"We are still in a commodities bull market" - Barclays Capital
"We are still in a commodities bull market" - Barclays Capital
February 10, 2009
The Struggle For Control Of The World’s Commodities May Be Only Just Beginning
By Alastair Ford
So where are we at? On the day that the BBC reported UK cabinet minister Ed Balls as having said that we are in “the worst global recession, I’m sure, for a hundred years”, and on the day that Minesite reported some hopeful signs from the two early February African conferences – Livingstone and Indaba – one thing’s for sure, we are in a whole new world, and no one’s really sure what’s going to happen next. Money just isn’t what it used to be; and neither’s demand. Politicians may squabble and throw money around, but Gordon Brown’s Freudian slips - he’s “saved the world”, even if we are in a “depression” – speak louder than any of his official statements. If we’re to take Ed Balls at his word, though, and this is the worst recession for 100 years, is it worth,then, taking a look at what the world looked like in 1909? The answer is: up to a point.
1909 was a world unburdened by knowledge of Ponzi schemes, derivatives trading, or asset-backed securities. In science, 1909 was before stainless steel had been developed, before Rutherford split the atom, and before radio had gained any ground. It was, however, a world in which the great global power had just fought a nasty little local war against an enemy over which it had rather optimistically proclaimed victory a little too early. But if there’s any mileage in comparing Lord Roberts’ early declaration of victory over the Boers to George Bush’s early declaration of victory in Iraq it’s probably only in that it serves to illustrate that each successive Great Power is destined to repeat the mistakes of its predecessor. And the year itself did witness some significant moments, too. Drilling commenced on the world’s biggest oil gusher, the Lakeview gusher, Louis Bleriot flew across the channel, and BP, or Anglo-Persian as it was then called, listed on the stock market. In mining there was major tragedy at the Cherry coal mine in Illinois, in which 259 miners, not all of them full-grown men, lost their lives. Then, as now, such disasters were sadly, still commonplace, although these days it’s China that suffers the heavy death toll each year.
So 100 years ago, plenty was different, but plenty was still the same. So far, so trite. What’s far more illuminating are the reasons why the world order that then prevailed no longer prevails today. Here we get far closer to the bone. Back in the dying days of the Edwardian era the world was split into imperial zones of influence. This mainly involved the European powers, but the US was a late arrival and active participant in the party, having recently expanded its own empire through the acquisitions of the Philippines, Guam, Puerto Rico and Hawaii. “We are stretching out our hands for what nature meant should be ours. We are taking our proper rank among the nations of the world... along with these markets will go our beneficent institutions, and humanity will bless us”. So said Charles Denby, a former US Minister to China, on the conclusion of his report to a commission of enquiry into the USA’s acquisition of the Philippines in 1898. In Britain, Kipling and Kitchener would surely have applauded. So how would it be if the Chinese or the Indians or the Pakistanis came up with such a phrase now to justify some such similar aggression? The answer, surely, is that no-one would like it, but plenty of people would understand it, and would also understand at least in a vague sense, the provenance.
Back in the early part of the 20th Century there just weren’t enough markets or commodities to go around to support the industrialization of all the Western countries. So these countries inevitably fought over them in a long, drawn-out process that historian Niall Fergusson has recently sought to buttonhole into the unwieldy phrase: “Wars of the world”. It’s a repeat of this series of 20th century conflicts that politicians fear when they argue against the evils of protectionism - it was the clashing of the protectionist economic blocks over markets and commodities that brought forth twentieth century conflict in its nastiest form. This fear is especially pronounced in Europe, a continent which bore a heavy brunt of these conflicts. Whether the Europeans are right to be so worried remains open to debate: perhaps it will be different this time round? All that we really know is that some things don’t change: if there’s not enough to go round, people will fight for their share, and, what’s more, it’s always advisable not to declare victory too early.
So when president Obama talks protectionism, Europeans get jumpy. Back in the day, in the late 1940s, the fractured protectionist world was finally welded back together by total American victory over the Germans, the Italians and the Japanese. The new order had as its pillars the gold standard, the World Bank, and the UN. The Germans had helpfully bumped the French off the playing field in 1940, and the Americans had taken over the British markets as the price for US destroyers and other aid offered at around about the same time. Game on for more than half a century of growing prosperity. Even the collapse of the gold standard as the US sought to finance the Vietnam war didn’t unsettle things too much. Decades after Rutherford had spit the atom, we were now in the world of Einstein’s relativity. Value it seemed, was relative too. No need for the absolutes of the gold standard. But times sure change: it might well be that we are already half way back to an unofficial gold standard even now.
Because that brave new world, a good world, one that lasted 60 years or more, and may yet survive, is nevertheless reeling from a severe and possibly fatal blow, one that was inflicted, paradoxically, by a group of people that benefitted more from the system in material terms than any other social group – its bankers. If it does start to disintegrate, one of the signs to look out for will be the increasing politicization of commodities and commodities-related issues. In the 1930s, in the shadow of war, the powers all jostled for position in commodities. Nowhere was this tendency clearer than in the Far East – where the Japanese wanted oil from the Dutch East Indies, now Indonesia, and also tin and coal. From Malaya, meanwhile, they wanted rubber, from China, raw materials in general and industrial capacity. And from the Philippines, that chain of islands that “nature meant” to be American, they wanted the nickel, iron ore, and other mineral resources, as well as the plantations, and the opportunity to defeat the Americans. They got them all. And they took them by force because no one would trade with them on terms that they thought were fair. If that’s not a warning from history for the world to heed, then we might as well all pack up and head for the hills.
Commodity Price Volatility and World Market Integration since 1700
Thanks for posting that drillinto. The bigger picture gives the greater view.
so much for higher highs and higher lows.. looks to be heading down some more??
February 25, 2009
Analysts Take A Reasonably Optimistic View On The Outlook For Gold This Year, Although There Are A Few Exceptions
By Charles Wyatt
Source: www.minesite.com/aus.html [Registration is free]
It’s always good fun to take a look at the forecasts precious metals analysts have previously put out for the prices of gold, silver, platinum and palladium. Fun, too, to take a look at how they think things will shape up in the current year. Gold evokes most interest from investors, so we'll stick to the yellow metal, and start with the winners. As far as 2008 went, the first prize in gold goes to Frederic Pannizzutti of MKS Finance SA, who was right on the button with his forecast of US$872 per ounce. This indeed was the average for 2008 after gold hit a high of US$1,011.25 per ounce on 17th March. And it’s interesting to record that just seven months earlier the Lex column on the Financial Times had published a piece – Stolid Gold - which had slammed the idea of investing in gold when it was only at US$660 per ounce. And it is even more interesting to record that the writer of said piece is now US Lex Editor. Funny way to get a promotion, but then Ed Balls, now a minister in Gordon Brown’s government, was previously an FT writer and it is said that he was the one who persuaded Brown to sell all our gold.
