Commodities tipped to collapse

According to this article Copper is sitting on its 200 day EMA and if it falls through it will cause a huge sell-off in commodities,

I don't believe that, surely the fundamentals of Zinc outweigh a technical chart on copper enough to support the Zinc price, that being said, I'd be happy to see Zinc pull back to $1.80/$1.85 to confirm this support level

http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=EB3D7EB8-17A4-1130-F54DB49C85F1237F

Aren't the individual prices of each metal governed by there demand in the market.

With metals such as copper, lead and aluminum primarily used in construction.

Copper used in the energy industry

and Zinc, nickle etc used for high tech devices and alloys.

wouldn't there need to be a global decline is basically all these industries to force there prices down.

Even if construction is low in the US and australia, China is people cities for the 12 million people every year that migrate from rural areas. If everybodys getting serious about global warming wouldn't there need to be massive investment in infrastructure across the globe? I mean solar power generators, water recycling plants and energy efficient buildings all require these basic resources. Even the technology we use is goin to have to be re-designed.

I wouldn't be surprised if waste/recycling became a big industry in years to come.

As for Gold and oil, my basic understanding is that oil can only be bought in US dollars and gold, oil and the US dollar are all very closly related. So as if oil goes up so does gold, and if the US dollar goes down oil and gold go up. If the US economy is weakening and oil prices are rising couldn't we see a big effect as most countries in the world have vast stokepiles of US dollars which would become worth less and less.

China has a trillion dollars of foriegn currency stockpiled for trade with a big proportion of that is US dollars. Can anyone shead more light on how any of these factors could influence comodity prices in the future?

Another article with graph

http://stockresource.com.au/chart_of_the_week/view/1833


Base Metal Price Correction
Chart of the Week 11 Nov, 2006
Base metal prices appear to have commenced a corrective phase in the last few days, under the influence of significant fund selling pressure. The primary driver of the change in sentiment is the downturn in economic growth potential of the major markets, including the US and China. Recent Chinese data shows a deceleration in the rate of growth in construction activity as a result of the bank lending restrictions to the construction sector. However, this deceleration is likely to be temporary with lending controls being eased.

In the copper market weaker orders have led to a rise in refined metal exchange stocks of close to 50,000t since their low-point at the end of July and falling physical market premiums. Recent trends in copper pricing are illustrated below:

Source: LME, BA, SR

While we recognise the risk of a significant correction in the near term, we remain optimistic over the outlook for base metal prices over the next few years due to the combination of ongoing constraints to supply growth and further strong Chinese demand.

Sorry Chook .. :hide: Todays West Aussie...


Mining giants forecast slump
20th November 2006, 7:00 WST


Major mining companies have warned the world’s powerful central bankers and finance ministers that the price of key minerals such as gold and iron ore are set to fall, potentially stalling WA’s commodities boom as early as next year.

The G20 meeting of nations ”” including Australia, the US, China, the European Union and Indonesia ”” also warned in an official communique yesterday of a real risk central banks would have to continue lifting interest rates to contain inflation from soaring commodity prices.

Treasurer Peter Costello cautioned that general economic euphoria might end in tears because of the inflationary risks facing the world.

In a report to the high-powered meeting in Melbourne, the chiefs of big unnamed international mining companies said the prices of some commodities had peaked and others would fall as extra supplies came on stream.

Some commodities that have propelled the WA economy, such as iron ore, aluminium and gold, are likely to be hit hardest.

The surge in prices for commodities has been led by China, helping fuel the WA economy, the State’s record wages and the property boom.

But mining companies have started preparing for a downturn in prices from next year.

By 2009, copper prices are tipped to return to the levels of 1990. Though iron ore prices are also tipped to fall, they are expected to come back by only a third from their current record highs. Even gold, now well above the $US600 an ounce mark, is expected to fall to about $US450 an ounce.

Mr Costello said mining companies had sunk enormous amounts of cash into investments aimed at boosting supply. When this supply eventually kicked in there would be an impact. “The general view is that we’ve got to the peak and the peak is going to be dealt with by increased supply,” he said.

