Commodities tipped to collapse

[rederob]

I guess there are some things that you will never see, ducati.
I have no interest in responding to your side tracks and irrelevances in this thread as it diminishes its value.
If you wish to simply and clearly state your position on the theme, please do so.
I am sure other readers are clear where I stand, and how I apply my knowledge of the markets to my trading decisions.

ducati
If you wish to simply and clearly state your position on the theme, please do so.
It's a relatively simple ask.

As I said earlier, you are great amusement value.

 

[BSD]

Really.
Is that data...........or opinion?

Let's have a look at some data......you know, numbers.

Labor force - by occupation:
agriculture: 49%
industry: 22%
services: 29% (2005 est.)

So from the numbers, [you can go first] what conclusions do you draw?
For the second part of your assertion, viz. the death rate, or the reduction of non-productive population, are these numbers supporting, or contradicting your assertion?

jog on
d998

I will happily go first.

Let me just chip away at your facts slowly. I too have access to the CIA Factbook and can put a different spin on the numbers.

Being more interested in the future and not the past, my different spin may be more useful in establishing the supply and demand function for future years - the years in which being right in our assumptions will make us money.

We need to add these figures too (bold makes them look more important don't you think?)

GDP - composition by sector:
agriculture: 12.5%
industry: 47.3%
services: 40.3%

GDP $2.225 trillion (2005 est.)

Labor force:
791.4 million (2005 est.)


While agriculture was the realm of 50% of the workforce in 2005 it was only 12.5% of the GDP. So 395 million working farmers ground out $278bn in GDP.

That is about $700 each per year. Not much buying power for copper or oil I would imagine.

The other sectors, those that are growing every year, generated 87.5% of the GDP. If you do the sums, it works out to be around $4928 per worker.

Being able to generate 7 times as much wealth by moving to the city is why 20 million are doing it every year.

Further, the amount of oil and copper you consume on such a wage would be more than 7 times that consumed when on $700. The copper intensity argument.


Now my stat surrounding 400m (someone elses projection, not mine) of farmers making this transition to a modern lifestyle is the reason that underlying demand is going to grow at a fast clip in the next decades. The population doesnt need to go up - the transition is the important part.


The demand from the US may move by a couple of percent either way from year to year - but their demand is already in the demand curve.

New demand is continuing to grow as 400m become richer by a multiple of their previous income. Your concern regarding the aging workforce should be dwarved by the leverage involved in moving people off the farms and into cities.

20 million people per annum earning an extra $4,000 per annum is the elephant in the room

____________________________________________________________

I will address supply later - but you may want to look up your Economic 101 definition of The Law of Dimishing Returns and apply it to metals and oil supply.

With grades getting lower and depths greater, the marginal volume of copper/oil from $1 of capital expenditure is getting lower and lower.

That capex needs to be amortised over the mine life and thus, the marginal cost is continuing to move up.

__________________________________________________________

Another way you may wish to view it all

China growing GDP by 10% = $250 BILLION in new demand

US GDP Growth Stagant = $0 effect on demand

Savage US recession 2% drop in GDP = $250 BILLION

US GDP needs to fall by 2% every year now to wipe out the China effect.
____________________________________________________________

This is not a new phenomena.

"When Deng Xiaoping took over the economy in 1979 there were only 60 privately owned passenger vehicles in the entire country.

In 2005 China had autobile sales of 5.92 million cars.

More than Japan with 5.8

Chinese GDP has grown now by 9.5% per annum for the last 26 years."

- Donald Coxe, Global Portfolio Strategist, BMO Financial
Supply Side Mineral Economics, Basic Points, February 2006

________________________________________________

I though your 'valuation' of Phelps was rather interesting too

A couple of comments from a first semester accounting student studying balance sheet for signs of health - but a very precise $ valuation.

No EPS forecasts, no comment on mine life, unit costs, your commodity price asumptions, your discount rate, your currency forecasts etc.

