Australian (ASX) Stock Market Forum

"The best place to be is in commodities"

Jump to new
February 27, 2012
Miners Are Leading The Way In Investing In New Capacity Even Though The Rest Of The World Remains Risk-Averse
By Rob Davies

In the topsy-turvy world of modern economics, governments and central banks are doing all they can to encourage consumers and corporates to take risks. This is being done by printing money, though it goes under official-sounding names like Quantitative Easing and Long Term Refinancing Operations.

The Bank of England announced more QE a few weeks ago and the markets are now expecting the European Central Bank to conduct another LTRO exercise shortly.

But after the stimulus delivered by these activities last year there is now concern that, like a sugar fix, their effects are wearing off and another one is required.

Equity markets have certainly lost some of the zing they started the year with and base metals are now advancing at a slower rate. Last week the LME Base Metal index gained a respectable 2.3 per cent, although since the beginning of the year the total advance is a more substantial 8.4 per cent.

It seems to be harder now for the risk assets to make much progress. Yet the authorities are desperate to point to some positive results from all their activity. Presumably the logic is that if you keep doing it then it will work eventually.

The problem with printing money is that it gradually reduces public confidence in the economy. If savers are being fleeced by interest rates that are below inflation rates are they going to spend what little they have left, or try and save some more? The evidence to date is that low interest rates are not encouraging spending. Consumers, it seems, are on strike.

The best hope is that corporates become the engine of growth. Certainly in the terrestrial commodities of oil and precious and base metals, all producers are investing strongly to raise output.

The constraints here are capital, equipment and labour. They can sell everything they produce so the market is not a limiting factor. Sure, there is a risk that China, now the single largest consumer of base metals, will crash and burn in a banking crisis - as has happened all too frequently in fast growing emerging markets.

But miners face a bigger risk if they don’t invest in new capacity, because if they don’t they will cede market share to rivals who are prepared to take that risk.

Bold decisions are needed now. Companies in other sectors need to build new capacity in anticipation of a pick-up in demand. That would create growth, employ more people, bring prosperity and maintain demand for commodities.

It is clear that governments are not going to spend the money yet on new infrastructure, however much it is needed. Despite all that encouragement from the ECB and other central banks, states are not in the mood to take risks, despite the absurdly low financing costs that currently prevail.

It is hard to believe that the British, American, Japanese and German governments cannot find investments that will make more than the current two per cent nominal risk-free rate, given that in real terms it’s more like a minus rate.

Central banks are paying people to take risks, but no wants to take up the challenge - except miners of course.

Source >> www.minesite.com
*****
 
March 03, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. Copper seems to have been the hot metal on your market last week.

Oz. It was, and there were a number of corresponding upward share-price moves, though the newsflow down this way was dominated again by political shenanigans. The Prime Minister, Julia Gillard, survived a challenge from former Prime Minister Kevin Rudd though that didn’t stop the fun and games. There was then a shuffle of senior ministerial positions, and a vitriolic attack on Australia’s super-rich miners by Gillard’s deputy, Wayne Swan.

Minews. Now that is interesting. You mean the government is levelling higher taxes on mining and criticising the people running the industry?

Oz. In a way, yes, though the attacks are at a personal level and aimed at the three top iron ore entrepreneurs, Andrew Forrest, Gina Rinehart and Clive Palmer. Their sin seem to have been criticising the mining tax and, in the case of Rinehart and Palmer, seeking a foothold in the media from which to continue their anti-tax and anti-government campaigns.

Minews. Does that mean the government is close to declaring war on the industry that kept Australia out of the global financial crisis?

Oz. Well spotted. That’s exactly what it means. Not only is mining facing higher taxes, but some of its most successful investors are now being hit with personal abuse. And that reeks of envy on the part of the politicians doing the name calling.
...

