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"The best place to be is in commodities"

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May 05, 2012
That Was The Week That Was ... In Australia
By Our Man in Oz

Minews. Good morning Australia. Your market seems to have done little last week.

Oz. That’s one way of looking at it. Another is that there were plenty of positive moves early which were then wiped out by a pair of poor days at the end as falls on Thursday and Friday took us back to where we started. At one stage the overall market, as measured by the all ordinaries, was up the best part of two per cent. When we all sloped off to the pub on Friday night, the gain had been reduced to around 0.5 per cent. It was a similar story with the industry-specific metals and mining index, which also added less than one per cent for the week, while the gold index lost a shade over one per cent.

Minews. Hardly inspiring! What’s troubling investors down your way?

Oz. Many of the same issues that are troubling investors in London, with an overlay of a deeply-troubled Australian government. The rolling European crisis, which this week gathered up Spain and promises to deliver a socialist President in France, has raised doubts about whether Europe can achieve any economic growth for some years, and that means European banks and investors will be sidelined for a good while yet. Closer to home, there are doubts about the strength of the local economy, but little doubt that the mining industry will be the prime target of higher taxes in next week’s budget - a diesel fuel rebate is likely to be wiped out, along with depreciation allowances for certain mine works, such as overburden removal. Capping those worries is concern that the two biggest miners in Australia, BHP Billiton and Rio Tinto, are shifting their focus to greener financial pastures in Africa and North America.

Minews. Surely Chinese commodity demand will pull your economy through any slowdown?

Oz. In theory, yes. In reality that might not be the case. The Chinese have their own worries, and while demand for minerals and metals remains relatively strong, there is a lot of new supply heading for China. The best example of that is the thermal coal that’s being forced into the international marketplace by the glut of natural gas in the US. This so-called shale gas is causing all Australian coal miners to think twice about expansion plans.
...

Source >> www.minesite.com
 
May 07, 2012
Political Uncertainty In Europe Will Lead To Increasing Uncertainty In The Commodity And Capital Markets Too
By Rob Davies

Spending money is usually a lot more fun than earning it. Spending other people’s money is even better. Such are the underlying feelings behind recent elections in various countries.

And if, at the end of the day, electorates decide they don’t want more cuts in government spending and increases in taxation they will kick out the politicians that advocate those policies and replace them with others.

That seems to be what is happening now in Europe as a new socialist regime takes the reins in France and the mandate of the Greek coalition looks shaky to say the least. The consequences could be far reaching for a number of asset classes, not least commodities. Everyone wants growth, of course but, human nature being what it is, few are prepared to wait for the cash flow to fund it.

Far more attractive is to borrow the money and “create” growth. You just need to find someone to lend you the money. And that is where it starts to get tricky.

Right now global capital markets are very happy to lend to the Germans at 1.6 per cent, the Americans at 1.9 per cent, and even the Brits at two per cent. Go down to Spain and Italy though and the rates shoot up to 5.5 per cent. Even France has to pay 2.8 per cent.

And the Greeks pay 17 per cent on what they still owe, after having already walked away from a big chunk of their obligations.

In theory yes, Governments can offer an alternative to austerity if they are prepared to pay for it. In practice even the socialists get to a point when the pain is too great.

Capital markets sense that austerity programmes are taking too long to deliver the goods to the voters. That is pushing values down because investors are nervous about what will replace these strategies. Last week, global equities fell several percent, bond prices rose and base metals fell 1.5 per cent as measured by the LME index.

But the depressed state of the major western economies was already well understood. What really upset markets last week were some downbeat comments from Rio Tinto and BHP Billiton. These two bellwether behemoths stated that they will slow the pace of their expansion programmes, save for iron ore, in the face of slower growth in China.

Right now, Chinese expansion is the only beacon of light in a rather gloomy economic world. And if that flame starts to flicker and sputter, the implications for metals, and other industries, would be dire.

Not everyone takes a negative view, though. Talk is that just two entities now control the bulk of the (albeit small) inventory of copper in LME warehouses. That’s a bullish position to take, even if copper is the one base metal that seems to offer the most promise in the medium term.

Because, even adding the 196,627 tonnes of copper held in Shanghai to the 235,200 tonnes the LME has, the total is still pitifully low, and makes the metal vulnerable to supply side shocks.

Still, traders seem to be moving to the wider macroeconomic view that the downside is more likely than the upside. That opinion will be reinforced by the news that oil for delivery in June fell below US$100 a barrel, and that oil inventories at Cushing rose 2.9 per cent to 43 million barrels.