But Mr Costello said while prices would come down, there would be a time lag due to the difficulties of bringing extra supply online. And prices would, in most cases, not plummet to past lows.

“I don’t want you to get the view that they’re going into a trough,” he said.

International Monetary Fund managing director Rodrigo de Rato also warned that while Australia and other mineral exporting nations had benefited from the commodities boom, those particularly hard hit would be nations like Australia that imported big amounts of oil.

Alan Carpenter said the State Government had been investing in projects to take the WA economy well beyond the boom.

“These projects are part of an $18 billion capital works program including new schools, hospitals and police stations as well as vital water and energy infrastructure,” the Premier said.

WA Chamber of Minerals and Energy policy director David Parker said commodity prices were impossible to predict but the prediction of a downturn was a timely reminder that WA’s resources industry should not be complacent.

He said the chamber believed the industry still had an “upside”, with figures released last week showing $35 billion was committed to minerals and energy projects in Australia.

SHANE WRIGHT and AMANDA BANKS

Kauri said:

Sorry Chook .. :hide: Todays West Aussie...


Mining giants forecast slump
20th November 2006, 7:00 WST


Major mining companies have warned the world’s powerful central bankers and finance ministers that the price of key minerals such as gold and iron ore are set to fall, potentially stalling WA’s commodities boom as early as next year.

The G20 meeting of nations ”” including Australia, the US, China, the European Union and Indonesia ”” also warned in an official communique yesterday of a real risk central banks would have to continue lifting interest rates to contain inflation from soaring commodity prices.

Treasurer Peter Costello cautioned that general economic euphoria might end in tears because of the inflationary risks facing the world.

In a report to the high-powered meeting in Melbourne, the chiefs of big unnamed international mining companies said the prices of some commodities had peaked and others would fall as extra supplies came on stream.

Some commodities that have propelled the WA economy, such as iron ore, aluminium and gold, are likely to be hit hardest.

The surge in prices for commodities has been led by China, helping fuel the WA economy, the State’s record wages and the property boom.

But mining companies have started preparing for a downturn in prices from next year.

By 2009, copper prices are tipped to return to the levels of 1990. Though iron ore prices are also tipped to fall, they are expected to come back by only a third from their current record highs. Even gold, now well above the $US600 an ounce mark, is expected to fall to about $US450 an ounce.

Mr Costello said mining companies had sunk enormous amounts of cash into investments aimed at boosting supply. When this supply eventually kicked in there would be an impact. “The general view is that we’ve got to the peak and the peak is going to be dealt with by increased supply,” he said.

But Mr Costello said while prices would come down, there would be a time lag due to the difficulties of bringing extra supply online. And prices would, in most cases, not plummet to past lows.

“I don’t want you to get the view that they’re going into a trough,” he said.

International Monetary Fund managing director Rodrigo de Rato also warned that while Australia and other mineral exporting nations had benefited from the commodities boom, those particularly hard hit would be nations like Australia that imported big amounts of oil.

Alan Carpenter said the State Government had been investing in projects to take the WA economy well beyond the boom.

“These projects are part of an $18 billion capital works program including new schools, hospitals and police stations as well as vital water and energy infrastructure,” the Premier said.

WA Chamber of Minerals and Energy policy director David Parker said commodity prices were impossible to predict but the prediction of a downturn was a timely reminder that WA’s resources industry should not be complacent.

He said the chamber believed the industry still had an “upside”, with figures released last week showing $35 billion was committed to minerals and energy projects in Australia.

SHANE WRIGHT and AMANDA BANKS

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Hmmmm My inside info seems to be panning out (was told by a mining big knob that the boom had 12 months at the most)

Found this on kitco metals

The Coming Nuclear Winter Base Metals

http://www.kitco.com/ind/veneroso/nov062006.pdf

Read it and weep.

wayneL said:

Hmmmm My inside info seems to be panning out (was told by a mining big knob that the boom had 12 months at the most)

Found this on kitco metals

The Coming Nuclear Winter Base Metals

http://www.kitco.com/ind/veneroso/nov062006.pdf

Read it and weep.

