# Resources Meltdown Discussion



## d_crome (5 August 2008)

After watching the turbulent markets of late it's become apparently obvious that the resources market has been hit harder than most others - even the Financials are recovering yet the resource stocks continue to hold at their current levels.

The speculative end of the market has been hit across the board, regardless of mineral or material.  The rot has not been limited to just speculative miners, the large producers, BHP, RIO etc have all plummeted.

I find this drop rather intriguing as I can't determine WHY this has occurred.  Sure the US market is in a rut, but the majority of the resources mined and shipped on this PLANET are conveyed to China or India in a timely fashion where these raw materials are then turned into mostly LARGE infrastructure projects within these emerging nations.  Sky scrapers, highways, rail, etc.  These projects are necessary for the growth of these nations - regardless of the ability of the American consumer to continue their existence of consuming and borrowing to their hearts content.

Over the past 30 years, India and China have become more than just a workshop of western goodies - they have invested their income from making the west's products such that now, 30 years on, they're self sustaining economies with more financial clout than the west that created them in the first place.

Hence given that India and China are STILL emerging, their populace is expanding its consumer base and instead of producing consumer goods for the west, their now producing goods for THEIR OWN consumer - hence they're now fully independent of what should happen elsewhere.

I know that the US is still the largest economy in the world etc - but the large scale projects that demand resources are the type of projects that can be compared with an elephant on roller-skates - it takes a lot of force to get going, but once started, the momentum is extremely difficult to stop.  Infrastructure projects have a long lead time, hence they'll continue to finish the project rather than put it on hold.

All in all - I'm flummoxed by the current Resource Sector's turmoil.

Anybody to care to shed some light on this discussion?

Again - DYOR!


----------



## agro (5 August 2008)

iron ore will always be in demand to build the growin economies


----------



## prawn_86 (5 August 2008)

agro said:


> iron ore will always be in demand to build the growin economies




Demand is only one side of the equation. You need to look at supply also. There are a lot of IO miners coming online in the next 5 years.

That said however, the big 3 IO producers should be ok due to their bargaining power and size...


----------



## tex.willer (5 August 2008)

Nickel was over $35000 per tonne
Now it's $19000.

It makes up a good chunk of BHPs earnings together with copper which is off by $1000 per tonne. After removing speculators from the equation, it explains the slide in BHPs price from 50->36$


----------



## Tukker (5 August 2008)

tex.willer said:


> Nickel was over $35000 per tonne
> Now it's $19000.
> 
> It makes up a good chunk of BHPs earnings together with copper which is off by $1000 per tonne. After removing speculators from the equation, it explains the slide in BHPs price from 50->36$




Yet record production and Fe prices are offsetting this.  The drop from 50 - 36 is based on market sentiment rather than fundamentals.  BHP is my only growth stock.


----------



## wayneL (5 August 2008)

Tukker said:


> Yet record production and Fe prices are offsetting this.  The drop from 50 - 36 is based on market sentiment rather than fundamentals.  BHP is my only growth stock.



So we lost the sentiment part and now back to the fundamental value?

Or is there still some sentimental fluff in the price?

:


----------



## Aussiest (5 August 2008)

Prawn_86 makes a good point. Maybe the emergence of a whole lot of new miners has scared people away.

I thought it was a matter of people shifting their $$$ around, looking for the next best thing, but i could be wrong.

I guess it's like the tech bubble, it will have to burst one day.


----------



## tex.willer (5 August 2008)

Tukker said:


> Yet record production and Fe prices are offsetting this.  The drop from 50 - 36 is based on market sentiment rather than fundamentals.  BHP is my only growth stock.




They are offsetting but not justifying the $50 price tag. That was just hot air.


----------



## mshepherd (5 August 2008)

tex.willer said:


> Nickel was over $35000 per tonne
> Now it's $19000.
> 
> It makes up a good chunk of BHPs earnings together with copper which is off by $1000 per tonne. After removing speculators from the equation, it explains the slide in BHPs price from 50->36$




More likely the drop in Oil price would have contriburted to the 50->36$ drop (aswell as market sentiment)

Also, Big mining companies are well aware of commodity price cycles and actively look to hedge them against each other (when the price of 1 is dropping the price of another is rising) and plan for major upgrades during times of low prices such they can greater exploit that commodities top earnings cycle peak.