But back to the forecasts... Frederic was only inches ahead of Rhona O’Connell of GFMS at the finishing line. Sadly, though, Rhona is not making a forecast this year. Last year she made it under the name of her own consultancy, but this year the head honchoes of the London Bullion Market Association deemed it invalid for two analysts from the same organisation to participate in the forecasts. She therefore left it to Philip Klapwijk, also of GFMS and who, it has to be said, was just about neck-and-neck with her last year with his forecast of an average gold price of US$870 per ounce. Others who came close were Jeff Christian of CPM Group New York, Martin Mureenbeeld of Dundee Economics, Bob Tokai of Sumitomo Corporation, Matthew Turner of Virtual Metals and Bhargava Vaidya of BN Vaidya & Associates of Mumbai.
Where there are winners there have to be losers, and the most ambitious was Rene Hochreiter of Allan Hochreiter Ltd in Jo’burg who forecast an average gold price for 2008 of US$1,050 per ounce. Ross Norman of Bulliondesk wasn’t far behind him with US$975 per ounce and at this point it’s probably worth recording that out of the 28 analysts who took part eight were ahead of the game and the rest, bar Frederic, behind. If anyone wants to read into this that the majority of analysts tend to be pessimists that is fine, but they should bear in mind that those working for certain US banks may have received some ‘guidance’ when these forecasts were made. Goldman Sachs, for instance, went short of gold at US$810 per ounce only a few months before it hit its high in March 2008. One cannot expect any analysts there to have been very optimistic when forecasting, but their figures cannot be traced, as no one from Goldman Sachs takes part in the LBMA competition.
On then to the forecasts for this year and it is probably best to take a look first at the high points these wise men expect gold to reach. Ross Norman takes the honours here with a high of US$1,275 per ounce. He’s followed closely by Philip Klapwijk with US$1,260. There’s a dead heat for third between Jeffrey Christian and Trevor Turnbull of Scotia Capital in Toronto. Frederic Panizzutti, as last year’s winner, should be given a mention for his forecast of US$1,180 per ounce. As some of these names come up with astonishing regularity it should be of use to investors to understand the thinking behind these forecasts. Philip says the outlook for gold has been transformed due to the official policy response to the global crisis. He sees the reckless expansion of US Government spending, the ballooning of its budget deficit, and the huge expansion in the Federal Reserve’s balance sheet and in the money supply, all leading to a weaker dollar and an increasing demand for gold from investors. Jeffrey Christian has roughly the same argument, but points out that physical supplies of gold remain tight so the impact on price could be even more significant.
At the other end of the scale comes poor old Rene Hochreiter who reckons that the high point for gold this year will be US$750 per ounce - so he is well wrong already, and may be wishing for a second chance. His reasoning is that deflation and a strong US dollar are likely to put pressure on the price. He goes on to say that the performance of gold in 2008 was a massive disappointment during the liquidity crisis and sentiment towards the metal is likely to remain poor. It looks slightly as if Rene lives in a parallel universe so we will embarrass him no more. Instead a look at the forecasts of John Reade of UBS should be rewarding as he has long been a leading figure in London from back when he was with Warburg. He forecasts that gold will average only US$700 per ounce this year, the first decline in the average price since 2001. His thinking is that gold will be hit by a stronger dollar, deflationary risks in developed markets, lower jewellery demand, and a decline in producer de-hedging.
There you have it. Markets are made up of buyers and sellers, and here one has examples of both. Just for the record no one thinks gold will average US$1,000 or over this year, though Ross Norman comes close with US$988 per ounce. At the other end of the scale John Reade thinks it could go as low as US$600 per ounce, as does our friend Rene. Overall the forecasters expected gold to be the only precious metal to finish with a higher 2009 average, at f US$881 per ounce, and 75 per cent of them expect gold to hit record highs, again with an average of US$1,074 per ounce. It is therefore not surprising that the trading range for gold is expected to widen further, as investors take profits whenever there is a forward surge. Wonder what the Financial Times will have to say about these forecasts? Probably nothing at all as it still regards gold as a barbarous relic, and refuses to appreciate the role it plays as a currency hedge in any well managed portfolio.
Oil and Gold Fundamental Outlook
Tuesday, 03 March 2009 22:11:15 GMT
Written by Stefan Tifigiu, CFDTrading Research
Despite deepening negative sentiment, Crude Oil prices gained today on expectations of supply reductions. Gold prices continued their downward trend today despite continually negative outlook for the global economy. While the economic outlook remains downbeat, several forces may be contributing to gold’s sell-off.
Commodities - Energy
Oil Gains on Production Cut Expectations
Crude Oil (WTI) $41.20 +1.050 +2.57%
Despite deepening negative sentiment, Crude Oil prices gained today on expectations of supply reductions. Several OPEC members stepped up hawkish supply-cut rhetoric in the face of sharp price declines. It seems that demand and supply forces will be battling it out in deciding the price of crude for the coming sessions. The question is: which of the two will have more influence? On the one hand, demand destruction continues to exert strong downward pressure on crude prices. If recent bearish releases are any indication, the world economy will likely remain stagnant or continue to contract for some time. Barring any unexpected reversal in global economic trends, demand destruction will maintain a strong influence on prices. On the other hand, cuts from a number of suppliers can help prop up crude prices at their current levels. OPEC and major corporations such as Royal Dutch Shell plan on reducing production in response to falling prices. How much these reductions will lower supply is questionable given several of the OPEC members’ budgetary constraints. Some members have already expressed concerns over other nations failing to fully comply with reductions. That being said, if tommorow’s DOE figures indicate a steeper reduction in supplies, this will provide support for current prices. Otherwise, crude prices will likely fall again.