Click to expand...

Do we buy banks Wayne? Or put the cash under the pillow?

kennas said:

Do we buy banks Wayne? Or put the cash under the pillow?

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Far be it for to offer advise, even if I had a definate scenario (which I don't)

But there is a reason I have migrated out of equities to futures.

* a range of non-correlated instruments... grains, metals, livestock, coffee, interest rates, etc etc etc
* shorting a no-fuss and integral option
* still able to play the broad stock market via index futures
* more commonsense margin rules (especially for options) than equities.

amongst others.

Cheers

wayneL said:

Hmmmm My inside info seems to be panning out (was told by a mining big knob that the boom had 12 months at the most)

Found this on kitco metals

The Coming Nuclear Winter Base Metals

http://www.kitco.com/ind/veneroso/nov062006.pdf

Read it and weep.

Click to expand...

The 'inside info' coming from the 'big knobs' who run Freeport would be the opposite I would imagine.

They have decided to pay US$26bn to buy Phelps Dodge at a 20% premium to the market.

The metals bears who will call this as another 'sign of the top' are the same metals bears who were selling/shorting the stock at prices 50% lower when Cu 'broke down' in May.

What other boom have we been able to buy the best stocks in the world at 9 times earnings?

What other boom has led to the best companies being debt free?

_______________________________________________________


The Nuclear Winter?

A few comments (focussing on copper) ...

1. I freely disregard any relevance of 200 day moving averages

2. I do not think "it went up so far" as a reason for a fall

3. I do not believe in reversion to mean as grounds for a change in the price of a scarce resource

4. I do not agree there has been a rapid growth in supply - copper supply has been forecast to grow at 1.7% in 2006 and 2007 by the Copper Study Group

5. The comment on free capacity in the supply chain is extremely wrong. Utilisation is at maximum (why wouldn't it be with such good prices) and this is another reason for the continued plant failures, delays, dissapointments on the supply side.

6. The Hedge Fund speculation story is difficult to fathom too. Are these guys saying that the short term momentum addicted hedge funds are still long and getting longer in the copper market? A market that has now fallen 25% since May? A fascinating argument. Surely there would be blood on the streets if this were true.

From my experience, the momentum players have been shorting both the physical and the companys. The BHP and RIO shorts have been so arrogant to short into a buy back. They got squeezed again last month, but will be back in there again now.

The hedge funds are short and not long. They are not manipulating the market. CHINA is the only party in town and they have far more ammo than the hedge funds.

7. The market is not in massive oversupply. How could it be? Supply has hardly moved and demand continues (and will continue) to rise. One month of negativity and the bears call a surplus. Noise would be a better description.

8. Contangos have not been present in copper at any time in the last year. Massive backwardisation has been the norm. In reality, the backwardisation has recently been reduced with spot approachng the forward months and the forwards not dropping much at all in comparison to spot. Nobody trading the forwards is getting too agressive in their selling.

9. Copper and alumina (let alone paladium) are vastly different. I struggle with the relevence. The trading in the US natural gas market also remains vastly different from the global metals complex. China dont trade in the US gas market.

10. The most major disagreement I have with Frank is in his absolute disregard for the contribution of the developing world for demand for copper. He doesnt believe the demand figures from the last three years!!!

___________________________________________________________


From my research, China has been drawing down their State Reserves and delivering into the LME to take advantage of the higher prices in Europe and to mark down the price of Cu before they are buyers again.

While Frank claims unreported stockpiles of metals -many believe the biggest private stockpile (that run by the Chinese) has been drawn down by 500,000tn this year.

China talks down their economy every year the iron ore negotiations start and they are at it again.

In September China imported 528,000tn of scrap Cu (the highest ever) and 380,000tn of concentrate (third highest ever) and in October they imported 75tn of refined copper (second highet this year).

The Chinese are buying again and anyone with a view beyond a couple of trading sessions would be more interested in the 400m Chinese moving to cities in the next decade than the noise that floods the markets hourly.

BSD,

Just the messenger, and as usual, you have valid arguments for the bull case. Thanks for those.