It has been said before many times that the .dot com bubble was unfounded, i.e. no cashflow to back up the promise. Resources have the cashflow and the right fundamentals, from one of them is this strategy "a common-sense, long-term approach. Strategy is to focus on large-scale, long-life, and low-cost operations, and to invest in maintaining competitive positions. The company constantly seeks new sources of advantage to institutionalize in ways competitors cannot easily replicate" This is the *complete* opposite to the dot com 'hype' of grandure promises and lack of delivery, easy competition startups, high costs, low value, short life.


----------



## tex.willer (5 August 2008)

mshepherd said:


> More likely the drop in Oil price would have contriburted to the 50->36$ drop (aswell as market sentiment)
> 
> Also, Big mining companies are well aware of commodity price cycles and actively look to hedge them against each other (when the price of 1 is dropping the price of another is rising) and plan for major upgrades during times of low prices such they can greater exploit that commodities top earnings cycle peak.




From my PhoenixAI system, attached is a chart of BHP vs oil price as a common base set to the day BHP hit 50$.
BHP started sliding back way before the oil price did.


----------



## agro (5 August 2008)

well i would certainly love some more BHP, FMG or RIO right now,

this is only a blip in the market , an opportunity to buy imo, who ever does will reap good benefits in couple years time!!


----------



## tex.willer (5 August 2008)

mshepherd said:


> More likely the drop in Oil price would have contriburted to the 50->36$ drop (aswell as market sentiment)
> 
> Also, Big mining companies are well aware of commodity price cycles and actively look to hedge them against each other (when the price of 1 is dropping the price of another is rising) and plan for major upgrades during times of low prices such they can greater exploit that commodities top earnings cycle peak.
> 
> It has been said before many times that the .dot com bubble was unfounded, i.e. no cashflow to back up the promise. Resources have the cashflow and the right fundamentals, from one of them is this strategy "a common-sense, long-term approach. Strategy is to focus on large-scale, long-life, and low-cost operations, and to invest in maintaining competitive positions. The company constantly seeks new sources of advantage to institutionalize in ways competitors cannot easily replicate" This is the *complete* opposite to the dot com 'hype' of grandure promises and lack of delivery, easy competition startups, high costs, low value, short life.




This graph is confusing me.

An excerpt from the half yearly announcement submitted to the stock exchange, Page 8 of the announcement

Underlying EBIT by customer sector group
Half year ended December

Petroleum 1972 mil
Aluminium 680 mil
Base metals( including uranium) 3367mil
Stainless steel materials 799mil
Iron ore 1673
etc
etc
Total 9623

Base metals group was by far the largest, not petroleum


----------



## mshepherd (5 August 2008)

I guess I will have to go kick someone for providing me that graph  and they are in a position that should know aswell.  hrmmm   

Not that it makes any diffrence, im with Agro - if I had some spare cash I would waiting for BHP to reach around $34 then jumping in for the rebound (hopefully )


----------



## moXJO (5 August 2008)

Any truth to the rumors that Russia is trying to steal our thunder and become China's supply of all things dug up?


----------



## tex.willer (5 August 2008)

moXJO said:


> Any truth to the rumors that Russia is trying to steal our thunder and become China's supply of all things dug up?




That would muddy things up. Transport by railway is pretty cheap + labor force in Russia. Wonder if they've got good iron reserves.

Btw, BHP @34 long term is much better for the cashed up than the crazy 50


----------



## spectrumchaser (6 August 2008)

Notice that the Fed have a campaign to "talk down" comodities/resources
and use all manner of tricks to support Yank financials .
Elaborate con artists


----------



## Nicks (6 August 2008)

Well at least with commodities it is a tangible asset. I cant see how a downturn in the US domestic market will affect BHP or RIO too much, whereas we have seen how it has affected financials or highly geared stocks.


----------



## CanOz (6 August 2008)

This is the CRB Index. If your not watching this then you should not be trading anything related to commodities, IMHO. It doesn't exactly look bullish does it?

Its a secular bull though right? Retracements should be expected.

Cheers,

CanOz


----------



## Julia (6 August 2008)

Perhaps consider a total of "X" dollars in the market.   Much of that was invested in the financials.  Then the bad news keeps coming globally on the financials, including on our home front, and investors pull their funds out of the financials and pour them into resources.  Obviously the SP of the resources rocket as this happens over now quite a sustained period.

Then, perhaps because of the attractive yield on especially the big banks, at the first faint glimmer of good news on the financial front, many investors think, whacko, it's all good again for the banks so the funds come out of resources and into the financials.

Doesn't really have to be more complicated than that, does it?