Commodities - Metals
Equities Reach Attractive Levels, Speculative Funds May Be Moving
Gold $915.275 -$10.075 -1.13%
Gold prices continued their downward trend today despite continually negative outlook for the global economy. While the economic outlook remains downbeat, several forces may be contributing to gold’s selloff. Some value-investors consider currentprices of equities to be exceptional bargains at current levels as many securities have fallen to decade lows. In response to this, some speculative funds may have begun to transfer from safe-havens toward equities, however equities markets are not particularly indicative of this. Most of the price action may be more readily attributed to traders deleveraging positionsby selling off on profits acquired through the safe-haven. Negative market sentiment continues to remain a major influence on the markets, however resistance was demonstrated as even extremely bearish comments by Fed Chairman Ben Bernanke could not spark up the metal’s demand. Given the outflows by speculative funds and competition from other safe-havens such as government bonds and the US Dollar, Gold prices may stall for the short-term. Favorable conditions for a mid-term to long-term rally however are in place but until short-term pressures subside, gold will likely trade flat.
Silver $12.800 -$0.140 -1.08%
Negative market sentiment continues to remain a major force in the markets, but so long as Gold experiences downward pressure, Silver will likely follow suit. Long-term the environment remains favorable for a future rally. Silver has historically lagged behind Gold’s gains and when demand begins to pick up again will likely grow at a very quick rate.
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war commodities are worth a look....copper is one obvious candidate.
April 14, 2009
Noble Group’s Richard Elman, Last Of The Hong Kong Taipans, Casts A Watchful Eye Down From His Eyrie Above The Harbour
By Our Man in Oz >> www.minesite.com
China has returned, which is an odd thing to say since it never actually went away. What it means is that the business of selling minerals and metals, food and fibre to the world’s most important “factory” is returning to normal, or at least to a condition significantly improved on the disaster which was the second half of 2008. Nowhere is it easier to sense a recovering “China trade” than in Hong Kong, and no-one is better placed to talk about it than the last of the great British “taipans”, Richard Elman, founder and still the hands-on boss of the supply-chain management specialist, Noble Group. From his eyrie overlooking one of the world’s great harbours, Elman sees and hears everything, which is why Minesite’s Man in Oz popped up for a session at the feet of the great man, leaving after a stimulating hour which confirmed his belief that recovery is underway.
A conversation with Elman can be a prickly affair. He is very much the boss, and this latest encounter was no exception. It started with a firm refusal to discuss Noble Group’s latest quarterly performance. “We don’t judge our business in 12-week chunks”, he said disdainfully. Fair enough, but there’s no denying that Noble Group had did well last year, in the face of daunting conditions. The calendar 2008 year produced stellar numbers. While other businesses were suffering, Noble lifted its annual turnover to a record US$36 billion, and net profit to a record US$577 million. Profit will probably be less in 2009, though all Elman will acknowledge is that he is confident of achieving his long-term target of a 20 per cent return on equity, a remarkably strong performance in difficult times, which illustrates the point that China, and other customers, are still buying the coal, oil, iron ore, manganese, soy and wheat that’s traded by Noble.
With the topic of financial forecasts falling into the teeth-extracting category Minesite’s Man switched to something easier: is the worst of the crash behind us? “I am more optimistic than a few months ago”, Elman said. “The good news is that the panic is out of the way. Around Christmas there was panic in the market and no-one seemed to know what was going on. I’m not sure we really know today, but I sure feel less stressed about it.”
China, Elman said was “quite committed” to doing whatever is necessary to stimulate its economy. “It is one of the few countries in the world that can actually get something substantial done,” he said. “Not everything is 100 per cent, but we have to assume that China will achieve an 80 to 90 per cent hit rate. For the time being things are okay. China will pour money at the issues and keep its industries going because there is a bigger problem than an economic downturn, and that is the social question which is pre-eminent in any discussions.”
The biggest challenge in China today is the reversal of its export-focused economy, something that is being achieved with basic industries such as steel-making switching production runs from steels used to make exported products to heavy-duty construction steels for girders, and other “long” products. Whether that is being done legitimately remains to be seen, with US steelmakers complaining bitterly that China is dumping steel to shift its stockpiles and win market share unfairly. “For the last 10 to 20 years China has been export focused, which is all well and good, but you have to find someone to import,” Elman said. “That means there is a much greater reliance today on domestic consumption, and that’s something we’re watching very closely.”
Elman is cautious about China’s future growth rates, almost as careful as he is in talking about Noble Group’s financial results. In late 2007, before the wheels fell off the world, Elman told Minesite that he doubted whether it would matter much if China’s double-digit growth contracted back to between six and eight per cent – a rate it appears to have achieved. “I’m still quite happy at the six to eight target, but I get worried if it falls below five per cent,” he said. “My senses tell me that five per cent is a threshold that we do not want to fall below.”
On the outlook for his home-town of Hong Kong, Elman is equally optimistic, in a cautious sort of way. He acknowledges the decline in sales of luxury goods, and the pressure being felt in the financial and property markets. “The mood of Hong Kong is back to a reading of about 70 per cent,” he said. “At the depths of the crisis it was below 50 per cent.” Elman then reminisces about the changing fortunes of Hong Kong. “Years ago we used to feel very rich in Hong Kong, and everything was affordable, and we wondered why everyone didn’t come and live in Hong Kong”, he said. “And then for the last three-or-four years, when we travelled to London, everything seemed so expensive and we sort of became the paupers. The wealth was coming from somewhere else. Suddenly, we didn’t feel as important any more. We couldn’t push our way around in queues in shops. But now it’s coming back. Now, we feel quite important again.”
Elman’s “feeling good in Hong Kong” mood is relative, and perhaps a reflection that the mood in London, and elsewhere is awful. But, for investors there is a message in the strength he is feeling in Hong Kong’s pulse, a strength derived directly from its proximity to the world’s great commodity sink, China. It leads naturally to a final question from Minesite: Where will the opportunities come from for investors as China spends big on its internal economic stimulus?
“I think it’s more of the same,” he said. “China needs raw materials, and it needs lots of them. All of the world’s major toilet makers manufacture in China, which means there’s a market for the raw materials which go into making a toilet.” Is that his way of saying that commodities are a good investment category for the future? “Well, we think so. I don’t mean to be rude, but it’s a silly question for someone who’s spent that last 50 years in supply-chain management.” Minesite duly apologises for asking a silly question but digs the hole a little deeper by persevering and asking (tongue in cheek) whether Elman might have made a terrible mistake by being in commodities for the past 50 years?
For the first time, as the conversation gets close to an end a laugh is extracted from the Taipan. “They are very fundamental things,” he said. “We believe that somewhere in the world we affect somebody every day because they eat, or build something, or use transport that we’re involved in, or use coal. It’s not this pen (Elman says, holding up his Mont Blanc). This is a luxury. You can also buy a cheaper pen, but it’s still got raw materials going into its manufacture.”