Just a very precise valuation at an 80% discount to what the rest of the world is willing to pay.
___________________________________

 

[wayneL]

Just a very precise valuation at an 80% discount to what the rest of the world is willing to pay.
___________________________________

BSD,

Look what the rest of the world was willing to pay for rubbish in the late 90's.

Social proof is a very strong influence, even in the institutional world... especially in the institutional world.

A nice quote I saw some years ago (ironically, on a church sign):

"A foolish thing said by 500,000 people, is still a foolish thing."


Cheers

 

[chops_a_must]

I will happily go first.

Let me just chip away at your facts slowly. I too have access to the CIA Factbook and can put a different spin on the numbers.

Being more interested in the future and not the past, my different spin may be more useful in establishing the supply and demand function for future years - the years in which being right in our assumptions will make us money.

We need to add these figures too (bold makes them look more important don't you think?)

GDP - composition by sector:
agriculture: 12.5%
industry: 47.3%
services: 40.3%

GDP $2.225 trillion (2005 est.)

Labor force:
791.4 million (2005 est.)


While agriculture was the realm of 50% of the workforce in 2005 it was only 12.5% of the GDP. So 395 million working farmers ground out $278bn in GDP.

That is about $700 each per year. Not much buying power for copper or oil I would imagine.

The other sectors, those that are growing every year, generated 87.5% of the GDP. If you do the sums, it works out to be around $4928 per worker.

Being able to generate 7 times as much wealth by moving to the city is why 20 million are doing it every year.

Further, the amount of oil and copper you consume on such a wage would be more than 7 times that consumed when on $700. The copper intensity argument.


Now my stat surrounding 400m (someone elses projection, not mine) of farmers making this transition to a modern lifestyle is the reason that underlying demand is going to grow at a fast clip in the next decades. The population doesnt need to go up - the transition is the important part.

Thankyou.

This is exactly why the Chinese government are telling peasant farmers to move to the cities, work in mines or have their rights to breed taken away.

 

[ducati916]

BSD

Let me just chip away at your facts slowly. I too have access to the CIA Factbook and can put a different spin on the numbers.

Excellent, well spotted, and debate over the numbers is exactly what should be occuring, as interpretations will vary.

Being more interested in the future and not the past, my different spin may be more useful in establishing the supply and demand function for future years - the years in which being right in our assumptions will make us money.

Fine.

We need to add these figures too (bold makes them look more important don't you think?)

GDP - composition by sector:
agriculture: 12.5%
industry: 47.3%
services: 40.3%

GDP $2.225 trillion (2005 est.)

Labor force:
791.4 million (2005 est.)

Agreed, lends a certain, je ne sais quoi.

While agriculture was the realm of 50% of the workforce in 2005 it was only 12.5% of the GDP. So 395 million working farmers ground out $278bn in GDP.

That is about $700 each per year. Not much buying power for copper or oil I would imagine.

The other sectors, those that are growing every year, generated 87.5% of the GDP. If you do the sums, it works out to be around $4928 per worker.

Being able to generate 7 times as much wealth by moving to the city is why 20 million are doing it every year.

Further, the amount of oil and copper you consume on such a wage would be more than 7 times that consumed when on $700. The copper intensity argument.

Now my stat surrounding 400m (someone elses projection, not mine) of farmers making this transition to a modern lifestyle is the reason that underlying demand is going to grow at a fast clip in the next decades. The population doesnt need to go up - the transition is the important part.

The crux of this argument revolves around employment, at or circa the figures that you calculate.

One of the problems in China is the provision of employment for the numbers moving from agriculture, to industry/services. One way currently, is to shore up failing businesses, thereby maintaining employment.

The recent decision by the Beijing government to suspend a new bankruptcy law for 2,116 of the country's worst-performing state-owned companies even before it goes into effect in June 2007 is a very bad sign. In a recent decision, the Beijing government decided to give these companies until August 2008 before they were covered by the new law.

