Commodities tipped to collapse

[Uncle Festivus]

NEW DELHI: Following a huge rise in production, China’s stainless steel industry is facing a problem of plenty now.

The glut has caused panic in China’s stainless steel market. A sharp fall in nickel and stainless steel prices, has forced a joint cut in production from this month in China.

State-owned and private mills are reportedly working in tandem to support falling prices. Some plants have resorted to production cuts, while others have commenced their maintenance work early.

From the peak of end-May, stainless steel prices had been falling and by mid-July, the market was 25 per cent lower. From around $4,500 a tonne in May, the rates have declined to less than $3,300 a tonne. Steel traders apprehend there could be a further drop in August when seasonal demand stays weak.

The sharp fall in prices and oversupply of stainless steel together with the rapid expansion of production capacity since the second half of 2006 has led to a substantial build-up in stainless steel inventories in China.

On the back of a rapid growth in stainless steel capacity, a strong rise in stainless steel production in the second half of 2006 was about 5.3 million tonnes, 68 per cent higher than in 2005.

For 2007, the forecast output is about 7.3 million tonne, up 38 per cent year-on-year.

 

[Bush Trader]

Not collapse so much as NAB believes the Cycle may have peaked. Remember many analysts are still using commodity valuations well below spot price numbers.

Cheers

BT

National Australia Bank Says Commodity Prices Have Peaked
Source: FN Arena News - August 09 2007
By Chris Shaw
According to the National Australia Bank Base Metal Index (BMI) prices among the base metals sector fell 5.2% in July, this after a 10.8% fall in June. Much of the fall can be attributed to the nickel price, as the metal has had consecutive months of 20% declines at the same time as most other metals have tracked sideways.
While a summer slowdown is nothing unusual, the bank suggests the recent peak in the index may in fact prove to be the top in the current cycle even allowing for continued strong growth from China and low metal stockpiles.
On the bank’s numbers China should record economic growth of around 11% in 2008, which means there will be no change to the recent trend of it being the dominant global consumer of base metals. As the bank’s economist Gerard Burg notes, this has the effect of pulling greater quantities of metals out of the global market, a trend evidenced by China’s growing imports of copper and nickel and lower exports of aluminium and lead.
Despite this, Burg expects increases in output will push all metals in the sector into a surplus in 2008, though the size of the surpluses will vary. Given this will alleviate some of the price pressure resulting from currently low stockpiles it supports the bank’s view prices will come down, while remaining at what are historically high levels. From a forecast average of 406.8 points this year Burg expects a decline of 15% in 2008 and 14% in 2009 in the value of the bank’s BMI.
Looking across the sector, the bank expects lead prices can rise further in the short-term as outages in production at key mines in Australia and the USA will keep the market tight. As this supply side issue returns to normal prices are expected to correct lower, so from an expected average this year of US$2,325 per tonne Burg is forecasting an average price in 2008 of US$1,550 per tonne, falling further to US$1,125 per tonne in 2009.
With the aluminium market expected to move into a surplus in 2008 the bank sees prices as continuing to drift lower, though it has lifted its forecasts to account for a tighter market than previously expected on the back of lower Chinese output. From a forecast of US$2,700 per tonne this year the bank sees prices falling to US$2,425 per tonne in 2008 and US$2,150 per tonne in 2009, its 2008 forecast having been revised up from US$2,125 previously.
International Copper Study Group figures suggest the copper market will be in surplus this year but the bank sees scope for disruptions to supply to produce a balanced market, meaning any surplus will be pushed out to next year. This sees the bank lifting its price forecast for next year to US$6,750 per tonne, up from US$5,900 per tonne previously, but down from its forecast for this year of an average of US$7,250.
Deliveries to LME warehouses through Europe are behind the recent slide in the nickel price, but the bank takes the view the slide has gone too far and prices should settle at around the low to mid US$30,000 per tonne level as this represents approximate break-even for ferronickel costs.
Both demand and supply expectations for the remainder of the year have been revised down slightly and the bank sees prices as averaging US$40,500 per tonne this year before falling to US$32,500 per tonne in 2008 and US$28,500 per tonne in 2009.
The bank suggests stockpile estimates in the zinc market may be skewed given Chinese producers brought forward output the beat increases in excise taxes, but it notes industry figures indicate a small production surplus in the first five months of the year despite stockpiles having fallen to historically low levels.
Assuming the figures are actually skewed Burg sees the market as remaining in deficit through the September quarter, though he expects a surplus to develop by December and extend into 2008. As a result the bank expects prices to average US$3,650 per tonne this year before falling to US$3,450 per tonne in 2008 and US$2,850 per tonne in 2009.