Elman’s final words are on the financial crisis itself, and how Noble rode it out so successfully, and is plotting a profitable future. “We’re very simple people,” he said. “We apply the KISS principle, keep-it-simple-stupid”. We don’t understand most of the financial products created over the past decade. You know, a huge amount of the dislocation in the banking community was caused by a lack of correlation between the instruments. People were hedging a peanut with an apple on the theory that they both came out of the ground, and if the price of one goes up they should all go up. It just doesn’t work like that. It was a terrible mismatch that had to come to an end.”
For investors in resource-related stocks there is hope, and a warning. The hope lies in the fact that demand in China for basic raw materials such as iron ore, copper, zinc and nickel, is rising after six dreadful months. It is demand from China which underpins much of the price recovery seen in those metals. The warning is that turning China around from an export-driven economy to one focused on internal consumption will not be as easy as it sounds. The US steel industry’s anti-dumping case against China is an early shot across China’s bows. More shots can be expected as China rebounds and attempts to steam away from the rest of the world. Hands up anyone who remembers the “de-coupling” theory which argued that China’s growth was separate from the rest of the world? De-coupling didn’t work last year, and it will not work next year – which is why Elman is optimistic, but watching very, very, carefully.
A 'Copper Standard' for the world's currency system
By Ambrose Evans-Pritchard
Last Updated: 2:41PM BST 16 Apr 2009
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.
The G20 moves the world a step closer to a global currency
China's growth more Occident than design
A world currency moves nearer after Tim Geithner's slip"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.
While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
April 20, 2009
Commodities Go Up As The Price Of Risk Falls
By Rob Davies | www.minesite.com
If everyone is so bearish why are prices going up? It is not just base metal prices that are on the rise. Equities and soft commodities are also moving up. Yet all the data from economists, governments and businessmen is uniformly downbeat. But therein lies the answer: if everyone expects the worst, then any news that is not absolutely atrocious is greeted as being less bad than the market was pricing in, and so there is a collective sigh of relief. Last week’s news that was better than expected was results from the US financial sector. True, there was a large element of one-off and special factors, but the overall results seemed to cheer traders up simply by not adding any more horrors to the long list that we already have.
That element of euphoria spilled over into equity markets generally, and continued on into commodities. Here again there are some special factors, the biggest one being the decision by China to buy up excess metal during the price slump to help domestic production. At the scale it is talking about - one million tonnes of aluminium, and half a million tonnes of copper and the same again of lead and zinc - it will probably have an impact outside China as well. One broker, which, for reasons that are somewhat obscure, prefers to remain anonymous, even reckons that China is buying up metals as part of a concerted switch out of the US dollar and into physical assets. Whether that’s true or not, the recent buying from the Chinese has certainly affected prices. Copper rose 6.5 per cent to US$4,756 a tonne, zinc 11 per cent to US$1,500 and nickel nearly 14 per cent to US$12,230. Not bad for a recession.
Essentially then, it seems the price of risk is coming down from the atmospheric levels to merely just expensive. Measuring the price of risk is not easy. But bond yields are one way, and there there has been some easing of prices so that yields have risen from their panic struck lows. Even so a yield of 2.9 per cent on a 10 year US Treasury suggests that most people are still pretty nervous. A better measure perhaps is the VIX, a measure of near term volatility in S&P 500 stock option prices. It peaked at 90 last autumn, and is now back at 34. While better than it was at this level the VIX still suggests the market is three times more nervous than it was two years ago. Gold too is telling us that markets are a little less nervous about risk than they were. But not much, a US$10 fall to US$870 an ounce over the week still indicates a lot of uncertainty. Trying to determine what happens next, though, is altogether different from arguing that risk is diminishing.
The mining industry is still in a flap. Mines are being closed, or openings delayed, the most recent production deferral coming from Vale’s Onca Puma 58,000 tonne a year nickel mine in Para. And the big boys are raising money - both Rio Tinto and Anglo American issued convertibles last week to beef up their balance sheets. They clearly think that there are still tough times ahead and want to be better prepared. On a more positive note it does seem that the firm action taken by De Beers to tighten up the diamond market has had some effect. Angola says sales are picking up and Botswana is planning to resume mining next week.
Positive news from banks, base metals and diamonds is encouraging. But given the scale of the bailouts being thrown by governments at banks and other businesses it is arguable that is the least we can expect. The big question that still remains is: what happens when the governments run out of money. How risky will that be?
April 25, 2009
That Was The Week That Was ... In Australia
By Our Man in Oz
Minews. Good morning Australia, it looks like you had a fairly flat week.
Oz. Going nowhere is the best way to describe a market which, overall, slipped by 1.6 per cent, and a metals sector which ended 2.1 per cent lower thanks almost entirely to a single company. BHP Billiton’s four per cent decline weighed so heavily that it dragged everything down with it. But, even if you blame sliding indices on the big boy of mining it was a week lacking in direction, although not news flow. A handful of stocks performed well, including some you’ve probably never heard of, which is an interesting development in itself, while a handful went south quite rapidly.
Minews. Let’s start with the news events, including what seems to be as fresh twist in way your government is handling Chinese investment.
Oz. Two developments in that area, starting with harsh criticism from the chairman of Gindalbie Metals (GBG), George Jones, over delays in the Australian Government’s foreign investment approvals process, followed by a remarkably strict set of rules governing approval for China Minmetals’ purchase of assets from OZ Minerals (OZL). The outburst from Jones was pure frustration because his Chinese partner, Ansteel, has been asked several times to re-submit its investment application, and has never been told why, which is rather curious. But, the terms of the OZ approval are potentially far more interesting because they might turn out to signify a great deal more, by setting the bar too high for Chinalco to climb over in its attempt to get into Rio Tinto’s bed.
Minews. You think the Rio Tinto deal with China is dead in the water?
Oz. It’s certainly looking that way when you consider the legally enforceable undertakings demanded by the Australian Government of China Minmetals in the OZ deal. The rules include the Chinese having to operate via Australian incorporated and headquartered companies, management to be predominantly Australian, the chief executive and chief financial officer to have Australia as their principal place of residence, the majority of meetings to be held here, all off-takes (sales) agreements to be priced by sales teams in Australia and be referenced against internationally observable benchmarks. They also stipulate that the Chinese produce an annual report that conforms with Australia’s Corporations Act, including reviews of employee, sales, environmental and community relationships, and that they make that report publicly available.