These companies face claims for back pay and health-care costs from workers that could add up to billions of yuan.[Financial Times] The new bankruptcy law would have put workers behind other creditors in the event of a corporate bankruptcy. But the government is afraid of the political unrest that would result from closing hundreds of unprofitable state-owned companies.

The biggest effect of the decision may be to delay yet again the central government's attempt to force banks to lend only to projects that have a chance of a showing a profit. In addition, it may force the central government to spend some of its reserves on bailing out the banks that hold the loans on the worst of these enterprises. The bankruptcy law is intended to create a mechanism that would allow banks to sell off bad loans and the assets of bankrupt companies to investors (often overseas investors). Absent that mechanism, Beijing will have to pump cash into the country's banks to offset these bad loans.

The recent IPO of Industrial & Commercial Bank of China that attracted many institutional investors and retail, is an example of a Bank with huge non-performing loans on the books, prior to the IPO, receiving a huge cash injection from the Government, and floated. Apparently, still carrying a significant % of non-performing loans.

The second problem is one of education.
The Japanese, recently required a huge Call centre for consumer complaints, issues, help desk etc. Initially, they were going to locate it in China.
This plan was dropped, as the mastery of English was so poor. It instead went to India. [Economist]

Various US Tech companies, while eager to provide FDI to China, cannot hire Chinese to higher positions, as their education on paper while seemingly adequate, in practical terms it has been a washout [Economist]

Therefore the services sector, cannot cater for the number of jobs required, thus, the more that move from the agricultural sector, to the services or industrial sector, potentially the larger the unemployment problem will grow.

The demand from the US may move by a couple of percent either way from year to year - but their demand is already in the demand curve.

Incorrect.
This very same argument was posited by chops
You both need to revisit some basic economics.

New demand is continuing to grow as 400m become richer by a multiple of their previous income. Your concern regarding the aging workforce should be dwarved by the leverage involved in moving people off the farms and into cities.

If they can find employment.
Currently, the growth in job seekers, exceeds job creation.
Unless it is publically subsidised by the government.
Hence my previous post regarding price floors

Taking price floors as our first example.
Price floors have the effect of creating surpluses, as the price is higher than the equilibrium clearing price.

20 million people per annum earning an extra $4,000 per annum is the elephant in the room

$20M * $4000 = $80 billion not an insignificant number if it can be achieved.
But in context, the revenue of two DJI companies.

I will address supply later - but you may want to look up your Economic 101 definition of The Law of Dimishing Returns and apply it to metals and oil supply.

Ready when you are.

That capex needs to be amortised over the mine life and thus, the marginal cost is continuing to move up.

Agreed.
Which really then addresses two main issues;
*are commodity producers price takers, or price makers?
*new technology, lowering marginal costs
Both are important and relevant, I'm sure we have differing views on both.

Another way you may wish to view it all

China growing GDP by 10% = $250 BILLION in new demand
US GDP Growth Stagant = $0 effect on demand
Savage US recession 2% drop in GDP = $250 BILLION
US GDP needs to fall by 2% every year now to wipe out the China effect.

First, a savage recession is not 2%
That is a concern for politicians, newspapers will headline it, but not significant. 5%+ = recession.

Second, US GDP stagnant, will not have $0.0 effect on demand.
That simply displays an analysis of convenience, not of penetration.
Politicians hate zero or negative numbers.
They will tinker, via enactment of new laws, interest rates [via the Fed] tariffs, regulation, deregulation etc.

Changes in a trading partner the size of the US, will have consequences for all other economies, especially China. If WalMart finds cheaper supply, that will shave points off of China's GDP, as the orders from WalMart alone already accounts for points in China's GDP

This is not a new phenomena.
"When Deng Xiaoping took over the economy in 1979 there were only 60 privately owned passenger vehicles in the entire country.
In 2005 China had autobile sales of 5.92 million cars.
More than Japan with 5.8
Chinese GDP has grown now by 9.5% per annum for the last 26 years."

