Will Commodities Recover?

[2020hindsight]

(I never say say anything bearish around mining folk)
Anyways he says and I quote "I give another 12 months max"

Maybe a fair summary would be that we should consider the three options :- old bull, young bull, and bear. Patient old bulls seem to be pretty contended in my experience. Can be bloody frustrating for young bulls. Maybe review all this in 11 months time. (?)

Speaking of Geralton and points north (Dampier etc) - Dampier's log (70 years before Cook) complains about the flies up there - Some things at least never change.
I guess if mining folk are putting up with the heat and the flies - they (generally) don't want to hear about any pessimism.

But then again 3000 budding millionaires cant all be wrong.

 

[wayneL]

A bit "touchy", Wayne - not a bear with a beer headache, I hope!
Now you could have interpreted this message from your INSIDER and added your view to it.
All I know is that every bull market has come to an end, so repeating the bullish view is fraught with getting caught out.
The opposite, however, might see one as a market savant if the timing of a turnaround gets nailed by one's lucid post.
If, historically, you read the economic tea leaves then you will know interests rates are far to low at present to spell global economic doom. The Yanks would probably say we are just into the second innings - based on the Fed's intention to slow the pace of further increases due to an apparent contraction of inflationary pressures. Anyone following baseball will know it's a pretty dull game most of the time - you can walk away and come back an hour later and nothing has changed on the scoreboard. The "plays" change, however, and it is these subtleties that one needs to watch most closely, as they determine the final outcome. In a long waiting game, patience is a principal virtue.

Red

There is more in this "ball game" than interest rates. Even so, there are alternative interpretations to the low interest rate environment.

As far as adding my view... FWIW I agree that mining in WA will be in deep doodoo in the relatively near future, even I was surprised at the 12 month timeframe. I had 2-3 years in mind for the poo to really hit the propeller.

But just on small pedantic point. Bears never have headaches. True bears are actually masters of disguise and at times, indiscernable from the most rampaging, drooling and obnoxious bull.

Even when caught wearing his/her true personna at the wrong time, the result is more likely to be a severe gash to the soft underbelly, rather than a headache.

Also bear (no pun intended) in mind that a bear is only a bear so he/she can be a bull in the future.

Cheers

 

[rederob]

Wayne
From a cyclical sense it is more obvious by the month that we are nearing an end after several years strength.
The issue for investors is if it is a short term retraction within a giant commodity bull, or an end to bull run for another decade or so.
There can be no doubt that ramped up production will overrun markets in late 2007/2008 and excess supply will smash prices.
However, our market is a bit lumpy right now and we are seeing separate metals "run", rather than all move relatively the same direction.
In this light we could see iron ore the first metal to slump, perhaps followed by coal, then copper, then aluminium etc: And the time frames may be right out of whack so that the overall "bearish" influence over the commodity tone is muted.
What I certainly believe is that the true commodity bull is years away. It will occur after China's infrastructure growth spurt is largely over, and its population turn into consumers: While at the same time India transmogrifies itself into a fledgling first world country by running an infrastucture build and consumer economy in tandem. 2.5 billion people will weigh heavier on global markets than anything we have seen, ever.

 

[Sean K]

Wayne
From a cyclical sense it is more obvious by the month that we are nearing an end after several years strength.
The issue for investors is if it is a short term retraction within a giant commodity bull, or an end to bull run for another decade or so.
There can be no doubt that ramped up production will overrun markets in late 2007/2008 and excess supply will smash prices.
However, our market is a bit lumpy right now and we are seeing separate metals "run", rather than all move relatively the same direction.
In this light we could see iron ore the first metal to slump, perhaps followed by coal, then copper, then aluminium etc: And the time frames may be right out of whack so that the overall "bearish" influence over the commodity tone is muted.
What I certainly believe is that the true commodity bull is years away. It will occur after China's infrastructure growth spurt is largely over, and its population turn into consumers: While at the same time India transmogrifies itself into a fledgling first world country by running an infrastucture build and consumer economy in tandem. 2.5 billion people will weigh heavier on global markets than anything we have seen, ever.

I agree rederob, only as long as the US can get Chindia to the point where the middle classes have expanded to a point where they are are self sustaining the economy. Hopefully this can occur in sync with metal supply/demand, but, as you have indicated this is probably doubtful. There will be a cycle, but how big a down turn is a best guess.

 

[wayneL]

Wayne
From a cyclical sense it is more obvious by the month that we are nearing an end after several years strength.
The issue for investors is if it is a short term retraction within a giant commodity bull, or an end to bull run for another decade or so.
There can be no doubt that ramped up production will overrun markets in late 2007/2008 and excess supply will smash prices.
However, our market is a bit lumpy right now and we are seeing separate metals "run", rather than all move relatively the same direction.
In this light we could see iron ore the first metal to slump, perhaps followed by coal, then copper, then aluminium etc: And the time frames may be right out of whack so that the overall "bearish" influence over the commodity tone is muted.
What I certainly believe is that the true commodity bull is years away. It will occur after China's infrastructure growth spurt is largely over, and its population turn into consumers: While at the same time India transmogrifies itself into a fledgling first world country by running an infrastucture build and consumer economy in tandem. 2.5 billion people will weigh heavier on global markets than anything we have seen, ever.

Red,

Makes perfect sense.

Thanks for the analysis.