Source >> www.minesite.com
 
March 05, 2012
Warren Buffett Sounds A Positive Note On Base Metals, Though He’s More Cautious On Gold
By Rob Davies

When the ECB threw €529.5 billion at European banks last week it had more effect on base metals than any other asset class. Equities hardly moved, gold dropped a bit, but the LME index rose by 2.1 per cent to 3,751 - by far the best performance of any of the major assets.

Whether that rise reflects anything fundamental is hard to know especially as Ben Bernanke, Chairman of the US Federal Reserve, made a speech last week which did not encourage people to think that QE3 was anything like just around the corner.

It is unclear if the European operation signals the return to growth in the eurozone, as the rise in metal prices might suggest. In truth there are more signs of growth in the US than in Europe, and that is the more likely driver for the rise in base metals, never mind the lacklustre response from equities.

Indeed, the ECB operation seems to be more driven by a need to stop momentum slipping back, than by a specific desire in this instance to kick start growth. Italian and Spanish bonds rallied on the deal and took yields back below the crisis levels of seven per cent.

However, following the European conference at which 25 countries signed up vigorously to abide by new financial rules, a jarring note was immediately sounded. Within hours Spain admitted that it will breach its previously agreed deficit by 1.4 per cent, causing some observers to wonder why it had even bothered to sign something it knew it could not comply with.

Still, that’s Europe. Sign something and then carry on as normal. It’s not ideal, but then the world is not perfect.

Within the metals space copper was again the front runner, gaining 1.9 per cent to US$8,569 a tonne. This market remains incredibly tight, is shown by the 13,000 tonne drop in LME inventories to 292,250 tonnes. When you compare that to the 20 million tonnes that the world chomps through every year, it’s clear that the stockpile represents just a few sweepings at the edge of the warehouse.

But if, as some say, Europe is past the worst and the US is on course for a recovery, albeit mild, then the implication is that metal demand in the west is going to increase. Some idea of the scale of the potential upside can be gleaned from views presented by the sagacious investor Warren Buffett in his most recent letter to shareholders.

As far as gold is concerned, Mr Buffett wasn’t that bullish, criticizing the current infatuation the market has with the yellow metal, even while admitting that the dollar is worth only a one seventh of what is was when he started his business.

But he make the point that his housing business is only running at a third of the level it was in 2005. Even allowing for the large element of froth that was present in the housing market during the sub-prime boom in the middle of the noughties this striking fact does suggest that there is a still a lot of upside in US housing. And few industries consume copper like US houses.

Each one uses about 440 pounds. Buffett makes the valid point that the US housing industry has flatlined for four years as it shakes off the excess capacity. Tellingly, though, he also observes that household formation in the US now exceeds housing starts. It is only a matter of time before that shortfall starts to impact house builders and create a positive market. At heart, Buffett is clearly more positive on base metals than precious metals.
 
March 10, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. You seem to have suffered a down market in a strong news week.

Oz. That’s not a bad description of what happened. It was an extremely good week for news, and a relatively poor week on the market. Despite some sort of resolution of the Greek financial farce, and the latest Australian national accounts which confirmed that 2011 was the country’s twentieth successive year of growth, most share prices trended down. The gold index led the way with a three per cent decline. The metals and mining index wasn’t far behind, down 2.8 per cent, while the all ordinaries index slipped by 1.5 per cent. As those numbers imply, every sector had more losers than winners.

What weighed most heavily on the mood of Australian investors were fresh doubts about the health of the Chinese economy, and the likely future demand from China for commodities. There was also fresh evidence that Australia’s central bank plans to keep interest rates high as an anti-inflation measure, which means the exchange rate will stay higher for longer. And that combination of exchange rates and interest rates copped the blame for a small rise in unemployment last week, as jobless claims rose by 0.1 per cent to 5.2 per cent. In the resource-focussed states the unemployment rate is closer to four per cent.

Minews. Does that mean your resources sector is running out of puff?

Oz. Pausing for a breather is perhaps a better way of putting it. China is the key to what happens down this way. If growth in China does slip from double-digits to the government’s target of 7.5 per cent then commodity demand will not be as strong as had been forecast. If that does turn out to be the case, it’ll be interesting to see whether the major expansion projects underway in the coal and iron ore sectors hit the market at just the wrong time, triggering sharp price falls.