- Donald Coxe, Global Portfolio Strategist, BMO Financial
Supply Side Mineral Economics, Basic Points, February 2006

Agreed.
China is growing. Historical fact. [you castigated historical evidence]
Can it keep growing [future]
And if yes, at what rate?
And if not, what are the consequences?
Which is where we are currently.
Hence, the utilization of growth rates of population, that if employed, at PPP levels, will be cumulative to GDP

I though your 'valuation' of Phelps was rather interesting too
A couple of comments from a first semester accounting student studying balance sheet for signs of health - but a very precise $ valuation.
No EPS forecasts, no comment on mine life, unit costs, your commodity price asumptions, your discount rate, your currency forecasts etc.

Just a very precise valuation at an 80% discount to what the rest of the world is willing to pay.

Ahhh, so you hated it.
But why go to the esoteric, if the black & white suggests that they are utilizing very aggressive accounting, to mislead investors?

If, I were to purchase a business [via stock, or otherwise] that I suspected were utilizing such aggressive accounting tactics, would you not demand a significant discount to provide at least a fighting chance to make a profit?
Possibly your altruistic nature is more forgiving than my own.

As for precise, I calculated a fair value at something like $41 to $55, which is a range, precisely as an exact figure is a nonsense.
My purchase recommendation was $20 or less, again, a range.

In conclusion, while we are poles apart in our thinking, at least you have presented an argument that utilizes data in evidence of your argument.
A vast improvement on the gibberish currently on offer.
I shall look forward to your counter-arguments should you so decide.

 

[ducati916]

enzo

Look what the rest of the world was willing to pay for rubbish in the late 90's.

Social proof is a very strong influence, even in the institutional world... especially in the institutional world.
A nice quote I saw some years ago (ironically, on a church sign):
"A foolish thing said by 500,000 people, is still a foolish thing."

Absolutely.
However, here we enter the psychological realm of price making, which as you allude to quite correctly *social proof* is a large component.

chops & rederob

doh.
Apparently this is now in the Oxford dictionary.

jog on
d998

 

[rederob]

deja vu:

ducati
If you wish to simply and clearly state your position on the theme, please do so.
It's a relatively simple ask.

You pretense over number crunching is wasteful f you are incapable of arriving at at a position.

 

[wayneL]

deja vu:

ducati
If you wish to simply and clearly state your position on the theme, please do so.
It's a relatively simple ask.

You pretense over number crunching is wasteful f you are incapable of arriving at at a position.

Come on red

You are capable of high quality posts. You can do better than this.

 

[rederob]

Come on red

You are capable of high quality posts. You can do better than this.

Wayne
We can agree or disagree on historical numbers - that's all "facts" are.
In the case of China, there are BIG data problems and little of the data is up to date - we typically have to extrapolate to get a better feel.
We can argue the fact, or numbers, this way or that way.
That can be useful.
But at some point it's useful to distill that into a "view", "position", "forecast" or whatever.
ducati was equally reluctant to do that in the gold thread.
Is he tipping commodities to collapse?
I know they will, but not exactly when.
And then what do we do if they only collapse a little bit bit - say our definition of "collapse" came up short!
Are we presently in decline - base metal and oil commodity-wise?
Are we in consolidation?
Are we, in the immediate term, facing a collapse?
Is it best we only look at China for direction on this?
The problem we have in these forums is that the issues for consideration are very complex, and arguing the toss on one country's data, or another's GDP is not going to tell us what we really need to know.
My personal view on China is that while their consumption of commodities of every kind is important in terms of its effect on global supply and demand, it's their continued massive accumulation of US currency that will ultimately be more important.

 

[ducati916]

rederob

it's their continued massive accumulation of US currency that will ultimately be more important.

Agreed, their accumulation of US$ currency is, and will be a problem for all concerned.