 

[doogie_goes_off]

Nickel stocks should be avoided short term, IMO $20,000/t US is a sustainable level, if a company can not operate with a profitable margin at this price then don't hold them, look for past production. At higher prices other metals become cheap replacements for Nickel in stainless steel. Zinc and lead prices still have big margins, so investors should not be spooked by this information and the world is still using copper flat out in electronics, so no problems there, my only advice would be to hold base metal producing stocks.

 

[noirua]

With pressure on all commodities in this mining sector "Great Slide" we can feel comforted at knowing that the Aussie has been very strong and peaked at around A$1.11 against the greenback a few weeks ago and has now fallen to AUS$1.22 in London.

This great shakeout is far from completed, but remember, even the best go down as people seek refuge in cash. So this is basically a shakeout and not a great slide. Many a good apple will be shaken from the tree and there will be profits to be made by picking up the good apples that have fallen.

 

[noirua]

Commodities, it seems, have only one way to go from here, and thats down, in US Dollar terms.

The Aussie Dollar has slumped against the British Pound to trade at A$2.5232.
Against the US Dollar, again only one way, and that's to A$1.2688.
Mining producers will indeed be chuffed by this.

 

[noirua]

Avoid direct investment in commodities, but look very closely at those quality profit making, little debt, developed companies in the sector, and ask yourself "Is this stock cheap with its Aussie mines or wells with the Greenback resergent and you have to pay A$1.30 to get US$1. These miners will rejoice and profits should rebound over the next 12 months; Especially for those with fixed price agreements going forward.

Be warned, that many hope-and-glory stocks, with little cash, are not worth much now.

 

[BSD]

Anybody keen to call the end of the commodities bull again?

Copper - 10% off all time highs
Iron Ore - heading for a 25%+ rise
Coking coal - ready to smash all time highs
Thermal - going up
Oil - all time highs
Softs - going up

The weakness of the USD is a minor factor, but the commodities bull is well intact and the doubters have yet another 12 months of egg on their face.

Check out some of the arguments on this thread from 12 months ago.

The US housing/economy bears were all doubting the commodities cycle and despite their accuracy concerning the pathetic state of US affairs, commodity prices continue to gain pace on real economic demand.

Supply response is NOWHERE to be seen.

Where is that d!ckhead calling for the 'nuclear winter' in commodities working now?

I keep asking this - name three new major copper, nickel, gold, iron ore, coking coal and/or oil sources?

The US is no longer the centre of the universe.

Bring on the Asian century...

 

[refined silver]

Commodity Bull not even half-way yet.

Even with systemic economic collapse in the US, the US Fed will flood will flood with liquidity leading to huge inflation (already on the way) and commodities will continue to increase in price (even though there may be a short sharp downward spike)

Sovereign Wealth Funds hold trillions of dollars in diminishing US treasuries. This money is starting to move into commodities and precious metals. The trickle will become a flood.

 

[Lyn]

It's great to see analysts supporting my strategy, which is 100% resources. Charlie Aitken, a director of Southern Cross Equities posted an interesting article on Eureka stating:

"People who are looking at the Dow for guidance to resource stock performance are completely missing the point: you should be using this period of Dow-led uncertainty to fill your portfolio up with... and the entire suite of next generation Australian resource stocks. "

He states that we should be looking at the mergers and acquisitions as they are telling us what the future will bring. I see exciting times ahead.

 

[vishalt]

Check out the article I did: http://www.investordaily.com.au/archive/3397.xml

Resources boom may hit a hurdle

By Vishal Teckchandani
Thursday 15 November 2007

The commodities boom is set to remain strong till 2009 after which it may start to burst, according to Putman Investments chief investment officer Shigeki Makino.

"We can expect two to three years of smooth sailing before you sense oversupply," Makino said.

"By around 2012 a lot of projects are expected to be complete in emerging economies like China and India.

"So when you see a lot of planes, ships, infrastructure and major cities complete, that's when the fundamentals may start to turn and the market will appreciate that a year before. At that point equities could collapse."

He expected the global economy, along with emerging markets and large cap stocks, to flourish in the current environment.

"Emerging markets are a long-term positive theme for global cyclicals. We remain bullish on steel, oil refineries, commodities, shipping and airlines," Makino said.

He said investors were too focused on the credit crunch and housing bust in the United States and should use any declines as buying opportunities.