Minews. A sobering thought. But let’s switch to prices now, starting with gold.

Oz. There was one reasonable rise among the gold companies, a handful of hefty falls, and a generally lower trend across the rest. Star of the week, for reasons yet to be explained, was Allied Gold (ALD) which regained recently lost ground, but which this week put in a rise of A17 cents to A$1.73. Good as that looks, the shares were trading around A$1.00 higher late last year. Other risers were hard to find. Auzex (AZX) gained A1 cent to A26.5 cents, but that was the only obvious upward move.

The long list of gold companies that lost ground included: Silver Lake (SLR), down A18 cents to A$3.55, Evolution (EVR), down A5 cents to A$2.25, Papillon (PIR), down A1 cent to A$1.23, Troy (TRY), down A24 cents to A$4.61, St Barbara (SBM), down A7 cents to A$2.16, and Medusa (MML), down A18 cents to A$5.96. Intrepid (IAU) fell a hefty A26 cents to A97 cents, in the wake of proposed changes in Indonesian mining laws, which will require the sale of 49 per cent of all new mines to local investors within 10 years of production starting. Other Indonesian companies were hit by the proposed legal changes too, among them Kingsrose (KRM), which slipped A3 cents lower to A$1.45 despite reporting a record half-year profit of A$11.4 million.
...

Source >> www.minesite.com
*****
 
March 12, 2012
Relax, This Uncertainty Is Normal
By Rob Davies

Uncertainty is the normal state of affairs in capital markets. Few people are pretending to claim now that they know what will happen next. It is when commentators profess that the market is clearly rising or about to fall off a cliff that investors should be worrying.

The risk rally that marked the start of the year has come to halt, although it certainly has not given up its gains either. Even though base metals gave up four per cent last week, as measured by the LME index, they are still up by 6.2 per cent on the year to date.

Most equity indices are up a little more, while bond prices are still at levels that defy rational explanation to anyone except a pension fund trustee or a governor of a central bank.

Economic growth in the developed world is positive, though only just, at low single digits. China has admitted that it too is growing less rapidly. Though at 7.5 per cent it is a rate most countries can only pray for.

The outlook therefore seems benign, but certainly not exciting. Even gold has drifted back below the US$1,700 an ounce level as inflation is tamed by overcapacity in almost every industry, except commodities. In such an environment it is hard to know where to place the risk dollar to get the maximum return.

But in the longer term a bet on rising inflation, fuelled by central bank monetary incontinence, makes a holding in gold still look sensible. Equities, with prospective yields of over four per cent, look stunningly cheap. The story in base metals is more complex.

In base metals, copper still has the best fundamentals, as steady demand around the world for electricity underpins demand for copper, while bottlenecks at producing operations continue to constrain capacity.

Aluminium is finely balanced, between high cost marginal smelters in China and firm demand from that country and elsewhere. Lead and zinc are both priced at around the same level as aluminium at just over US$2,000 a tonne. They too seem to be in a sweet spot, where the marginal cost of production is enough to keep most miners happy.

Nickel is probably the metal under the most pressure, as new capacity is gradually brought on stream in an environment in which demand for stainless steel is not rising as fast as it once was.

Underlying all this is concern that rising oil prices will increase production costs across the board for all miners. At prevailing metal prices only copper, and maybe nickel, could cope with higher costs without marginal capacity being affected.

The remainder of the complex would undoubtedly face some tough decisions and marginal capacity might have to close.

That probably would not affect the major mining companies too much because of their reliance on bulk commodities like iron ore and coal, where prices have remained more resilient.

However, some of the smaller gold miners in remote locations relying on diesel power may find margins being squeezed, even at these gold prices, if oil continues to edge up.

All this adds up to metal prices continuing to trade at the full marginal cost of production for some time to come unless and until a major up or down trend is established. And no one knows when that will be. Which is all perfectly normal.