Estimates place the foreign exchange reserves at $1 Trillion+
China's massive hoard is the result of;
*large current account surplus
*significant foreign direct investment [FDI]
*speculative capital

The Central bank, to protect the Yuan from appreciating has been forced to accumulate US$ primarily in the form of Treasuries [estimated at 70%]. Thus has this massive balance been created.

China could prevent this accumulation [estimated at $16 billion/month] by;
*set free its exchange rate
*relax restrictions on capital outflows
*allow private citizens to own foreign assets

Alternatively a big shift out of US$ into an alternative asset, could push up Bond yields, and further pressure the US housing market.
For example a shift into Euros, however, this would cause a falling dollar, causing capital losses to remaining balances, and, cause an appreciation in the Yuan, forcing a further purchase of US$.

Spending 5% on gold, would buy the entire years production.
On oil, six months reserves would cost 8%
Prices on both would be pushed up dramatically. Likely?

Spend on infra-structure?
Already overspent.
Writing off of banks non-performing loans, already underway, some $60 billion.
The problem that to spend at home, you must convert $ to Yuan.
That causes a rise in the Yuan, and is again self-defeating.

jog on
d998
http://grantmacdonald.blog.co.nz/

 

[rederob]

ducati
If you wish to simply and clearly state your position on the theme, please do so.

Mine's up.

 

[3 veiws of a secret]

I was in the bath a few nights ago listening to the radio ABC news with(Gee&Tee in hand) and they played an interview with Jimmy Rogers (spelling ...it could have been Jimmy Rodgers? but definetly not Ginger Rodgers).....his total slant on commodities seemed to me Bullish! be it agri/resources /power.........it might be an interesting podcast download from the ABC.....suggest you listen to it, whether its gospel it's up to yourselves to figure.

 

[rederob]

rederob

Agreed, their accumulation of US$ currency is, and will be a problem for all concerned.

jog on
d998
http://grantmacdonald.blog.co.nz/

A more detailed elaboration on ducati's post is at http://www.economist.com/finance/displaystory.cfm?story_id=8083036

 

[ducati916]

ducati
If you wish to simply and clearly state your position on the theme, please do so.

Mine's up.

Hey peanut, I'm not here to educate you, I'm here to entertain you.

Irrespective, the key to growing GDP and wealth, which is a fair proxy for commodity consumption [or demand] is;

Population + Productivity

BSD and I disagree on population trends, and their interpretation.
We will possibly disagree on productivity trends as well.
But in amongst all the data lies a fair stab at the answer.

jog on
d998

 

[ducati916]

And from Bloomberg just now;

By Helen Yuan and Allen T. Cheng

Nov. 25 (Bloomberg) -- China's economy, the world's fourth- largest, may expand as much as 10.7 percent in 2006, said Yao Jingyuan, chief economist at the National Bureau of Statistics.

Gross domestic product may rise between 10 percent and 10.7 percent this year, Yao told reporters at a steel conference in Shanghai today. Growth close to the top of the range would exceed the World Bank's Nov. 14 estimate for China's economy to advance 10.4 percent in 2006.

China has raised minimum wages and increased welfare spending to get households to spend more and make the world's fastest growing major economy less dependent on investment and exports. Economic expansion slowed in the third quarter for the first time in a year as lending curbs damped business spending.

``Given the pace of growth around the world, I don't think 10.7 percent is excessive,'' said Tai Hui, an economist at Standard Chartered Bank in Hong Kong. ``China definitely needs some rebalancing'' in growth away from business investment.

Standard Chartered forecasts China's economic growth will accelerate to between 10.6 percent and 10.8 percent this year. The economy advanced 10.2 percent in 2005.

The People's Bank of China, the nation's central bank, on Nov. 14 said the economy likely will expand at a more than 10 percent pace in 2006. The central bank raised interest rates twice this year to cool an investment boom that threatens to leave China with idle factories.

