Commodities tipped to collapse

ducati916 · 26 November 2006

BSD said:
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.

Couple of points;
BHP according to their Balance Sheet 09/25/06
Carry $7.648 billion in LT Debt
Notes Payable, $1.368 billion

Rio Tinto; 06/30/06
$1.686 billion LT Debt
$2.305 billion Notes Payable

So according to their filings, they are carrying debt.

They are buying back billions of dollars worth of shares.

And destroying shareholder value, as the shares are selling at a premium.

Mining company balance sheets have not been stronger

True enough.
Due to the current exceptional operating conditions; high demand, and high prices. The value always appears in bad times, low demand, low prices, if at this time it has an exceptional Balance Sheet, it will most likely be a true bargain.

Second point, many [most] aquisitions in the resource sector are based on gaining access to new inventory [supply] This supply, may or may not be currently under production, if it is not, very often it is placed into production, or existing production is increased, as the aquirers marginal costs are different. Either way, new supply is brought to market stimualated by the high spot prices and or futures prices.

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

Then we would really need to discuss management as well.
If they think their shares [businesses] are undervalued, I guess they are busy buying shares for their personal accounts?

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

Knobby22 · 26 November 2006

ducati916 said:
Then we would really need to discuss management as well.
If they think their shares [businesses] are undervalued, I guess they are busy buying shares for their personal accounts?

http://grantmacdonald.blog.co.nz/

Or undertaking a buyback as is occurring.

Refer BHP thread.

rederob · 26 November 2006

ducati
This thread has a theme and despite every request that you address it, your preference is to change the subject.
Wat is your specific view on the notion that commodities will collapse: Near, medium or longer term?

If you wish to bring the US into the debate, you need to determine the extent that its GDP correction will impact base metals/oil - I do not bring soft commodities into discussion.

In a generally balanced commodity market, there will need to be some give and take. If the US falters the worst that China will be impacted is a bit over 20% using China's exports as a basis.
In fact, there is nothing to indicate that China will lose its exports base to the US if its economy declines. That's because there is a high probability that cheaper Chinese products will in fact continue to be preferred to their patriotic counterparts.

Given that you contend the dynamics of US GDP are shifting (a relative given as it is almost impossible for it to stay "constant"), what material impact has been observable?

So far we can attribute a small copper stock build to the US housing slowdown, but not much else that suggest the commodity bull is faltering.

I suggest you closely read your last paragraph in reply to me. It suggests only that acquisitions are occurring, which do nothing for increasing supply. And your contention that these acquisitions diminish a company's balance sheet similarly have no material impact on supply.
What will make a difference is that companies spend considerably on new capacity. No new capacity means no additional supply.

ducati916 · 27 November 2006

Not good for commodities;

NEW YORK (Reuters) - After a string of strong years, U.S. auto sales are slowing and an increasing number of forecasts say sales could fall next year to their lowest in nearly a decade, the Wall Street Journal reported on its Web site on Monday.

Slowing growth in the overall U.S. economy and a slump in the housing industry, particularly in big markets such as California, come at a bad time for General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler Group, the paper said.

IRN, a Michigan market researcher, forecasts U.S. 2007 sales of 16.3 million light vehicles, or cars and trucks. That would be the lowest since 1998 and a drop of 300,000, or 1.8 percent, from this year's expected sales of 16.6 million vehicles.

Some auto makers are more optimistic, the paper says, with both GM and Toyota Motor Corp. forecasting 2007 industry sales of 16.5 million cars and trucks.

But analysts at Bank of America, Wachovia Corp. and Citigroup expect a sharper decline, as does investor Wilbur Ross, who has spent hundreds of millions of dollars in the past 18 months buying battered auto suppliers, the WSJ says.

Not good for China;

CHICAGO (Reuters) - Wal-Mart Stores Inc. predicted a rare decline in monthly sales on Saturday, even as U.S. bargain-hunters jammed stores in search of gifts at the start of the crucial holiday shopping season.

Wal-Mart, the world's biggest retailer, sounded a cautious note for retailers as they began a second day of Thanksgiving weekend sales with deep discounts and early bird specials on items from cashmere sweaters to big-screen plasma televisions.

Wal-Mart estimated that November sales fell 0.1 percent at its U.S. stores open at least a year -- a closely watched retail measure known as same-store sales.