I have a few comments about your comments _

Re Big Knobs and the Freeport/Phelps deal: The guys in charge of that deal aren't actually big knobs, they are huge/enormous/humungus/(insert your own adjective) knobs.

In this deal they are not concerned as much much for shareholder value in the short/medium term as are shareholders/big knobs (ie a nice trending chart) It is more about power, market share, control and high falutin concepts like that. In no way can that deal be seen as an endorsement of higher and hihger prices in the near/medium future. There is a totally different imperative at work.

Why did they not buy PD 3 years ago? ....think about that one, you have already answered this question.

Re 200MA's and the "break down": Firstly the 200 MA. It is a simple map of the longer term trend. If price action is below the 200 MA, mathematically it is trending down. A simple, but blunt measure looked at by most participants in the market.

Now to the "break down". What break down? There is no break down yet. Evidence of your ignorance of technicals. Sorry, but if you don't subscribe to technical theory, it does no good to your credibility to comment. We all know your illogical disdain for technicals, but enough already.

Ditto regression to the mean. BTW, to describe base metals as scarce is taking a great journalistic liberty with the truth. "Undersupplied" would be closer to the mark. Oversupply will inevitably follow, as with all booms.

All other points (even those I disagree on) are taken in the spirit of discussion.

The ultimate arbiter will of course be price and we each have different ways of dealing with its continuous revelation. If you are a bull, you should be thankful for sellers/shorters as they ensure supply for your demand. I don't understand the thinly veiled antagonism.

Wayne
Since you began this thread precious metals, oil and copper are lower.
Nickel and zinc are substantially higher.
Copper has been the barometer for base metals, but in my view broad-based market tightness is now allowing discrete metals to run their own races: Zinc being a winner in the sprint to middle distances and nickel doing the marathon.
While oil remains low, it will be interesting to see if precious metals remain similar, and range-bound.
The Veneroso link is an interesting mix of facts, charts and anecdote. It is substantially flawed because he has not done the numbers longer term.
A supply side response is inevitable within 2 years - perhaps much less now.
Once the cycle turns prices down, many players will leave the game because their margins were narrow on entry.
However, the size of the new metals market is increasing so rapidly that the next game of catch-up will be played out for longer than the present bull run.
That's simply because the shift of wealth from West to East will have pent up a demand that will remain difficult to satisfy.
The past has seen boom times dependent on a burgeoning Europe, then USA, then Japan.
The future will see global populations 10 times this size wanting what we have, while we at the same time want more.
Once Veneroso's nuclear winter sets in, I will be an early vulture picking out the eyes of those blindsided to opportunity.

wayneL said:

Why did they not buy PD 3 years ago? ....think about that one, you have already answered this question.

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PD wasnt as grossly overvalued as it was recently.

BHP and RIO are also cheaper now on cashflow and earnings multiples than I can ever remember. Even using bearish assumptions for metals.

wayneL said:

Ditto regression to the mean. BTW, to describe base metals as scarce is taking a great journalistic liberty with the truth.

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The most common argument for metals falling is "it has gone so far" it must fall.

In an economic and physical sense, metals are scarce - they are neither unlimited or renewable without expense. Their supply is limited by way of a cost curve that continues to push out.

Frank's marginal cost of production would be $0.50c higher now than in 1998. Grades are falling - capex is rising.

Imagine if bears started squealing for $20 barrels of oil, on a reversion to mean argument. They would be laughed at.

While I can only quote Bloomberg and other talking head chartists on confirming/denying 'breakouts/downs' - I have studied stats enough to build a firm understanding of the meaning of mean reversion.

wayneL said:

The ultimate arbiter will of course be price and we each have different ways of dealing with its continuous revelation. If you are a bull, you should be thankful for sellers/shorters as they ensure supply for your demand. I don't understand the thinly veiled antagonism.

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All true

But antagonism? Not meant to be any - thinly veiled or otherwise. My response is not in reaction/conflict to you.

Just a completely different view and timeframe of investment. It appears to be extremely different to most on this site, so it may appear divisive.