Growth in fixed-asset investment and industrial production has moderated since June, reflecting tighter rules on land use, higher rates and efforts by the central bank to remove funds from the financial system. By contrast, retail sales jumped in October at the fastest pace in almost two years as rising incomes spurred consumer spending.

Investment May Rebound

``China's macro-economic measures to rebalance growth are correct, but the question is whether the magnitude or aggressiveness are sufficient enough,'' Hui said.

Profits at industrial companies accelerated in October for a seventh straight month as steelmakers including Baoshan Iron & Steel Co. boosted prices, the statistics bureau reported Nov. 22. Rising profits may cause business investment to rebound as many companies finance capacity expansion from retained earnings.

China's inflation rate will be ``as high as 1.5 percent for 2006,'' Yao also said at the conference today. Rising prices are a sign that deflation, which has plagued China for years, may be on the wane, he said.

The nation's trade surplus will be more than $150 billion this year, Yao said, without giving a comparison for 2005.

Money Supply

China's trade surplus surged to a record $23.8 billion in the month of October as imports grew at the slowest pace in 15 months, raising the likelihood that the U.S. and Europe will intensify demands for currency gains and more market access.

U.S. and European policy makers have accused China of keeping its currency undervalued, ignoring copyrights and protecting local businesses.

The government's fiscal revenues for the year will be 4 trillion yuan ($510 billion), Yao said, without providing a comparison for 2005.

China's money supply measure, M2, will gain between 16 percent and 17 percent in 2007, said Wang Yu, a director of China's central bank. Wang also was speaking at the conference in Shanghai.

M2, the broadest measure of money supply, gained 17.1 percent in October from a year earlier, a Nov. 13 report showed.

China's foreign exchange reserves exceeded $1 billion by the end of October, Wang said. The nation's foreign exchange reserves are the world's largest.

To contact the reporter on this story: Allen T. Cheng in Beijing at acheng13@bloomberg.net Helen Yuan in Shanghai at hyuan@bloomberg.net

jog on
d998
http://grantmacdonald.blog.co.nz/

 

[rederob]

Hey peanut, I'm not here to educate you, I'm here to entertain you.

Irrespective, the key to growing GDP and wealth, which is a fair proxy for commodity consumption [or demand] is;

Population + Productivity

BSD and I disagree on population trends, and their interpretation.
We will possibly disagree on productivity trends as well.
But in amongst all the data lies .

jog on
d998

ducati
It is for you to take a fair stab at the answer.
How about giving it a try!

What BSD has determined (quite correctly) is that economies in predominant supply/demand balance - via steady and moderate GDPs - will have a minimal impact on global commodity balances.
The principal reason for this is that demand remains relatively steady, so consumers can lock into term supply contracts and producers schedule output to meet order books.
Over the past 3 years the disproportionately strong growth from BRIC nations has tipped the balance to demand, and while supply has ramped up, capacity constraints have again kicked in: In very simple terms, ramped up output to meet expected demand, has been exceeded at a global level.

Producers are now at a point where they are reluctant to commit heavily to new capacity as the numbers do not stack up. That is, the risk of overproduction - which can lead to sharply declining prices - outweighs the commitment of funds for expansion, except for greenfield sites.

 

[Dr Doom]

Would it be fair to assume the case for continued bullish sentiment for copper in particular is detracted by the following -
Demand - US housing - houses consume copper, probably the biggest consumer???
If the US housing market continues to recede at the current pace then demand from this sector will fall.
Supply - Increased production - As a combined company, Freeport-McMoRan and Phelps Dodge think they can deliver nearly 1 billion pounds of additional copper production capacity in the next three years.
Along with other suppliers, is this amount enough to tip the supply/demand balance to excess supply.
Bottom line, is copper the first commodity to fall from bull to bear market??