That is the highest since 2004. High prices work to constrain demand, be it in oil, copper or government debt. The markets know this, but do the incoming governments? We shall have to see.

Source >> www.minesite.com
*****
 
May 12, 2012
That Was The Week That Was ... In Australia
By Our Man in Oz

Minews. Good morning Australia. Have you any good news, after another tough week on the market?

Oz. Not a lot. But if you look hard enough there are always a few nuggets to be found, even if they were well buried by the latest ghastly example of financial mismanagement from the Australian government, which announced its budget on Tuesday. Political populism is the only way to describe the cash hand-outs that are being given to traditional Labor voters, as business was whacked with higher taxes. The net result was a further fall in the value of the Australian dollar, which is back to parity with its US cousin. Other indexes were also weaker, including the ASX all ordinaries index, which was down 2.6 per cent, and the gold index, down 2.5 per cent fall. There was also a 5.1 per cent fall in the metals and mining index thanks to a sharp sell-off in the big miners, BHP Billiton and Rio Tinto.

Minews. How are those big declines by the mining leaders being reported in Australia?

Oz. One interpretation is that the super-cycle of stronger commodity prices has come to an end. Another is that investor pressure is forcing all of the big miners to reconsider their growth plans, with a number of major expansion projects likely to be delayed. However, that could turn out to be a blessing in disguise.

Minews. You mean that the seeds of a recovery are being sewn in the possibility of a reduction in future supply?

Oz. Precisely. You can’t mothball giant projects of the sort in the pipelines of BHP Billiton and Rio Tinto without causing a supply hiccup which, in turn, leads to a commodity-price recovery.

Minews. That will be interesting to watch. But on a more immediate point, did those cash hand-outs - or bribes, as some of your media are calling them - go down well with the electorate?

Oz. No. In the first wave of opinion polls after the budget the government suffered a further decline in support. It seems that even the average Aussie can seen through a bribe, and also rejects the attempt to start a class war by pitting the poor against the rich. The attacks on the rich might actually turn out to be the biggest mistake that the current government has made because most Australians like to think we live in an egalitarian society where class distinction is more than irrelevant, and is actually treated with contempt. The mood down this way is one of: bring on the next election as quickly as possible.

Minews. Interesting thoughts, but time for prices, starting with any of those nuggets of good news hinted at earlier.

Oz. There weren’t many, but they’re more interesting than the long list of fallers. The most spectacular move of the week was from a minnow called Kibaran Nickel (KNL) which jumped aboard the fad of the week, graphite. Technically, Kibaran tripled in price from A4.7 cents to a closing price of A17.5 cents, with some sales going through at A20 cents before the close. However, that move needs to be taken with a hefty pinch of salt because Kibaran is thinly traded, graphite is not a mainstream mineral, even if popular today with punters, and the company is capitalised at just A$4.9 million, which wouldn’t buy you a decent apartment in London these days.

Another company that moved up sharply was Coalworks (CWK), which added A17 cents to A$1.02 after receiving a long-awaited takeover bid from Whitehaven Coal (WHC). For its part, Whitehaven duly fell by A30 cents to A$4.61. A handful of gold companies also shook off the effects of the weaker gold price, which was in turn offset slightly by the falling exchange rate. Dual-listed Endeavour Mining (EVR) reported a strong first quarter of production, and added A13 cents on the ASX to A$2.17. Newcrest (NCM) clawed back a meagre A5 cents to A$25.70, bringing to an end, temporarily at least, a heavy slide in its price. The shares traded as high as A$41 a few months ago. Perseus (PRU) added A2 cents to A$2.52, and Kingsrose (KRM) managed to stem the outgoing tide, with a rise of A1 cent to A$1.15.
...
Source >> www.minesite.com
**********************
 
May 14, 2012
There's A Massive Bubble In The Bond Market Right Now, But The Implications For Commodities Aren't Yet Clear
By Rob Davies

There is no question that each individual metal price reflects the unique supply and demand characteristics for the given metal. It is also true that these characteristics, especially the demand side, are very sensitive to the prevailing macro-economic environment.

But perhaps even more important to the pricing of commodities are perceptions as to how the economic landscape might change in the future. The economic background is set, to a large degree, by the great and the good, consisting of politicians, treasury departments and the assorted monetary authorities. And among the most important of the last group are central banks.

Central bankers are not politicians on the prowl for the next vote so their pronouncements are rarer and ought, perhaps, to be taken more seriously. Which is why the recent lecture given by Mervyn King, Governor of the Bank of England, attracted a great deal of attention. Among his many observations was one that struck some as particularly strange.

He said there was a bust without a boom.