----------



## Warren Buffet II (6 August 2008)

mshepherd said:


> More likely the drop in Oil price would have contriburted to the 50->36$ drop (aswell as market sentiment)
> 
> Also, Big mining companies are well aware of commodity price cycles and actively look to hedge them against each other (when the price of 1 is dropping the price of another is rising) and plan for major upgrades during times of low prices such they can greater exploit that commodities top earnings cycle peak.
> 
> It has been said before many times that the .dot com bubble was unfounded, i.e. no cashflow to back up the promise. Resources have the cashflow and the right fundamentals, from one of them is this strategy "a common-sense, long-term approach. Strategy is to focus on large-scale, long-life, and low-cost operations, and to invest in maintaining competitive positions. The company constantly seeks new sources of advantage to institutionalize in ways competitors cannot easily replicate" This is the *complete* opposite to the dot com 'hype' of grandure promises and lack of delivery, easy competition startups, high costs, low value, short life.





How cares about all that?, this is the market, BHP is worth as much as people are willing to pay for it, that ´s it.

The commodity buble is suffering a huge slip this days, prices just keep dropping as all the hedge funds are getting scared of the bust.

Now, in summary this is what is happening:
1) Commodity prices dropping big time 15% already?
2) AUS dollar dropping big time 6% in 3 weeks
3) AUS inflation up and up (costs up)

I just can ´t understand people asking why are prices dropping?, well, prices go up and go down (Australia should put under his flag some words like 'Property prices never fall, the commodity boom will save us and will save the queen  ). So we can all remember those stupidities in 5 or 10 years time.

WBII


----------



## Nicks (6 August 2008)

Dropping AUD is good for companies that earn in USD. The lower the Aussie goes, the better it is.


----------



## CanOz (6 August 2008)

Julia said:


> Perhaps consider a total of "X" dollars in the market.   Much of that was invested in the financials.  Then the bad news keeps coming globally on the financials, including on our home front, and investors pull their funds out of the financials and pour them into resources.  Obviously the SP of the resources rocket as this happens over now quite a sustained period.
> 
> Then, perhaps because of the attractive yield on especially the big banks, at the first faint glimmer of good news on the financial front, many investors think, whacko, it's all good again for the banks so the funds come out of resources and into the financials.
> 
> Doesn't really have to be more complicated than that, does it?




I don't believe however, that the smart money will be heading into financial s until the housing market gets close to a bottom in the US....The only ones that stupid are the US Treasury and the Federal reserve!

Cheers,


CanOz


----------



## qmanthebarbarian (6 August 2008)

CanOz said:


> I don't believe however, that the smart money will be heading into financial s until the housing market gets close to a bottom in the US....The only ones that stupid are the US Treasury and the Federal reserve!
> 
> Cheers,
> 
> ...




but where is it going to go? if commodities are being dragged down on recession fears, then earnings will slow on pretty much everything discretionary? 

i think a bit of rotation is going on and some hedge funds are in the cross hairs of a few people. seen natural gas - looks like a forced fire sale resulting from a failed hedge fund.

definitely think this will keep going and funds will pile back in.


----------



## fenis (6 August 2008)

I'm surprised that no one has mentioned the olympics. I believe it's possible that short term demand for metals from china will decline due to the olympics. The forced shutdown of many factories and power plants will perhaps put china into an economic downturn.

Will be interesting to see how this pans out  Anyone else have any thoughts on this?


----------



## d_crome (6 August 2008)

Fenis - I've been thinking that all day myself.  I know a lot of this sell off was caused by price reductions on the London Metals Exchange - hence it makes perfect sense that if those that consume the materials are NOT consuming those materials for a matter of MONTHS (remember we have the special olympics following the standard one) I'm sure that the supply and demand ratio's would slip towards there being an excess of supply.

All in all it still doesn't make any sense to me what-so-ever.

The only thing I fear is that when the Olympics are said and done, and the world's attention leaves China, the Chinese might allow their stock market to correct itself in an attempt to contain rampant inflation and an overheating economy....


----------



## So_Cynical (6 August 2008)

Julia said:


> Perhaps consider a total of "X" dollars in the market.   Much of that was invested in the financials.  Then the bad news keeps coming globally on the financials, including on our home front, and investors pull their funds out of the financials and pour them into resources.  Obviously the SP of the resources rocket as this happens over now quite a sustained period.
> 
> Then, perhaps because of the attractive yield on especially the big banks, at the first faint glimmer of good news on the financial front, many investors think, whacko, it's all good again for the banks so the funds come out of resources and into the financials.
> 
> Doesn't really have to be more complicated than that, does it?




Im with Julia...if we remember back to Feb and March the flow was the other 
way around, from the financials to the miners.


----------