Source >> www.minesite.com
*****
 
March 26, 2012
Oil Prices Will Play A Crucial Role In The Strength Or Weakness Of The Coming Economic Recovery
By Rob Davies

There is one big difference between the metallic commodities and the carbon commodities – metallic ones don’t burn, carbon ones do. And that means that while the prices of copper, other base metals and gold may shoot up and down there will always be metal available at a price.

And ultimately, if prices go high enough, metal is scrapped and fed back into the system. Indeed, that is where the bulk of lead comes from now and the about a third of the other metals.

That argument does not apply to oil and coal because once consumed, and transformed into carbon dioxide, neither oil nor coal can ever be used again. That is why the price of oil reaching US$125 a barrel is such a concern.

No matter how many wind farms are built the fact remains that modern industrial economies are still based on carbon. A rise in energy prices has two big effects: it reduces overall demand by diverting cash into oil producers, and it increases costs, mainly through transport.

And the latest rise in energy prices now threatens to derail the global economy, just as it looked as if it was reaching an understanding on how to deal with the aftermath of the banking and euro crisis.

Anaemic growth has been slowly building in the major Anglo-Saxon economies over the last few months, but the sustainability of that is now being questioned as energy prices tick higher.

Last week risk assets all moved lower on these, and other, concerns. Base metals, as measured by the LME Index dropped back 3.8 per cent. Equity markets fell a couple of percent as well.

London, with its heavy exposure to miners was unsettled by a comment from BHP Billiton that demand for iron ore in China, its cash cow, was flattening. Rumours of an attempted coup in the Middle Kingdom did not help sentiment in that direction either.

No one really knows the inner machinations of the Chinese political machine, but rumours like that serve as s a stark reminder that the economic well being of a many large industries, and hence countries, relies on the egos and ambitions of a handful of obscure, little known and of course unelected politicians.

Their goals are certainly not the same as the goals of most others. They want to get to the top of the heap. They are less interested in making the heap bigger.

So there could be a degree of self correction ahead. If political uncertainty reduces growth in China, that will reduce demand, and prices, for oil and other commodities. And those reductions could be enough to maintain growth in the West. Life is rarely that simple, though. Any political upheaval in China could be very destabilising and the impact almost unquantifiable.

Such uncertainty is probably going to be a fact of life in the future, and will just be one more component in the mixture of factors that determine asset prices. That is what makes the markets such fun.

Though perhaps not if you are Chinese technocrat wondering about your power base. The technocrat is too busy trying to make sure he has made enough before he gets pushed off the greasy pole.


Source >> www.minesite.com
*****
 
March 19, 2012
The Current Market Rally Will Run For Several Years Yet
By Rob Davies

It is almost impossible to determine the specific point when the mood of the market changes. There is no doubt though, that the mood has changed and that the effect of the change is tangible on the exchanges. Technical analysts will point to moving averages and golden crosses, but the best demonstration of the change is the sharp rise in the cost of money.

Taking 10 year US Treasury bonds as the best proxy for the global price of money, the 12.8 per cent sell-off this week clearly shows that demand for money has pushed fixed income yields up to 2.3 per cent from 2.1 per cent. After all, who wants to hold boring fixed income securities when equities are rising and industrial commodities are on a tear?

The LME base metal index rose 2.8 per cent last week and equities in developed markets, the other main risk asset, rose a similar amount. Moving the other way, but by almost the same amount, was gold, providing further evidence that the nervousness is fading from capital markets.

Whether the markets are right to be less nervous is a totally different matter. But for the time being anyway, it makes little sense to stand in the way.

One immediate impact of more expensive money is to push up the future prices of base metals. Aluminium offers a case in point. Over the week the cash price rose by one per cent to US$2,195 a tonne, but the 15 month price rose 8.9 per cent to US$2,540 a tonne, taking the contango up to 15.7 per cent.