The following link gives the position on all types of coal in the United States by the US Government. It gives a good idea of the projections for coal prices, even though Asian prices may vary a great deal. We are still led by the US and demand there for coal gives a lead as to iron ore, pig iron and steel prices for the future; and of course all associated metals used in its manufacture.

http://tonto.eia.doe.gov/FTPROOT/coal/newsmarket/coalmar061029.html

BSD said:

In an economic and physical sense, metals are scarce - they are neither unlimited or renewable without expense. Their supply is limited by way of a cost curve that continues to push out.

Frank's marginal cost of production would be $0.50c higher now than in 1998. Grades are falling - capex is rising.

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OK by that definition, they are scarce. I don't really agree 100%, but can see the point.

It would seem then that there is a criminal wastage of these "scarce " commodities, but that is another discussion.

BSD said:

Imagine if bears started squealing for $20 barrels of oil, on a reversion to mean argument. They would be laughed at.

While I can only quote Bloomberg and other talking head chartists on confirming/denying 'breakouts/downs' - I have studied stats enough to build a firm understanding of the meaning of mean reversion.

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1/ Bloomberg et al are bobbleheads, absolute %$#*ing imbeciles! I refuse to even watch that crap. They are just filling in airtime with garbage.

2/ If you had studies stats, you would know that the "mean" is actually a moving target and must be viewed as in the same family of statistical functions as an average. Indeed it can be an average:

# Mathematics.

1. A number that typifies a set of numbers, such as a geometric mean or an arithmetic mean.
2. The average value of a set of numbers.

Therefore, the mean value of oil (to use your example) is nowhere even close to $20, unless you want to use an irrelevant time frame. In fact oil is an excellent example of reversion to the mean.

BSD said:

But antagonism? Not meant to be any - thinly veiled or otherwise. My response is not in reaction/conflict to you.

Just a completely different view and timeframe of investment. It appears to be extremely different to most on this site, so it may appear divisive.

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I don't find your opinion divisive at all in the context of your obvious time frame and investing style.

But your comments with regard to technicians and shorter time frames are condescending and derisive. Your posts are otherwise of high quality and I fail to see the necessity of same. It is this I take issue with.

Cheers

noirua said:

The following link gives the position on all types of coal in the United States by the US Government. It gives a good idea of the projections for coal prices, even though Asian prices may vary a great deal. We are still led by the US and demand there for coal gives a lead as to iron ore, pig iron and steel prices for the future; and of course all associated metals used in its manufacture.

http://tonto.eia.doe.gov/FTPROOT/coal/newsmarket/coalmar061029.html

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Just maybe, this call, for collapses in commodity prices is basically a wrong call and markets are going through a phase of consolidation after sharp rises.

http://www.bhpbilliton.com/bbContentRepository/Presentations/060523LeondeVeldMcCloskeyCoalConf.pdf

From memory the bears were sharpening their claws and eyeing the succulent salmon swimming upstream in May 2004 as well. Copper, which seems to be leading the pack, has in my opinion, a ways to go yet before it can called anything major. Not for one moment implying it wont fall further, but so far its still healthy for mine. :bounce:

Kauri said:

From memory the bears were sharpening their claws and eyeing the succulent salmon swimming upstream in May 2004 as well. Copper, which seems to be leading the pack, has in my opinion, a ways to go yet before it can called anything major. Not for one moment implying it wont fall further, but so far its still healthy for mine. :bounce:

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Well some bear somewhere would have made a nice trade out of that.

I traded the volatility which peaked at that time... too chicken to play straight out price.



Copper is off > $1.00 from the highs so some bears must be happy.

wayneL said:

Well some bear somewhere would have made a nice trade out of that.

I traded the volatility which peaked at that time... too chicken to play straight out price.

Copper is off > $1.00 from the highs so some bears must be happy.

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Sometimes a chart of one commodity alone ignores the bigger picture. A chart of sugar prices, in soft commodities, could be used to show that the whole sector has collapsed, it's just not so.