Minews. Wow. Your government seems to be intent on forcing a Chinese company to perform to western standards?
Oz. Precisely, that’s why the OZ/Minmetals decision could have far reaching implications - it seems to be laying down a template for others to follow, plus sending out a very loud warning that all Chinese investment in the mining sector will be watched very carefully. That’s why a BHP Billiton merger with Rio Tinto is looking to be a much easier route to follow.
Minews. Enough of the news flow, time for prices.
Oz. As was said earlier, not much movement in any sector. Gold, iron ore, and base metals stocks were evenly split, with a few specials standing out. Among the gold stocks to rise was Perseus (PRU) which continues to attract attention with its Ayanfuri project in Ghana, adding A8.5 cents to A91.5 cents, although it was briefly above the A$1.00 mark early in the week. Kingsgate (KCN) bounced back from its Thai riots setback, gaining A61 cents to A$5.82. Mundo (MUN) reported solid production numbers from its South American mines, rising A5 cents to A38 cents, and Avoca (AVO) crept A7 cents higher to A$1.53. Going down, we saw Medusa (MML) slip A4 cents to A$1.56, though the stock did trade up to A$1.67 on Tuesday. Adamus (ADU) fell by A3 cents to A38 cents, while St Barbara (SBM) put in the worst showing with a drop of A5.5 cents to A27.5 cents after reporting poor production numbers.
Minews. Iron ore now, perhaps with an opening comment on the Fortescue Metals court case.
Oz. Now that is getting interesting. Most of the evidence has been heard with final summations next week when we will know whether Fortescue and its chief executive, Andrew Forrest, did mislead the market in 2004 with a statement about “binding” sales contracts. In court this week there was plenty of fun and games with the defence blind-siding the prosecution by not calling three witnesses it had earlier indicated might give evidence. That, of course, is a perfectly legitimate move, but it deeply upset the government’s prosecutors who complained loudly that “we had assumed” the witnesses would be called because it had more documents to go through. Perhaps a lesson in life for everyone - never assume anything, especially in a legal action. On the market, Fortescue barely moved, losing A1 cent during the week to close at A$2.52. Most other iron ore stocks were modestly weaker. Territory (TTY) lost A1 cent to A19.5 cents, Atlas (AGO) fell A4 cents to A1.32, Northern Iron (NFE) slipped A7 cents lower to A$1.15, and Brockman (BRM) declined by A8 cents to A$1.14.
Minews. Not much to write home about there. Anything more interesting in the base metals?
Oz. No. Copper, nickel and zinc were mixed, with a modest downward trend evident. Among the copper stocks Equinox (EQN) moved most with a fall of A29 cents to A$2.09, but that comes after a big capital raising. Citadel (CGG) added A1.5 cents to A14.5 cents, and Anvil (AVM) lost A13 cents to A$1.37. Marengo (MGO) opened the strongly at A12 cents, then reported a fresh copper discovery in Papua New Guinea, and closed the week even at A10 cents. In the nickel sector, Mincor (MCR) slipped A7.5 cents lower to A94.5 cents, Mirabela (MBN) added A6 cents to A$1.84, Minara (MRE) lost A8.5 cents to A60 cents and Independence (IGO) gained A2 cent to A$94.5 cent. There was a more defined downward pattern among zinc stocks with Bass Metals (BSM) the only stock to rise, and then by just half a cent to A16.5 cents. Kagara (KZL) lost A19 cents to A81 cents. Terramin (TZN) fell A7 cents to A66 cents, and CBH (CBH) was A1.8 cents weaker at A8.7 cents.
Minews. Uranium, coal and specials to finish please.
Oz. There was more strength in the uranium market, which continued on an upward trend that has been evident for several weeks now. Mantra (MRU) added another A30 cents to A$2.60, Uranex (UNX) added A1 cent to A37 cents, and Forte (FTE) rose by A1.5 cents to A11 cents. Coal stocks were generally weaker. Riversdale (RIV) lost A24 cents to A$4.22 despite reporting a big increase in reserves. Coal of Africa (CZA) was A10 cents lighter at A$1.20 and Centennial (CEY) dropped A42 cents to A$1.71 after a poor production report.
Minews. And specials?
Oz. Saving the best for last because there was bit of action among some penny dreadfuls which never get a mention anywhere, plus some encouraging exploration news in odd places. Among the “dreadfuls” we saw the copper/gold explorer Augur Resources (AUK) top the trading report on Friday with a rise of A1.9 cents to A4 cents, a jump of 90 per cent on the day, in thin turnover and with no news, nor ASX speeding fine. Another “Neville Nobody” called MKY Resources (MKY) did cop a speeding ticket from the ASX on Friday after shooting up by 86 per cent to A1.3 cents. There was also a strong move by Platina Resources (PGM) which added 57 per cent to A33 cents.
And Exploration news came from Magma Metals (MMB) which reported more encouraging platinum assays from its work in Canada. It added A5 cents to A45 cents, which is very good news for the lucky clients of the broking firm, Hartleys, who subscribed early in the week to a A$16 million capital raising priced at A32 cents, a difference which equates to making 41 per cent on your money in three days. There was also a “Robert Friedland” moment on the market when the local stock he controls, Ivanhoe Australia, reported rich molybdenum and rhenium assays from its Merlin prospect in Queensland, and that drove the stock up by 34 per cent to A$2.01.
Minews. Thanks Oz. That activity at the small end of town, and from exploration news, is rather encouraging.
Oz. It certainly is, perhaps the start of a climb out of the hole we’ve been stuck in for the past year.
May 26, 2009
For Insights Into What Happens Next Watching The Chinese Is A Better Idea Than Paying Attention To Rating Agencies
By Rob Davies
Few institutions have come out of this financial crisis well. Apart from the banks, one group that has suffered more than most are the ratings agencies, led by S& P and Moody’s. The obvious conflict of interest they suffered from of saying nice things about the companies that paid them was overlooked during the feeding frenzy of the securitised debt markets boom. Those concerns seem to have been forgotten now as the press give wide coverage to the reservations expressed by S&P about the credit worthiness of the UK and the likelihood of similar opinions being expressed about US debt. It is doubtful if the UK or UK Treasuries sought or paid for these opinions. More likely S&P thought it was doing everyone a favour by publishing its opinions.