Compare that to the 7.3 per cent it stood at last week, and the pace of the recent change becomes clear. The same argument applies to lead, where long dated metal rose 2.4 per cent last week, while cash only gained 0.4%.

Copper is a much tighter market than the rest of the base metals group and the upward pressure pushed it out of contango, so that the current cash price of US$8, 490 per tonne is now higher than the US$8,480 15 month price. The real issue here is just scrambling to get copper to use now.

It is quite clear from these changes that more expensive money is now being translated directly into higher commodity prices. That dynamic will, eventually, push inflation up, and that will be the mechanism for eroding the mountain of debt that still overhangs the global economy.

After three and a half years of financial gloom it is hard for many financial analysts and commentators to accept that the situation has changed. But if you had said three years ago that it was too early to buy risk assets like metals you would have missed out on one of the biggest rallies this century.

Equities are up 80 per cent and base metals have more than doubled since the start of 2009. The problem for many is that having ignored the powerful effect of free money, and massive money creation over that time, it is hard for them to now start turning bullish. So they stay bearish and advise investors to take profits.

But if you do that, where do you then allocate the cash? Bonds may be cheaper, but the yields, at two or three per cent, are little short of laughable when inflation is at the same level. Cash on deposit earns you nothing either, even though many people have massive holdings.

What will happen is of course totally predictable. The bears will keep proclaiming this is false rally and get more and more vociferous as risk assets get more and more expensive.

One by one, investors will succumb to envy and gradually move money into the markets to avoid being left behind and that will continue to drive the rally. And it won’t stop until everyone is fully invested. But that won’t happen for many years yet.

Source >> www.minesite.com
**********************
 
March 31, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia, it looks like you had a better week on your market this week, but there seems to be concern growing about the Australian government’s finances.

Oz. The question of the moment is: how will the government an extra A$40 billion that it needs to plug a big hole in its budget. The fear is that the mining industry is about to get whacked again.

Minews. Surely your government can’t be so silly as to raise the already contentious mining tax?

Oz. No, it will be more subtle this time. The current speculation is that mining will lose some of its tax breaks, such as being able to write off expenditure on capital equipment. The end result is the same though - more money from mining flowing into government coffers.

Minews. Alarming stuff! Are investors in Australia taking the threat seriously?

Oz. Not yet. The proof either way will come in the next federal budget in mid-May. In any case, it’s the major miners, BHP Billiton, Rio Tinto and Fortescue (FMG) who are likely to be hit hardest.
...

Source >> www.minesite.com
 
April 02, 2012
The US Is Now The Only Major Economy Without A Credible Debt Reduction Plan
By Rob Davies

For a while it all looked quite promising. After the ECB pumped a trillion euros into the European banking system in December by offering three year loans at one per cent, it seemed as if the credit problems in Europe were being quietly forgotten.

The resultant optimism probably peaked in early February when the LME index reached 3,821, although equity markets peaked about a month later.

On the face of it there is no reason to be less optimistic than there was a few months ago. That said, there is now a mood of caution which is persuading investors to hang back. A contractionary budget in Spain last week is the only the latest evidence that growth in Europe is going to be modest for some time to come.

Indeed, analysts at Barclays now expect European demand for copper to fall to 3.71 million tonnes this year, from 3.78 million tonnes last year, as an indirect consequence.

That shouldn’t pose too much of a threat because copper inventories have continued to shrink. This year to date they are down 31 per cent and LME warehouses now only hold 255,625 tonnes.

While that looks good for the copper price, Barclays also points out that China is sitting on inventories of 650,000 tonnes so the market may not be as tight as it seems. That is just a reminder, if one is needed, of exactly how important China is to commodity markets.

Bulls can point to rising expectations of growth in the US, which is the main reason US Treasury bonds fell 17 per cent over the quarter, to give the worst returns for that asset class since the end of 2010.

But while the improved outlook for the US is true, it is also worth noting – as many gold bulls do - that the US is now the only major economy without a credible long term sovereign debt reduction strategy.