No doubt, some commodities will fall in price as more production comes onstream. This however, does not point to a collapse, as total expenditure on the product may rise despite a drop in the price per defined traded weight of product

noirua said:

Sometimes a chart of one commodity alone ignores the bigger picture. A chart of sugar prices, in soft commodities, could be used to show that the whole sector has collapsed, it's just not so.

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Quite so.

This is one thing I like about trading physical commodities as opposed to the companies that deal in them; non-correlation.

noirua said:

No doubt, some commodities will fall in price as more production comes onstream. This however, does not point to a collapse, as total expenditure on the product may rise despite a drop in the price per defined traded weight of product

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...highlighting the differences again between trading the actual commodity as opposed to shares.

I suppose we all need to be aware of the context in which people comment on these things.

However, I would defy the the SPs of these businesses to stay resilient in the face of declining prices in the commodity of their choice... hypothetically speaking.

wayneL said:

However, I would defy the the SPs of these businesses to stay resilient in the face of declining prices in the commodity of their choice... hypothetically speaking.

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Yes, that's fair enough, as so often in the past I've heard the comment "all the future bad news is priced into the sector", then when the bad news duly arrives, all the stocks plunge.

BSD

They have decided to pay US$26bn to buy Phelps Dodge at a 20% premium to the market.

Click to expand...

I'll have to crunch the numbers on this one and see if your 20% premium was an intelligent purchase price for those involved.

3. I do not believe in reversion to mean as grounds for a change in the price of a scarce resource

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Well I would disagree with you here.
The reason that I disagree would be the following;
*The Law of Diminishing Returns
*The US is a far larger market in % terms than China et al, and the US GDP has been slowing, this accounts additionally for the fall in oil prices.
Will the US head into recession? Who knows, but, while GDP growth falls, so will the prices commodities. Further, European growth is again falling, with Germany in particular being anaemic.
*The high price, reduces demand, and increases supply, thus, reversion to the mean becomes a very powerful statistical tool.

6. The Hedge Fund speculation story is difficult to fathom too. Are these guys saying that the short term momentum addicted hedge funds are still long and getting longer in the copper market? A market that has now fallen 25% since May? A fascinating argument. Surely there would be blood on the streets if this were true.

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Hedge Funds will undoubtably have contributed to a component of the price rises, and in most commodities. How much, is slightly difficult to calculate, as there are no reliable proxies by which to estimate the cash asset inflows.
Therefore, an open question.

The hedge funds are short and not long. They are not manipulating the market. CHINA is the only party in town and they have far more ammo than the hedge funds.

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You state that the Hedge Funds are short.
Based on what evidence?

China, the only party in town.
Based on what evidence?

The economic data would suggest that the largest player, by a country mile to be the US.

7. The market is not in massive oversupply. How could it be? Supply has hardly moved and demand continues (and will continue) to rise. One month of negativity and the bears call a surplus. Noise would be a better description.

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Assume for a moment that this is true [highlighted section]
*What happens to price when supply equals demand?
*What happens to price when supply exceeds demand?
*What if your assertion is incorrect?

Demand will continue to rise. This seems an outright prediction.
Predictions tend to be dangerous as;
*They can be wrong
*They tie you psychologically to a bias

From my research, China has been drawing down their State Reserves and delivering into the LME to take advantage of the higher prices in Europe and to mark down the price of Cu before they are buyers again.

While Frank claims unreported stockpiles of metals -many believe the biggest private stockpile (that run by the Chinese) has been drawn down by 500,000tn this year.

China talks down their economy every year the iron ore negotiations start and they are at it again.

In September China imported 528,000tn of scrap Cu (the highest ever) and 380,000tn of concentrate (third highest ever) and in October they imported 75tn of refined copper (second highet this year).

The Chinese are buying again and anyone with a view beyond a couple of trading sessions would be more interested in the 400m Chinese moving to cities in the next decade than the noise that floods the markets hourly.

Click to expand...

In point of fact, the whole argument that has been presented, is based upon the thesis of China and it's emerging hegemony. This argument is flawed in so many ways, and thus the argument for continued price rises in commodities carries inherent flaws.

jog on
d998