Cheers

 

[rederob]

What I certainly believe is that the true commodity bull is years away. It will occur after China's infrastructure growth spurt is largely over, and its population turn into consumers: While at the same time India transmogrifies itself into a fledgling first world country by running an infrastructure build and consumer economy in tandem. 2.5 billion people will weigh heavier on global markets than anything we have seen, ever.

Over ten years later and where are we?
Well, India and China are now at 2.8billion - so I was "out" by the population of the USA on that one .
Between then and now there was the BRIC phenomenon, but it seems only the IC have powered through.
On commodities alone there are some very interesting fronts, and the newest are carried-in on electric vehicles.
Lithium has been seen by many as a big power play (excuse pun) with the largest and cheapest producers globally set to continue to do well. Never a race I joined, so shall leave comment on this metal to those better informed. All I know is that from a supply perspective it's well endowed.
Other battery metals become problematic.
Cobalt as a stand alone mine barely exists outside of corrupted African countries, so no joy for me there.
Nickel is doing ok, and could do a lot better as battery chemistry substitutes cobalt for the cheaper nickel metal. LME warehouse levels have been in strong decline for a year, dropping from around 350K tonnes a year ago to 200K tonnes today.
On the EV front, copper demand will continue apace and mine supply looks like struggling when trying to balance this new feed with existing uses of the remarkable metal. Comex warehouse trends look dire compared with LME. Comex has dropped 25k tonnes in the last month (to now sit around 70K tonnes), while LME is up 15K tonnes in the month. This, however hides a 200K decline in the past 12 months. My sense is that the LME warehouses are likely to continue to lose metal through this year. I base this largely on the US/China trade imbroglio which has seen investment decisions take a back seat in recent months.
Lead has been the most recent surprise, dropping over 40K tonnes in 2 months to leave LME warehouses at just under 70K tonnes. I am clueless as to why. However, with LME stocks their lowest for as long as I can recall it's an interesting omen.
My cake icing is zinc. 5 years ago LME zinc levels were in excess of 800k tonnes. Today they are just over 90k tonnes, and falling at an unusual pace. Zinc is significantly an industrial metal, and with such a rate of decline it might be telling us that "business as usual" in the rest of the world really means that metals as a whole are now in a firm state of undersupply.
I will leave iron ore and aluminium out for now, and see if there is another story they are telling.

 

[rederob]

Zinc and copper remain very tight with LME inventories continuing their rapid decline.
Comex copper was down 30K tinnes over the month with prices rising 5.6% during the week.
LME warehouse levels declined a lesser 20K tonnes and LME copper prices rose only 4% over the week.
Nickel drawdowns are steady, but warehouse levels are ample, unlike Cu and Zn.
Diversified miners should get a perk up this month if the metal markets continue their trends.

 

[Smurf1976]

My cake icing is zinc. 5 years ago LME zinc levels were in excess of 800k tonnes. Today they are just over 90k tonnes, and falling at an unusual pace.

Something to be careful of when it comes to investing is that zinc as it is mined is a very different thing to zinc that is actually useful.

To get from one to the other at a high purity level requires electrolytic smelting, an expensive and energy-intensive process that's generally not done where the ore is mined.

Point being that a company with a zinc mine can't sell zinc to anyone, all they can sell is ore to a smelter. The financial details of contracts etc will determine who is getting the benefit of rising prices - could be the miner or could be the smelter or could be both.

 

[rederob]

Something to be careful of when it comes to investing is that zinc as it is mined is a very different thing to zinc that is actually useful.

To get from one to the other at a high purity level requires electrolytic smelting, an expensive and energy-intensive process that's generally not done where the ore is mined.

Point being that a company with a zinc mine can't sell zinc to anyone, all they can sell is ore to a smelter. The financial details of contracts etc will determine who is getting the benefit of rising prices - could be the miner or could be the smelter or could be both.

Zinc producers will either deliver into spot, or a market agreed price. By way of example, here's a contract from December 2018 for MMG Dugald River outlining terms.
In any case, the TC/RCs are a small portion of the sale price - less than 10 cents/lb, whereas zinc prices increased 15 cents in the last 6 months. Here is an interesting article from last May about TC/RCs. Especially interesting in that article was the part about "tightness". Last May LME zinc warehouses had almost 230K tonnes on warrant with cancellations of around 10K tonnes. Today these warehouses have only 52K tonnes on warrant with 12K tonnes cancelled. (Remember that just 5 years ago there was over 800k tonnes in warehouses - ie over 15 times as much as today.)
I only use LME data as a barometer: it shows trends. If industry is oversupplied LME warehouse levels will build, or seesaw. The trend for zinc has been of very long term deficit, and the supply side response simply is not there and has not been there for the past 5 years.

 

[finicky]

Some guy called 'Julian' on twitter expresses that the trend break out of this etf XME ratioed against the etf SPY on the daily chart could have "implications that are utterly profound". Wouldn't the word 'major' do? Not for utterly profound Julian. Of course everyone who reads his tweet knows what XME and SPY are - no need to over explain for the plebs. Looking them up I found that XME reflects metals and miners, SPY is the etf of S&P500 (SPX). He does admit the break might be false based on the Ukraine Hitler fiasco. It's just another take that commodities are gaining ground on general equities.

Note this chart is just the XME, not XME:SPY ratio chart mentioned and it is monthly not daily

All Data Monthly - nice chart!

 

[Sean K]

You just need to look at the right hand column on these tables to see what's happened and likely to continue imo. Hard to put a timetable on it. Gold and silver have only just began and have some catching up to do.