As a statement of the bleedin obvious these views are about as redundant and irrelevant as it possible to make. Both the UK and US economies will have budget deficits of 12 to 13 per cent and debt to GDP ratios approaching 100 per cent in few years’ time or maybe sooner. You don’t need to be an economic mastermind to realise these are not good numbers and do not merit high quality rating for the debt being issued by these two. The same goes for many other countries. Nevertheless, this exercise is all part of the system of modern finance where external validation is required to demonstrate that our politicians are honest. The population needs to be told what to think about such complex matters as sovereign debt. No matter that any reasonably well read person could come to the same conclusion as the agencies, and possibly act on it.
It is in the interests of the authorities to keep these matters arcane. The alternative, something that every man in the street could comprehend, is far too democratic for the powers that be. Even so, not everyone believes that the emperor has new clothes. It is not surprising that the Chinese have been steady and consistent buyers of hard commodities this year. No one needs a second opinion to determine the value of a tonne of copper. Its price is US$4,500 a tonne, about US$200 more than it was worth last week. Is that because the price of copper has gone up or the value of the dollar has gone down? It is hard to tell but it is certainly easier to assess the utility of the tonne of copper, and what you can do with it next year, than the future worth of 4,500 promises from the US Government.
Not all metals had a good week though. Aluminium was sold down US$50 to US$1,429 a tonne as inventories on the LME rose to over four million tonnes. That transparency is a vital part of confidence that buyers of commodities have. Knowing how much more of a metal there is in stock makes it much easier to put a value on it. Moreover, news from Brazil that Vale is going to slash its capital expenditure by US$5 billion to US$9 billion makes it clear that less metal will be coming onto the market in the years to come. Buying something where you know there is some restriction on supply usually makes more sense than putting money into something where supply could be never ending.
June 01, 2009
The Collapse Of General Motors Might Mark The Moment When Uncle Sam Changes Its Economic Gear From Reverse To Forward
By Rob Davies | www.minesite.com
No one rings a bell at the top or bottom or any market. These things are only visible with hindsight. While that is good for journalists, it is not a fat lot of use for market participants attempting to time entries and exits from the markets.
In an excellent article on the bond-focused PIMCO website, economist Paul McCulley declares that the Minsky Moment for this economic cycle was August 2007, give or take three months on either side. For those not in the know, the Minsky Moment is the occasion when market participants stop increasing debt and switch to repaying it. It’s also when the price of risk assets peaks and starts to turn down. Commodities are regarded as the quintessential risk asset. Although the time Paul McCulley presents as the Minsky Moment in this most recent of cycles isn’t a perfect fit for any particular metal, it does offer a pretty good approximation of recent pricing across the commodities asset class. Some metals, like nickel, peaked earlier. Others, like copper, peaked later.
Over the following eighteen months pretty much everything went downhill, with the exception of bonds and gold, the assets you switch to when you want to minimise risk. Bonds, as defined by the 10 year US Treasury, peaked at the end of 2008 with a yield of two per cent. Since then bond prices have collapsed by 80 per cent so that last week the yield had risen to 3.75 per cent. Whatever the bears sitting on cash say, that looks as if the price of risk is falling. Growth assets such as commodities and equities have benefited from that. Mining equities of course give you two bites of the cherry when risk is being sought, so it is little surprise that the mining sector has been one of the best performers this year.
The gains in metal prices may have moderated a little but the upward trend remains in place. A three per cent rise in copper took it to US$4,636 a tonne while a nine per cent increase in nickel saw it jump to US$13,335 a tonne. True, aluminium and zinc moved in the other direction but a 4.7 per cent drop in the former to US$1,362 and a 1.3 per cent decline in the latter to $1,423 a tonne demonstrates that each metal has its own dynamics. Another key measure of the appetite for risk is freight rates. Last week these jumped 25 per cent.
So do all these signs mean that December 2008 was an inverse Minsky Moment? That would be the point when the reverse Minsky journey of shrinkage changed direction again to growth. Mr. McCulley seems to think not, but he does think we are much further along the path than many believe. Since many markets, especially equities, anticipate events up to 18 months ahead it is quite rational for them to start pricing that change in a long time before it actually happened.
That’s the thing with forward Minsky journeys. They start slowly and take a long time to build as they are essentially momentum driven. Reverse journeys happen more rapidly because they are just one big margin call. Perhaps the widely anticipated bankruptcy of General Motors on June 1st will be the definitive moment when Uncle Sam steps up to the plate and meets that margin. It would be ironic if the collapse of the iconic US car builder was marked by a change of economic gear from reverse to forward.
June 07, 2009
That Was The Week That Was ... In Australia
By Our Man in Oz
Minews. Good morning Australia, Rio Tinto’s double-dump on China must be good news for your small iron ore miners and explorers?
Oz. It certainly is. Prices of iron ore stocks rose sharply on the Australian market on Friday after Rio Tinto’s deal with BHP Billiton, and those rises reinforced a trend which started a week earlier when Rio Tinto settled this year’s long-term iron ore sales contracts with Japan, rather than China. Next week, Beijing might even cop a third slap across its sensitive chops when OZ Minerals is forced to divulge the details of a rival bid to the deal its management has negotiated with China Minmetals.
Minews. Is the mood in Australia turning anti-China?
Oz. No. It’s turning against a bargain-basement shopper who pushed too hard for the extra 20 per cent discount, and suddenly finds that what he wanted has been bought by someone offering better terms. China pushed too hard on price at the bottom of the market correction, and has now failed to realise that the trend has changed. The great weakness of Chinese companies - that they all report to the Chinese Government - has also been exposed.
Minews. Are you serious about a counter bid for OZ?
Oz. Absolutely. In fact a rival bid has been proposed but the board of OZ has deemed it to not be superior, and will not be putting it to shareholders before next Thursday’s vote on the China Minmetals deals. But the fact remains that the Canadian investment bank, RBC, and the Australian resource financier, RFC, have structured a deal which keeps OZ intact, rather than face dismemberment under the Chinese deal.
Minews. Sounds like more fun and games for you next week. Time for prices, starting with iron ore.