This sounds bizarre to anyone who experienced the tripling of house prices from the late 1990s to 2007. It also contradicts the experience of the commodity world in which the price of nickel rose tenfold from US$5,000 to US$50,000 a tonne, copper quadrupled in price, and most others experienced dramatic increases as well.

To be fair commodities shot up because of the vast sucking sound from China. Nevertheless, a fair chunk of that nickel went into the Smiths’ new kitchen that they could only afford by taking equity out of their house after it had shot up in value.

Underlying the booms in China and the west were soaring property prices, as banks opened up the spigot on real estate lending to the maximum they could, and then some. All this happened under the watchful eye of central bankers who denied the existence of a property bubble.

And these are the same people now charged with extricating the Eurozone from its self-imposed mess. No wonder the markets have little faith in the power of the authorities to create a lasting solution.

Political impasse in Greece is matched by uncertainty about exactly what President elect Hollande in France will do to bridge the gap between his promises and the economic straightjacket of the bond and foreign exchange markets.

No wonder the euro fell against the dollar last week - and a strong dollar usually makes for weaker metal prices. That was certainly the case this time as the LME base metal index fell 1.6 per cent to 3448.

Gold, perhaps surprisingly, had an even bigger fall, dropping 3.5 per cent to US$1,588 an ounce. Instead, investors put their faith in debt issued by the US government.
Demand for these IOUs to be redeemed in ten years time is such that they only yield 1.85 per cent. Since US inflation is running at 2.7 per cent that seems like a guaranteed way to lose over one per cent a year for the next ten years.

It is doubtful that central bankers read these pages. But, in case they do, they should read this: Guys, the bond market is a massive bubble, stop buying it.

Every commentator is arguing for governments to adopt strategies for growth. But it is hard to do that when the a fifth of the loans the banks have made are not servicing their debt - as is the case with the Spanish banking system.

Unless the authorities can contrive a credible solution, the market will impose its own. And solution will essentially be to stop providing capital to anyone market participants suspect won’t be able to repay it.

On that scenario, a disorderly break-up of the Eurozone seems more likely than a managed one. But unfortunately, it still seems more plausible than expecting the authorities, who denied there was a problem in the first place, to draft a strategy to resolve it.

Source >> www.minesite.com
**********************
 
CANADA

May 18, 2012
That Was The Week That Was … In Canada
By Our Canadian Correspondent

Minews. Now, over to our Canadian Correspondent for a look at how the Canadian markets performed over the past week.

CC. It was another painful week in the resource space, as a couple of Canadian-listed African plays disappointed investors in a big way. And, while the price of bullion managed to bounce off its recent lows, it’s nonetheless clear that investors have absolutely no appetite for mineral resource plays at the moment. Once all the trading was done this past week, the TSX Ventures Exchange, home to more junior exploration companies than anywhere else in the world, had plunged 8.8 per cent, while the TSX Gold Index bucked the down trend and managed to squeak out a gain of 0.13 of a per cent.
...
Source >> www.minesite.com
 
May 19, 2012
That Was The Week That Was … In Australia
By Our Man in Oz

Minews. Good morning Australia. Have you any good news for us after a truly dreadful week?

Oz. No, is the short answer. Like the rest of the world our market behaved like a rabbit caught in the headlights of an oncoming car with a manic Greek taxi driver at the wheel. The least bad - a cumbersome expression but one which sums up the situation - was the gold sector which on Friday managed to do what no other index did, rise modestly. But after the falls of the previous four days, that was of course too little too late. The damage to investor confidence has been profound. The 5.6 per cent fall in the all ordinaries index has wiped out what remained of the gains made earlier in the year. The metals and mining index also dropped by 5.6 per cent, and the gold index fell by 4.7 per cent, despite a 2.7 per cent rise on Friday.

Compounding the gloomy mood down this way is deepening uncertainty about the performance of the Chinese economy, and the demand it will stimulate for Australian mineral exports. That doubt saw the mining leaders, BHP Billiton and Rio Tinto, hammered lower, with BHP also hit by threats of a fresh round of industrial action in its coal mines.

Minews. Falling prices and industrial action to boot - that’s not a good combination.

Oz. It’s not, and it looks like Australia is heading into a period of considerable uncertainty as domestic political squabbles weigh on the popularity of the government, even as its unpopular new mining and carbon taxes weigh on investors. The next shoe to drop in the Australian economy will be a realisation that the promised return of the government budget to a small surplus is likely to be little more than wishful thinking, because corporate taxes will not be as high as assumed in the year ahead.

Minews. Time for prices, and don’t hold back on the bad news. It’s better to face the truth than hide from it, like some European governments.