The retailer will provide a final monthly sales report on Thursday, when most other major chain stores report their November figures. This would mark Wal-Mart's first monthly same-store sales decline since April 1996.

Wal-Mart had expected same-store sales to be flat compared with the same period last year, which many Wall Street analysts had viewed as disappointing. Wal-Mart's four-week November sales period ended on Friday.

"We would frankly have expected better," Merrill Lynch retail analyst Virginia Genereux wrote in a note to clients dated Friday, pointing out that Wal-Mart had slashed prices on popular toys, electronics and other gift items to lure customers. The retailer's widely publicized $4 generic drug program should have drawn more shoppers.

Investors are watching holiday sales particularly closely this year to gauge how consumers are coping with a slowdown in the housing market that has already hurt home improvement retailers and furniture stores.

Consumer spending accounts for some two-thirds of U.S. economic activity, and the November-December holiday season makes up anywhere from 20 percent to 40 percent of retailers' annual sales.

The National Retail Federation trade group expects holiday sales growth of about 5 percent, which would be a slowdown from last year's surprisingly strong 6.1 percent gain.

$1,200 HAND-MADE TOYS

Department store chain J.C. Penney Co. Inc. said its holiday season was off to a good start, with brisk foot traffic and strong demand for categories such as home entertainment, jewelry, children's clothing and housewares.

Famed toy retailer FAO Schwarz kept its stores open on Thanksgiving Day, and reported strong demand for hand-made wooden toys -- some of which sold for $1,200 apiece.

At FAO Schwarz's flagship store in New York, Thanksgiving Day sales were flat, which the company attributed to badweather, while its Las Vegas store saw a 45 percent sales increase.

"I see people buying better, what I call 'antiquity', presents that are better made, more durable -- things I view as generational presents," Ed Schmults, the chief executive, told Reuters in an interview.

Wayne Best, a senior economist at Visa USA, said steep discounts helped spur the strongest sales on Black Friday at furniture and home furnishings stores and electronics and appliance stores. In the later category, the average ticket rose 9 percent, he said.

Discount and department stores saw much softer growth, Best said. Visa is expected on Monday to release its sales data for Black Friday -- so named because retailers traditionally become profitable for the year on the day after Thanksgiving.

A Wal-Mart spokeswoman declined to comment on its Black Friday sales, but said the retailer will provide those details along with its sales report on Thursday.

Stores were packed on Friday, the traditional start to the holiday shopping season, and retailers were pushing another round of discounts on Saturday to keep shoppers coming back. The NRF trade group expected some 137 million Americans to go shopping this weekend.

But big crowds don't necessarily mean strong sales.

Michael McNamara, vice president of research and analysis at MasterCard's SpendingPulse, noted that while hot items such as the PlayStation 3 video game system have generated buzz, they are only a tiny portion of retailers' overall sales.

He said rather than focusing on Black Friday crowds, investors should pay close attention to October sales trends, which showed a dramatic slowdown in growth year-over-year heading into the holiday season.

"You're looking at (sales) growth rates that are about half of what they were last year," he said. "The momentum that we have coming in is definitely down several notches."

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

rederob · 27 November 2006

ducati
nice cut and paste post
not willing to put your views forward?

On the matter of vehicle sales - the report is about 2007 forecast levels and may or may not come true.

On the matter of retail sales, forecast growth of only 5% is not too bad a result.

I would welcome a correction in 2007 as it will mean that when demand springs back, we could well be ahead of where we are today with commodity prices.

Dr Doom · 27 November 2006

Hey Rederob,
I'm not too sure where you are going with this either, as the topic was 'commodities tipped to collapse' & Ducati & others have put forward ample evidence for their opinions, data trending to suggest a serious hard landing in the US.
To quote Paul van Eeden, supporting the case for the reduced demand side of the argument - "Construction of new homes fell 14.6% in October (from September) to the lowest level in six years while data previously released for August and September were revised lower. Homebuilders are facing record numbers of cancellations: D.R. Horton, one the largest home builders in the country by number of units, said its cancellation rate had increased to 40%, up from 29% in the previous quarter. Its historical cancellation rate is 16% to 20%. Toll Brothers, which builds luxury homes, said its cancellation rate had increased from 2% a year earlier to 7% -- the highest level of cancellations in the company's history.