Oz. The big winner was Fortescue Metals (FMG) which has effectively been elevated from its self-proclaimed status as the “third force” in Australian iron ore to the status of second force, now that Rio is in business with BHP Billiton. On the market, FMG shot up by A56 cents to A$3.18, but did get as high as A$3.41, its highest level since October. The theory behind the rise is that China will forgive Fortescue’s past indiscretions and place future orders with anyone who rivals the new BHP/Rio iron ore joint venture. Other solid iron ore moves included Atlas (AGO), which added A16 cents to close at A$1.70 after peaking on Friday at A$1.78. Meanwhile BC Iron (BCI) announced that it had negotiated an ore transport agreement with FMG, a very positive move, which helped the stock rise by A25 cents to A87 cents. At one stage BC was trading at A95 cents. Also on the up, Brockman (BRM) added A15 cents to A$1.18. Giralia (GIR) gained a more modest A3 cents to A69 cents, and Aquila (AQA), which has iron ore as well as coal interests, put on A25 cents to A$5.04.
Minews. Solid rises indeed.
Oz. They were, and it was the iron ore sector which played the dominant role in the startling rise on the metals and mining sector of the ASX, up y an eye-catching 8.2 per cent over the week, double the performance of the all-ordinaries which gained four per cent. BHP Billiton, up 10 per cent, and Rio Tinto, up 12.3 per cent, did most of the heavy lifting, but their leadership flowed across the entire resources division.
Minews. Let’s shift to gold, and then move through uranium and base metals.
Oz. The gold tone was positive, thanks to a slightly better metal price, though the rising Aussie dollar weighed on some stocks. Robust Resources (ROL), a stock you never hear about, was the star, rising by A25 cents to A80 cents after the one-time king of coal, Ken Talbot, snapped up a 15 per cent stake in this Indonesian gold and copper explorer. The investment cost Talbot A$2.5 million, which is chickenfeed for his A$1 billion portfolio, but it is a useful pointer to where a very experienced resource investor sees future profits.
Other gold stocks on the way up included Kingsgate (KCN) which is slowly winning recognition for the improving production outlook at its Chatree mine in Thailand, and for its nearby Chokdee discovery. It closed the week at A$6.59, up A54 cents, after peaking on Wednesday at A$6.93. Perseus (PRU) was on the rise again after a couple of down weeks. It added A8 cents to A97 cents. Dominion (DOM) announced plans to expand its Challenger mine and rose by A12 cents to A$5.02. Allied Gold (ALD) rose by A7 cents to A52 cents. Silver Lake (SLR) gained A9 cents to A79 cents and Resolute (RSG) rose by A3 cents to A73 cents.
It wasn’t all up traffic thanks to our dollar clearing the US80 cent mark early in the week, and trading as high as US82.6 cents before slipping back on Friday. Avoca (AVO) ran out of steam after strong gains, slipping A5 cents lower to A$1.75. Troy (TRY) fell A4 cents to A$1.54, and Centamin was A8 cents lighter at A$1.62.
Minews. Uranium now, please.
Oz. Another strong showing, despite the short-term price of uranium staying below US$50 a pound. Extract (EXT) hit a fresh 12-month high during the week at A$6.24, as its war of words with Kalahari Minerals dragged on. Extract ended the week at A$5.90, for a gain over the week of A40 cents. Forte (FTE) added A4 cents to A16 cents after releasing a positive update to market, and Uranex (UNX) was up A2 cents at A45 cents.
However, the star of the uranium sector was Uranio (UNO) which announced a merger with the privately-led Manhattan Resources, a company which is led by one-time Summit Resources boss, Alan Eggers. The market loved the deal because Eggers made fortunes for followers after selling Summit to Paladin Resources (PDN) in the last phase of the uranium boom. On the market, Uranio more than doubled from A19.5 cents to A49 cents, after peaking on Friday at A53 cents.
Minews. Base metals to finish please.
Oz. Star of the copper sector was another new corporate name with an old head at the top. Sandfire Resources (SFR) which has an interesting copper and gold play in Western Australia rose a very sharp A22 cents to A68 cents, and earned a speeding fine for its chairman, Miles Kennedy. Best known for his exploits in the diamond world, Kennedy has made a return to the market with his long-time corporate associate, Karl Simich. Recent drilling at the Degrussa prospect has returned assays as high as 2.4% copper and 10.9 grams a tonne of gold over a 75 metre intersection.
Other copper moves included CuDeco (CDU) which has been very quiet for a few months but which came back last week with a rise of A13 cents to A$3.22 even after announcing a big capital raising. Equinox (EQN) was up A16 cents to A$3.24 and Marengo (MGO) rose by A1 cent to A12 cents.
Nickel and zinc stocks also showed further signs of improvement. Best of the nickels was Independence (IGO) which added A55 cents to A$4.44. Mincor (MCR) gained A22 cents to A$1.56 and Minara (MRE) rose by A25 cents to A89 cents. Terramin (TZN) led the way in a steadily improving zinc sector, gaining A12 cents to A88 cents. Perilya (PEM) was steady at A44 cents and CBH (CBH) gained half-a-cent to A14.5 cents.
Minews. Thanks Oz.
June 08, 2009
Perennially Bullish Or Perpetually Bearish? - Metals Inventories Remain Incredibly Low
By Rob Davies
Sometimes it seems that market observers will stick to their opinion, bullish or bearish, whatever the data. A journalist commented to this writer last week that he felt there was a lot more downside in metal prices, even from these levels. That generated some surprise, for two reasons. Firstly, this writer assumed that consensus opinion was that metals were trading close their cyclical lows. Secondly, as was pointed out, inventories of metal are incredibly low for such a severe recession. “Yeah, but...” was the reaction.
What is totally amazing about this downturn is that despite its intensity, metal inventories are incredibly low. To put some numbers around that it seems that the German economy is now forecast to shrink by 6.2 per cent this year, an unprecedented contraction. Bearing in mind that it is one country that still does a lot of metal bashing, the impact of that contraction on commodities should be dramatic.
Yet over the last week inventories of copper on the LME declined from 317,000 tonnes to 300,000 tonnes. Even though demand has fallen, that stockpile is only equivalent to a few weeks consumption. It is true that LME stocks are only part of the total inventory and the Chinese are probably sitting on large tonnages as well. Nevertheless, compared to the huge tonnages that used to sit around in warehouses for years in earlier, much milder, recessions, these figures are simply staggering.
It was this decline in inventory that pushed metals up last week and took three month copper back over US$5,000 a tonne, before easing back at the end of the week. In terms of cash prices copper gained US$230 to close at US$4,868 a tonne, while aluminium added US$80 to US$1,440 a tonne. Zinc added a similar amount to US$1,504 while lead had a stronger run putting on US$130 taking it to US$1,565 a tonne. Nickel joined in, with a US$500 increase to US$13,800 a tonne.