 

[rederob]

During the week, all the base metals moved from positions of fundamental weakness to strength, or indifference - nickel falling into the latter camp.
Copper is leading the charge again, suggesting that whatever new capacity has come on stream, it's hardly denting demand.
Both zinc and lead have added significant cancellations to their picture, and shoud increase drawdowns next week.
Aluminium is going to go long term bullish, but will move as quickly as a snail.
Irrespective of US market capitulation, it does seem that there remains a strong and vibrant metals market that for now is making its own race.

 

[Boyou]

From todays edition of the Daly Reckoning.

........ article from Simon Hunt over at Mineweb.com that made sense. Hunt says that because 2008 is an election year, "We can be sure that the US authorities and others will produce a trick out of the bag which would temporarily shore up the system, but, in the process, make the crisis even deeper, when the final tsunami wave strikes (2009-2013).

--"In effect," he continues, "the authorities will inflate their way out of today's turmoil. Money will have to find a home: it will go into equities and commodities, thus creating the final fifth wave of this cycle, which by its nature tends to be parabolic in direction. 2008 should then be characterised by rising stock and commodity markets at least until mid-year. Once these markets have reached their peaks (latest spring 2009), a 4-5 year bear market will unfold, which will be characterised by the unwinding of a decade of leverage."


Any comments?
----------------------------------

 

[chops_a_must]

During the week, all the base metals moved from positions of fundamental weakness to strength, or indifference - nickel falling into the latter camp.
Copper is leading the charge again, suggesting that whatever new capacity has come on stream, it's hardly denting demand.
Both zinc and lead have added significant cancellations to their picture, and shoud increase drawdowns next week.
Aluminium is going to go long term bullish, but will move as quickly as a snail.
Irrespective of US market capitulation, it does seem that there remains a strong and vibrant metals market that for now is making its own race.

The nicklers here seem to be looking really good.

Whether or not the fundamentals of the base metals have changed because of perceived strength in the USD, thus increasing physical buying... who knows? But that's my reasoning behind it.

 

[Scuba]

Zinc to drop 11% in 2008: Study
Bloomberg / Mumbai November 30, 2007
More gloomy predictions from Gerard Burg: Business standard.com smart investor link
Any thoughts on this guy?

 

[dhukka]

The ABS reported Gross Operating Profits for Australian companies fell -2.1% in the latest quarter. That was due almost entirely to an -11% decline in mining sector profits in the latest quarter. Mining sector profits are down -15% year over year and are down more than -19% from their peak in June 2006. September was a weak quarter and December is shaping up as even weaker given the falls in commodity prices. Could be a somewhat lacklustre 1H08 profit season for resource companies.

 

[Nyden]

Zinc to drop 11% in 2008: Study
Bloomberg / Mumbai November 30, 2007
More gloomy predictions from Gerard Burg: Business standard.com smart investor link
Any thoughts on this guy?

A lot of those article headlines are very misleading ; notice in the article it says an 11% drop in their forecast.

They still expect it to hit $2,925 a tonne, and currently it trades around the area of 2200-2500. So, many of these articles make it seem like Zinc is going to just keep falling, & falling from where it's at now. So; their forecast says Zinc is going to still rise a fair bit. Of course, these sorts of articles never say that, do they? Negative nellys :

 

[Kauri]

I would have copper under a touch of pressure here.. triple top/old support and all that...
Cheers
,,,,,,,,,,Kauri

 

[noirua]

Article from Aireview "Boom Slows as Resources Run Out of Steam": http://www.aireview.com.au/index.php?act=view&catid=8&id=7472&setSub=1

 

[The Mint Man]

Interesting to note that this was posted back in 2004

 

[Kipp]

During the week, all the base metals moved from positions of fundamental weakness to strength, or indifference - nickel falling into the latter camp.
Copper is leading the charge again, suggesting that whatever new capacity has come on stream, it's hardly denting demand.
Both zinc and lead have added significant cancellations to their picture, and shoud increase drawdowns next week.
Aluminium is going to go long term bullish, but will move as quickly as a snail.
Irrespective of US market capitulation, it does seem that there remains a strong and vibrant metals market that for now is making its own race.

Hmm... I'm very confused by the state of play with Zinc... inventories still haven't really recovered, from the mass emptying that took place from the start of 2005. Nickel has been pummelled down to 11.50/lb in the same period, but I think it is worth noting that inentories have QUARDRUPLED to 45,000t in the same period.

What am I missing here? Are there millions of tonnes of Zinc stockpiled at the Chinese docks? From a t/a point of view, there is no sign of a break from the steady downrend that kicked off around the end of March.