Borrowing more and more money is a great way to grow, until lenders change their minds. While that is not a problem right now, it will be one day, and then Uncle Sam will have to face the same issues that Spain is tackling right now.

After all, the US has a higher ratio of official debt to GDP than Spain. Worse, its ratio of total net government liabilities to GDP is over 500 per cent. In Spain it is only 250 per cent according to Albert Edwards of Société Generalé.

The difference is that the US can print as many dollars as it wants, while Spain has no ability to create euros to order, even if the ECB is doing a pretty god job in its stead.

None of this amounts to much of economic strategy. Rather the world’s economic policy makers are simply limping on from one period to the next. Elections dominate economic policy, and no one is going to prejudice their chance of election, or re-election, by introducing policies that will benefit the next incumbent of the seat of power and not the current occupier.

Who knows what the next quarter will bring? Chances are that what will do well are those assets that underperformed last time. Gold did not have a bad time over the first quarter - it was essentially flat. But maybe it is time for it to shine again.

Source >> www.minesite.com
 
April 06, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. How did you market perform in the short week before the Easter break?

Oz. It started well, then fizzled out. The net result was a modest overall decline in the all ordinaries of around half a per cent, a bigger decline of 1.3 per cent in the metals and mining index, and a more painful four per cent slide by the gold index. And the same forces which cut into commodity markets last week also produced a solid fall in the value of the Australian dollar, which appears to be rushing back towards parity with its US cousin. Last week’s closing rate of US$1.02 represents a fall of US2 cents in the week, and takes the drop over the past five weeks to US6 cents.

Minews. That lower rate should mean that your miners, and especially the gold producers are being shielded from the worst effects of the commodity-price correction.

Oz. They are, but the sentiment down this way is distinctly negative, as a result of factors that go beyond the commodity market. Politics in Australia gets more bizarre by the day, and could become quite nasty for the resources sector over the next 12 to 18 months. There now seems little doubt that the Australian government is preparing to spring a tax surprise in its May budget by slashing tax allowances, and this will have the effect of raising more revenue from mining.

What’s more, the relationship between the national government and state governments has taken an unpleasant turn, also over tax. The Premier of Western Australia even went so far last week as to say that if the tax situation was not resolved he would not be encouraging new mining developments. His beef is over a value-added tax called the goods and services tax (GST) which is supposed to be shared evenly by the states. But WA’s share in recent years has dropped, leading him to make the following threat: “For WA, the logical thing would be to leave the minerals in the ground”.

Minews. Remarkable. That sounds like a government mine-development strike.

Oz. It does, but it’s probably not that extreme. What it really means is that the state will not spend as much providing essential services such as roads, schools and hospitals in remote locations because Canberra is not sharing the GST revenue. So any company planning a mine development will face a higher capital cost to pay for things government normally pays for.
...

Source >> www.minesite.com
 
Garpal Gumnut said:
The Mining Tax will see a severe retracement in the sp of all mining stocks.

gg
Click to expand...

Not too sure about severe due to the mining tax. The downturn showing up of late from China is going to have its effects too.

All the money they can take off many of the big rich non-philanthropic types the better.

But anyhoouuww, plenty of money being made by Aussie offshore miners at the moment.
 

Similar threads

Joe Blow
  • Locked
  • Sticky
November 2024 Stock Tipping Competition Entry Thread!
2
Replies
27
Views
1K
Garpal Gumnut
Garpal Gumnut
Joe Blow
  • Locked
October 2024 Stock Tipping Competition Entry Thread!
2
Replies
35
Views
2K
frugal.rock
frugal.rock
wayneL
The future of... The future?
Replies
3
Views
536
qldfrog
qldfrog
Joe Blow
  • Locked
September 2024 Stock Tipping Competition Entry Thread!
2
Replies
32
Views
4K
greggles
greggles
Joe Blow
  • Locked
August 2024 Stock Tipping Competition Entry Thread!
2
Replies
33
Views
3K
farmerge
farmerge
Top