Although copper inventories have the highest profile, other metals saw some modest falls in their stocks, including aluminium, the bête noir that has caused Rio Tinto so much grief. So the story is one that applies across the asset class, not just to one or two individual metals. Moreover, it means that is not related to short terms moves in external factors like exchange rates. What is happening here is fundamentally different to previous recessions and has dramatic implications for the future. Basic arithmetic tells us that a recovery will come at some point simply because economies will not shrink forever. Once they stabilise, albeit at a lower levels of activity, the data will stop being negative. It then only takes a small increase in business to register positive figures, especially as they will be working from a smaller base. When that happens, as it will, the metal markets are likely to respond in a dramatic fashion and prices are likely to move very sharply indeed.
It is doubtful, though, whether that will be enough to convince the bears that things are on the mend. They won’t be convinced until copper is trading at US$8,000 a tonne. Then they’ll turn bullish.
June 15, 2009
Is Recovery On The Way? - LME Stocks Are At Amazingly Low Levels
By Rob Davies
The definition of economic recovery is one quarter of growth. Bizarrely, it takes two quarters of contraction to constitute a recession. With widespread expectations that this quarter will show a higher level of economic activity than the first quarter of the year, a number of observers have hailed this period as marking the end of the recession. There is certainly a great deal of evidence in the prices of various assets to support this view. Bond yields in the UK and the US have risen sharply since the start of the year, to approach four per cent. Bearing in mind they started the year at 2.2 per cent and three per cent respectively, that is a pretty dramatic decline in bond prices. Equity markets we know have experienced steep rallies of 30 per cent or more. Within that rise some of the individual moves have been remarkable, such as the 85 per cent increase in the share price of Man Group, a listed hedge fund.
It is not surprising that commodity prices have been carried upwards on this wave of optimism. Oil prices are over US$70 a barrel, an eight month high, and base metals have continued to make progress. Copper was up eight per cent last week to US$5,265 a tonne, and zinc was up a similar percentage to US$1,633 a tonne. But these were the laggards of the group. Aluminium and lead both reported double digit rises of 14 per cent to US$1,641 and US$1,786 respectively, while nickel rose 12 per cent to US$15,430 a tonne. The great beauty of traded markets is that they reflect the total knowledge the whole world has at that particular moment in time.
At the price agreed exactly half the world thinks the price is too high and the other half thinks it is too low. As fresh data comes in that price may rise or fall depending on its nature. That is why you need terminal markets. What happened last week was that prices reacted to further falls in LME inventories. Copper stocks at the LME are now less at than 300,000 tonnes, and while there were no falls in the other metals, these are all still at amazingly low levels. The rationalisation of the mining industry over the last cycle has left it tightly controlled and very focussed on managing supplies to match demand. Consequently prices now react very quickly.
Not all commodities use terminal market pricing. Some use contract prices instead, typically re-priced once a year. That makes them much lumpier, and when prices are revised they can be sharp moves. Last week, for example, BHP Billiton accepted a 58 per cent cut in coking coal prices. That is pretty painful but is probably not a lot different from what other pro-growth asset prices have done over 2008. The new price is therefore a reasonable approximation of the change in market conditions as of a few months ago.
But, as we have seen, traded markets have been in a positive trend for several months, and there is enough data to think that the worst of the recession has passed. After all, if Ferrari only sold 18 cars worldwide in March how much worse can it get?
This does, though, beg very large question. If this is as bad as it is going to get and metal inventories are still at historically low levels, even for normal times, what will happen to stocks, and hence prices, when conditions improve? At least commodities that are priced on terminal markets can reflect the change in circumstances quickly. The same cannot be said of those using annual contract prices. A few more quarters of growth and things could get very exciting indeed.
June 22, 2009
Commodities Markets Pause For Breath, As Black Holes Elsewhere Suck In Cash
By Rob Davies | www.minesite.com |
All the multi-faceted impacts of unwinding the debt left over from the biggest credit bubble the world has ever seen still seem to make analysis of the future all but impossible. The rally in risk assets, like equities and commodities, stuttered to a halt last week. Part of the reason for the slowdown in equities were more demands for cash, and these were led by Rio Tinto with its request for US$15 billion to clear its balance sheet of the debt from the Alcan acquisition of two years ago. The Financial Times estimates that so far this year the UK stock market has been asked to stump up US$50 billion to bail out indebted companies and we haven’t even reached the halfway point yet.
Such a large black hole in the equity market, sucking in vast amounts of cash, is bound to have an impact on other asset classes. The attraction of buying new shares in Rio at £14 when they were trading at £30 a few weeks ago is easily enough to persuade the market to take profits from other assets, such as commodities, and redeploy them on favourable terms. One asset class that has already felt the heat is fixed income.
While most bonds are higher than they were last year, many are down on the year to date so taking profits from gilts and treasuries is not quite so easy. The reason for the weakness in that asset class in 2009 is the giant sucking sound from governments as they prepare to carry on spending as if nothing has happened. Pimco, the US bond fund manager, estimates that the US Government needs to sell a net US$2 trillion worth of Treasuries in 2009 to fund its spending habit. That is four times the level of last year. Well... it has got two car companies to feed that it has just adopted.
The journey the US economy is taking from a capitalist structure to a socialist one might be expected to depress the dollar. But no, last week the dollar rose slightly against its rivals. Bad as the US economy is, the alternatives don’t look a lot better either. The good thing about the US way of doing things is that it is pretty rapid. While the American bank crisis is not over, there has been quick action to deal with the problem and set a course to rectify the situation - albeit, a fairly brutal one for shareholders and employees.
The same cannot be said of the European banks. Their approach has been more dilatory with the ECB expecting another US$283 billion of losses to be revealed by the end of the year. It is this growing sense of realisation that the global economy is not out of the woods yet that seems to have prompted this setback in the market.
Commodities could not escape the weakness, and all ended the week lower, and not just because of a slight strength in the dollar. Lead was the worst performer falling eight per cent to US$1,638 a tonne, but zinc, its blood brother, fell almost as much with a seven per cent drop to US$1,515 a tonne. In percentage terms, that was about same as copper, which went to US$4,900 a tonne. Aluminium, the cause of so much grief for Rio Tinto, only fell three per cent to US$1,589 a tonne. The big difference though, is that anyone holding commodities won’t be asked to put their hands in their pockets to buy more.