 

[rederob]

Would it be fair to assume the case for continued bullish sentiment for copper in particular is detracted by the following -
Demand - US housing - houses consume copper, probably the biggest consumer???
If the US housing market continues to recede at the current pace then demand from this sector will fall.
Supply - Increased production - As a combined company, Freeport-McMoRan and Phelps Dodge think they can deliver nearly 1 billion pounds of additional copper production capacity in the next three years.
Along with other suppliers, is this amount enough to tip the supply/demand balance to excess supply.
Bottom line, is copper the first commodity to fall from bull to bear market??

Dr Doom
Yes, if the extent of the decline impacts the "balance" significantly.
US housing is in decline, but industrial production is firm and commercial construction is robust.
We need in the US to see Comex copper inventories rapidly spin out. Instead the past few weeks have seen demand wane and small inventory declines occur.
At the same time, China's Shanghai copper warehouse stocks have been in decline for some weeks.
And spare copper in Europe is at critical levels.
Remember that in the past year the so called ramp up of copper output, including post-strike action at major producers, has had a minimal impact on the global balance. Moreover, if the supply situation was ameliorated by consumer destocking (especially in China), then a return to restocking will quickly erode inventories.
If we are near this latter point, then we shall soon see a global resumption of a broad based commodity bull.

 

[ducati916]

rederob

What BSD has determined (quite correctly) is that economies in predominant supply/demand balance - via steady and moderate GDPs - will have a minimal impact on global commodity balances.

Correct.
However this currently is not the case.
US GDP [supply/demand] dynamics are shifting.
*Housing
*Car Industry
*Steel
*Defense
*Agriculture

Are all examples of industries where there are large inputs of raw materials, [commodities] and or producing commodities themselves [agriculture] and there are dynamic changes in demand from the consumer, thus effecting changes in their [producer demand]

If this was some piddling small economy, it really wouldn't make much of a difference at international level.

This however is the US.
Still the largest economy in the world.
The US accounts for 21% of China's exports.
Thus if the US goes into recession, commodities get reduced demand from two sources;

*falling demand from the US from its own falling demand, due to the aforementioned industries
*falling demand from China, as US demand for Chinese goods falls.

Thus the net result is falling demand [ & increased supply in agricultural commodities] from the two largest economies. This will I imagine affect the prices of commodities.

Over the past 3 years the disproportionately strong growth from BRIC nations has tipped the balance to demand, and while supply has ramped up, capacity constraints have again kicked in: In very simple terms, ramped up output to meet expected demand, has been exceeded at a global level.

And because US GDP has been surprisingly robust and above trend that it is now falling, and possibly to fall below trend, this changes the scenario in a very material way.

Producers are now at a point where they are reluctant to commit heavily to new capacity as the numbers do not stack up. That is, the risk of overproduction - which can lead to sharply declining prices - outweighs the commitment of funds for expansion, except for greenfield sites.

On what evidence?
I see the very industries, commodity based industries doing exactly the opposite, but via the aqusition route, as it is a quicker way to bring fresh supply. It however seriously weakens balance sheets, so that any downturn is magnified by the increased leverage, thus, many producers that were overvalued are becoming highly overvalued.

jog on
d998
http://grantmacdonald.blog.co.nz/

 

[BSD]

rederob

I see the very industries, commodity based industries doing exactly the opposite, but via the aqusition route, as it is a quicker way to bring fresh supply. It however seriously weakens balance sheets, so that any downturn is magnified by the increased leverage, thus, many producers that were overvalued are becoming highly overvalued.

Simply not true.

BHP and RIO are set to be free of all debt in coming years

They are buying back billions of dollars worth of shares.

Mining company balance sheets have not been stronger


Acquired mines do not increase supply. They probably reduce it in the medium term because money is being used to buy control of an existing business and not a new project.

The fact acquisitions at 40% above the already 'overvalued' share prices make sense economically compared to a greenfields project identifies that the majors think prices are going to remain strong in the next five-ten years and that the market is seriously undervaluing these businesses.