To get rid of the glut of unsold homes, builders are slashing prices. The median price of a new home is down 9.7% from a year ago and building permits for new houses fell 6.3% in October. Single-family home starts were down 32% in October as compared to last year, but in January 1991 year-on-year starts fell 45% and in March 1980 they fell 52%."

US consumers not being able to borrow against their homes as they have in the past means less spending eg Wal Mart, less Chinese goods consumed etc etc. This is the first domino to fall

Maybe the parties over, so position yourself best to mitigate your losses or gain from the coming recessionary/deflationary environment.

Speaking of which, what would be the best defense in such a scenario?. Gold maybe??

rederob · 27 November 2006

Dr Doom
Every cycle comes to an end.
Otherwise it is not a "cycle".
The commodity bull will come to an end, too.
But when?
Surely that is the question we need to address.
This will be the third full year that I have seen the bears out in force.
Had I taken notice of them I guess my portfolio would not be overweight commodities.
Over the next 3 months I believe the commodity bull (and I am talking mostly hard commodities) should remain reasonably intact.
Beyond the first quarter 2007 we should get seasonal weakness, but will it be enough to end the bull run.
I do not know.
My view is that we continue to place too much importance on the US a principal dynamic to the bull cycle.
My view will definitely change if the US capitulates and global economies fall like dominos.
My "defense" is that the commodity sector turns as quickly and as visibly as a supertanker.
My position would be to go predominately to cash and, yes, to have a core gold holding.

So my plus-6 month view is presently one of uncertainty, and of being more watchful than now.

Going forward, we will be able to see the supply side response to both present demand, and any change in demand. There remains a chance that demand will be maintained at a level that prevents stockbuilds, and maintains commodity prices at an elevated level. There is certainly nothing preventing the giant mining houses from doing and OPEC and simply reducing output to keep prices high - what do they have to lose?

It is also my view that any correction will be relatively (from a cyclical perspective) short-lived. I have little doubt that the shift of wealth from West to East is multi-generational. And it is apparent already that what most of us take for granted here is going to be on the wish list of those that aspire to our living standards.

So my long term strategy is to move back into the next commodity run early, as a lot of catch will be played to accommodate a new Asian middle class that may not immediately have the disposable income of Westerners, but will attempt to mimic our lifestyles to the maximum extent. That means a productive capacity the likes of which we are not even close to right now.

ducati916 · 30 November 2006

WASHINGTON (Reuters) - The U.S. economy grew faster than first thought in third quarter on strong business investment, even as the housing sector posted its biggest decline in more than 15 years, the government said Wednesday.

After-tax corporate profits during the quarter were far stronger than expected, and will likely reinforce expectations that Federal Reserve policy-makers would keep interest rates unchanged for the next few months.

"Net/net, I think the data is not going to change too many opinions (about Fed policy)," said Adam Brown, co-head of U.S. Treasury trading at Barclays Capital in New York.

Gross domestic product, which measures total economic activity within U.S. borders, expanded at a 2.2 percent annual rate during the third quarter, higher than the 1.6 percent gain first estimated and above Wall Street expectations for a 1.8 percent gain.

"This kind of cools the talk that the economy is edging closer to the brink of recession," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York.

U.S. Treasury debt prices turned lower after the release of the higher-than-expected third quarter GDP reading. The euro held steady against the dollar, which was relatively unchanged against the yen.

The third quarter gain was still weaker than the 2.6 percent advance in the second quarter.

Even so, business spending was stronger than first thought according to the Commerce Department report, which was the second estimate of the third quarter figures after an initial report issued last month.

Business spending rose at a 10 percent annual rate, up from the 8.6 percent rise first estimated. Corporate profits during the quarter, after taxes, advanced by 4.6 percent. That was far above the scant 0.3 percent advance in the second quarter and surprisingly higher than the 0.4 percent gain economists in a Reuters poll were expecting.

Business spending on inventories increased at a $58 billion rate, sharply higher than the $50.7 billion earlier estimated.

Investment in housing tumbled by 18 percent during the quarter, a slightly bigger decline than the 17.4 percent decrease in the government's earlier estimate. It was the biggest decline since a 21.7 percent slide in the first quarter of 1991.

Adding more evidence to a weakened housing market, applications for U.S. home mortgages fell last week, pulled down by a shortened holiday week and namely by a decline in mortgage refinancing, according to separate data released Wednesday by the Mortgage Bankers Association.