Oz. Okay, but just before we get there, there was one spark of good news from this side of the world. While the minerals industry is being hit by low prices and even lower confidence, the energy industry is looking much more optimistic, especially for companies exposed to natural gas. Japan, in particular, is leading a charge into the Australian gas export sector, as it seeks additional supplies of fuel to fill in the gaps left by its mothballed fleet of nuclear reactors. With that dynamic in the background, Japan, coupled with China, is pushing our gas industry to the point where Australia should become the world’s biggest exporter of liquefied natural gas (LNG) within the next 10 years, displacing the current leader, Qatar.
...

Source >> www.minesite.com
*****
 
May 21, 2012
Who Will Be Left To Buy Government Debt, When The Current Crop Of Buyers Come To Sell?
By Rob Davies

The moves in capital markets last week were all negative, save from the perspective of a selected number of governments. Equities fell three or four per cent, and the base metal index dropped four per cent to 3311. Copper fell six per cent to US$7,707 a tonne.

Conversely though, many governments saw the price of their debt fall. US treasuries rose 6.9 per cent taking the yield on 10 year US Treasuries down to 1.7 per cent, while German bunds of the same maturity became even more expensive with a yield of 1.4 per cent.

It is doubtful that the respective governments concerned viewed these developments as positive. As Neil Collins of the Financial Times pointed out, this asset class has now morphed from being the definitive risk-free asset, to simply offering return-free risk.

Despite that, the market still views a select group of AAA and AA governments as the safest place to be during this unprecedented period of uncertainty. That is bad news for business and economic growth, because it is pulling risk capital away from productive investment opportunities, and allocating it instead to unproductive lending to bureaucrats.

It is not only governments and central banks that are buying these IOUs - corporations and aspiring pensioners are as well. Such an emphasis on one asset class in so many different portfolios does not bode well, and history strongly suggests it will have a sticky ending.

At the heart of modern portfolio theory is diversification. But the necessity of diversity applies to the owners as well as the asset classes. If one asset class is so widely held by so many different types of investors, it begs the following question: who will be the buyers when all the current investors decide to exit?

Whatever the ramifications are for asset allocation, the reason for the crisis is well understood. There are huge doubts over the creditworthiness of banks and countries on the periphery of Europe.

Although everyone knows that these banks and countries are really bust, there is still a hope that someone will bail them out. It’s just that Angela Merkel hasn’t volunteered yet.

In the short term, the cost of bailing out Greece and Spain will be a lot less than what’s likely to be incurred in kicking them out of the euro. Such a development would expose the ECB as insolvent and in need of a massive capital injection from the Bundesbank - not something likely to appeal to German voters.

Moreover, allowing all those countries to leave will shrink the export market for German goods. And it is this trade with uncompetitive neighbours that has been Germany’s big advantage over the last decade.

Once that goes so does Germany’s growth, and with it any prospect for a pickup in metal demand in Europe.

But China remains a never-ending pit of metal consumption and there are good signs that US fabrication is also picking up. So at the moment metal demand is running pretty close to supply and the markets are not too far out of balance, save for copper where published data on inventories in LME and Shanghai warehouses still show amazingly low levels at 391,254 tonnes.

But if overall demand does weaken further and depress prices, there will be a supply side response with production cuts that will act to stabilise prices.

No such mechanism exists in the sovereign debt market. When pension funds, central banks and investors are no longer willing, or able, to mop up the torrent of bonds being issued by all and sundry there is no self correcting procedure to limit supply.

Then, prices will collapse in what will be a truly scary sell-off, because there will be no one left to buy them. Whether the other asset classes will rally as bonds sell off is the big question for asset allocators.

Source >> www.minesite.com
*****
 
London, UK

May 20, 2012
That Was The Week That Was … In London
By Martin Li

The Eurozone crisis took another significant turn for the worse as Spain's borrowing costs again reached critical levels. Meanwhile, the problems in Greece rumble on as talk of a Greek exit from the Euro becomes ever more pronounced. Against this gloomy backdrop, not even the US$100 billion flotation of Facebook could prevent markets plummeting further. The FTSE 100 dropped 308 points, or 5.5 per cent, to 5,268.

But after last week’s falls, precious metals mostly held their own. Gold closed at US$1,591 per ounce, silver edged lower to US$28.62 per ounce, platinum edged lower to US$1,454 per ounce and palladium held firm at US$603 per ounce. The picture was more mixed in base metals, where copper fell to US$7,745 per tonne or US$3.51 per pound, but nickel climbed to US$17,150 per tonne. Zinc edged lower to US$1,920 per tonne.
...
Source >> www.minesite.com
 

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