.09 to $6.02.

AEP’s Australian arm Australian Retail Holdings (ARH) said it believes “its offer provides the existing minority shareholders in Colorado with a compelling opportunity to crystallise substantial value from their shareholding without exposure to the significant execution risks faced by Colorado in implementing its current business strategy”.

This means they REALLY want CDO minorities to sell their shares.

The offer saw the CDO board call off a shareholder meeting yesterday that was going to consider a 52c a share capital return ($49.9 million), which would have benefited AEP with its 83.6 per cent stake in the retailer, and Solomon Lew, who holds a blocking 10.9 per cent stake.

The offer price is a 26 per cent premium to the closing price on Tuesday and a substantial amount above the cash price of $4.18 and 52c special dividend paid last October in the first offer last year.

That totaled $4.70 a share which was a substantial premium in itself above the CDO share price before the bid from AEP, which was notable for being the first hostile bid in this country from a private equity buyer who normally like to ‘hug’ and ‘hold ‘ their targets.

By holding out the prospect of a big gain, AEP is hoping to lure Lew into selling, but going by his stance at Country Road where he has remained a ‘locked’ in shareholder with around 12 per cent and an irritant for the South African owners, I wouldn’t be betting on him accepting too quickly.

After all he doesn’t need the money having sold his stake in Coles to Wesfarmers for more than $1.1 billion for his main company, Premier Investments.

In calling the now postponed meeting, Colorado said its capital structure was inefficient and the AEP local subsidiary ARH proposed the 52c a share capital return to create a more efficient capital structure for CDO.

CDO was in the process of completing a term debt facility to repay the $49.9 million borrowed from ARH to fund the share special dividend paid to shareholders on 6 October 2006.

The faint signs of recovery in the Australian home building market seem to have disappeared once again with the news of a sharp drop in March approvals, thanks to a slump in flats and home units.

The 2007-08 Federal Budget won’t cause too many problems.