CONSUMER SPENDING WEAKENS

Consumer spending, which accounts for roughly two-thirds of national economic activity, advanced at a 2.9 percent annual rate during the quarter, a weaker reading than the 3.1 percent advance first estimated.

A key inflation measure favored by the Federal Reserve -- personal spending excluding food and energy -- advanced at a 2.2 percent rate during the quarter, down slightly from the 2.3 percent first estimated and close to Wall Street expectations.

So-called core prices, measured on a year-over-year basis were up 2.4 percent, the same as first estimated and the strongest rate since 1995.

*Consumer spending weaker than expected. Thus it would be rational to assume weakening demand [from consumers] next Xquarters?

*Business spending higher, thus increasing either; inventory [supply] or productive capacity [future supply]

*Corporate profits higher, from previous higher consumer spending.

*Inflation steady [driven via PPI] thus Fed policy will be driven in this scenario by commodity [high] prices. Thus any further rise in commodity prices could lead to a continuation of interest rate rises. This is already being priced into the Bond market [highlighted section] with increasing yield [falling debt prices]

jog on
d998

chops_a_must · 30 November 2006

I fail to see how this is bad news, considering most of the indicators are better than expected.

Plus the weaker USD is good for the automobile sector.

wayneL · 30 November 2006

chops_a_must said:
I fail to see how this is bad news, considering most of the indicators are better than expected.

Plus the weaker USD is good for the automobile sector.

There is no such thing as bad news any more.

Even a 10 megaton burst over NYC would be seen as bullish for the building sector.

Goldilocks rules.

BSD · 30 November 2006

wayneL said:
Even a 10 megaton burst over NYC would be seen as bullish for the building sector.

Not the same - but is anyone factoring-in the rebuild of New Orleans as a cushion against the housing bust?

I have heard some very big numbers quoted.

____________________________

Also, oil is looking good again despite the dire forecasts from a month ago.

Did it snow in Manhattan this week?

wayneL · 30 November 2006

BSD said:
Not the same - but is anyone factoring-in the rebuild of New Orleans as a cushion against the housing bust?

I have heard some very big numbers quoted.

____________________________

Also, oil is looking good again despite the dire forecasts from a month ago.

Did it snow in Manhattan this week?

Oil is one market I am a committed, unreasonable, frothing at the mouth bull, and have been long (with limited risk) since the congress of criminals election.

Re; N.O. cushioning the housing bust? It may save the @rses of a few builders, but the bust will take the US down IMO. It will be the long awaited last straw.

USD looking to be in the schtook as well.

Metals in Euros must be looking a bit shabby.

rederob · 30 November 2006

ducati
Perhaps if you cast your gaze to Japan, Europe, China, Russia and a few other nations you will see media reports that differ markedly from your Reuters aticle.

Metals Insider - 29 November 2006
Japan is doggedly refusing to perform to the accepted market script for a significant slowdown in economic activity through the end of this year and into early next year.
After the first estimate for Q3 GDP of 0.5% growth surprised the market with its strength, this morning it has been the turn of the latest industrial production report.
Analysts were looking for a contraction of around 0.4% month-on-month in October, not least because the Ministry of Economy Trade and Industry’s own monthly survey in September had suggested a 0.2% contraction. Instead, the report showed a sharp 1.6% month-on-month gain with the (seasonally adjusted) headline index hitting a record high.

noirua · 30 November 2006

Commodities will not, I feel, collapse in US Dollar prices, however, in Aussie Dollar prices at around A$1.27 to the greenback, the price fall is around 10%. This, combined with an overall reduction in prices of commodities in US Dollars will cause a further fall of around 15%, making an average drop of around 25%, for Aussie companies.
Costs may well drop, but general wage rises are unlikely to fall back with so many new mines coming onstream.

dhukka · 30 November 2006

rederob said:
ducati
Perhaps if you cast your gaze to Japan, Europe, China, Russia and a few other nations you will see media reports that differ markedly from your Reuters aticle.

Metals Insider - 29 November 2006
Japan is doggedly refusing to perform to the accepted market script for a significant slowdown in economic activity through the end of this year and into early next year.After the first estimate for Q3 GDP of 0.5% growth surprised the market with its strength, this morning it has been the turn of the latest industrial production report.Analysts were looking for a contraction of around 0.4% month-on-month in October, not least because the Ministry of Economy Trade and Industry’s own monthly survey in September had suggested a 0.2% contraction. Instead, the report showed a sharp 1.6% month-on-month gain with the (seasonally adjusted) headline index hitting a record high.

It's rarely difficult to find a contrarian view to support your own. Just a note on Japan's suprising figure for last month's IP. "Credit Suisse economist Hiromichi Shirakawa wrote in a research note e-mailed Wednesday that the higher production figures were tempered by a rise in inventories, which grew 0.8% on month. "Surprisingly strong figures for October are not enough to dispel concerns over the prospect of inventory adjustments among Japan's high-tech manufacturers," Shirakawa wrote". Source Takes some of the gloss off the figures. Who is going to suck up this inventory buildup? All indications are that it certainly won't be the US consumer and the weak Japanese retail figures suggest the Japanese aren't either although the Japanese central bank keeps telling us retail spending will pick up. Might get a bargain on a flat screen TV in Akihabara this Christmas.

rederob · 30 November 2006

dhukka said:
It's rarely difficult to find a contrarian view to support your own. Just a note on Japan's suprising figure for last month's IP

dhukka
Yes, it's easy to find an opposite view.
However, I see the issue as one of which we take a position on - ie, bullish or bearish (that is, collapsing), and what we do in response.
My position is very clear.
I remain medium term bullish and am heavily overweight commodity-based equities.
In this regard I actually purchased 2k BHP shares on Monday (before their AGM), so have gone even more overweight.
I am very unsure of what the second half of 2007 might bring, and my thinking at present is that great vigilance is required to determine the extent that this present (generally bullish) commodity market might break down.
My view is that any major correction to commodities will be relatively short-lived in terms of historical market cycles - I would see it as difficult for a correction to drag into a few years duration.

CanOz · 30 November 2006

There are so many views out there at the moment regarding this topic. I wonder if that is in part due to the infrequency of commodity booms in resource based industries, like mining. Isn't it true that they happen once or twice, maybe three times a century and last many years. The supercycle would be like any other bull market but just longer, and having impulsive waves as well as corretive waves we should see small corrections along the way.

Sometimes i think this is so hard to call because there aren't many people left that experienced the last one that are in the business of making these kinds of claims.

Also, given that the follow through to the actual resource prices, inventories etc., from a slowing U.S. economy, and then a slowing BRIC could take sometime, it seems to me that there would be plenty of notice.

This is just a general sort of view, any comments?

Halba · 30 November 2006

In all practical terms the chinese industrialisation is the biggest known to man. Over 900mil ppl industrialising into cities. Imagine the amounts of steel and materials required, especially as they are building about 20-50 cities. The actual boom hasn't really started as these are currently in the design stage..

chops_a_must · 30 November 2006

Halba said:
In all practical terms the chinese industrialisation is the biggest known to man. Over 900mil ppl industrialising into cities. Imagine the amounts of steel and materials required, especially as they are building about 20-50 cities. The actual boom hasn't really started as these are currently in the design stage..

That's up for debate, because some of their main cities have just about reached the limits. However, the port and rail development is more than worth keeping an eye on.

dhukka · 30 November 2006

rederob said:
dhukka
Yes, it's easy to find an opposite view.
However, I see the issue as one of which we take a position on - ie, bullish or bearish (that is, collapsing), and what we do in response.
My position is very clear.
I remain medium term bullish and am heavily overweight commodity-based equities.
In this regard I actually purchased 2k BHP shares on Monday (before their AGM), so have gone even more overweight.
I am very unsure of what the second half of 2007 might bring, and my thinking at present is that great vigilance is required to determine the extent that this present (generally bullish) commodity market might break down.
My view is that any major correction to commodities will be relatively short-lived in terms of historical market cycles - I would see it as difficult for a correction to drag into a few years duration.

Rederob,

Your recent puchases are proof that you have the courage of your convictions and nothing more. My point is that the Japanese IP numbers aren't as bullish as they might look on the surface. Here is another article from the FT on the same story, granted the IP numbers were strong however note the last paragraph "The strong figures could be a reflection of a deliberate build-up of inventories ahead of the year-end, economists said. This could backfire if US and or domestic demand does not materialise as expected, leading production to fall in the new year."

Commodities tipped to collapse

ducati916

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BSD

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