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Ardent Listener
Administrator
USA
4841 Posts |
 Posted - 09/19/2006 : 09:56:32
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The Coming Industrial Metals Downturn
The following daily chart * shows that December copper futures broke below a short-term trend-line last week. There is significant support in the 3.20s, but if this support gives way then a test of the June low (the 2.80s) will probably follow in fairly quick time.
*See link below
Unlike the situation in the oil and natural gas markets, the aboveground supply of physical copper remains quite low relative to demand. The short-term risk in the copper market isn't that a moderately-tight supply situation will suddenly turn into a supply glut, but that the price will plunge in response to a mass exodus from commodity-related funds by the investors who piled into these funds over the past couple of years. Even if the commercial demand for copper remained at its current levels the copper price could quickly drop to $2.50, or even to $2.00, if the breaking of some technical support levels caused the money managers who have channeled more than $200B into commodity-linked funds to seriously question the "commodity super-cycle" thesis. On the positive side of the ledger, unless such a decline were accompanied by a significant reduction in demand it would be short-lived. It would, we think, create a wonderful short-term buying opportunity for investors in mining stocks and a good opportunity for 'hedged' copper producers such as Phelps Dodge to exit their short positions.
The longer-term risk is that the combination of a recovery in the US$ and a substantial slowdown in global growth will create a bearish set of supply/demand circomestances for copper and the other industrial metals. We expect that the copper price will exceed this year's high before the end of the decade, but, as appears to be the case with oil, it's quite possible that the industrial metals will experience cyclical bear markets over the coming 6-12 months.
In any case, regardless of what happens over the next several months it's important for investors to understand that the long-term bull markets in metals and the stocks of metal producers did not end earlier this year. Long-term bull markets don't end when the major stocks in the bull-market sector have valuations that are less than half the broad market's average valuation; they end after valuations in the bull-market sector reach huge premiums. Right now, the world's two largest miners of industrial metals -- BHP Billiton and Rio Tinto -- are being valued by the stock market at less than 10-times earnings; and even if we assume that the prices of industrial metals are going to be, on average, 30% lower over the coming year than they are right now, at their current share prices these companies will still earn enough money to keep their P/E ratios in single digits. Furthermore, many of the smaller metal-producing companies are trading at even lower valuations than the aforementioned majors.
In other words, although the stocks of industrial metal producers would almost certainly trade at lower levels in response to a 6-12 month downturn in the prices of the metals, there doesn't appear to be scope for them to trade a LOT lower. This is because current share prices already discount much lower metal prices. Investors in these stocks should therefore be wary about getting too bearish at this time. The time to have done some selling was earlier this year when prices were spiking upward in spectacular fashion, not now that almost all of the speculative enthusiasm has been wrung-out of the market.
On a related matter, if a significant economic slowdown is on the cards as far as the coming year is concerned then we are about to enter an extended period when gold-related investments will do much better than industrial-metal-related investments. Given that this IS our expectation (we perceive a significant economic slowdown to be the most likely intermediate-term outcome) we would emphasize the gold sector when making new investments. We would, however, maintain CORE positions in selected industrial metal shares, and if presented with the opportunity to buy a high-potential industrial metal share at a substantial discount to fair value we would seriously consider taking it.
One reason for maintaining core exposure to the industrial metals is that the long-term bull market is almost certainly intact (even if prices are lower in 6 months time, they will probably be a lot higher 2 years from now). Another is that we don't KNOW what the future has in store, so our current less-than-sanguine economic outlook might not necessarily be prescient. The best we can do is weigh the relevant evidence -- in the case of the economic outlook, the signals being generated by the most reliable leading indicators -- with the aim of determining the highest-probability outcome.
Unfortunately, the over-arching message currently being sent by leading economic signals is not definitive. The breakdowns in some commodities and the stocks of some major commodity producers might be signaling a substantial growth slowdown, but yield-spreads and credit spreads -- amongst the most reliable indicators of future economic performance -- are not YET warning that a 'rough patch' lies ahead. Furthermore, the performance of the broad stock market suggests that if there is going to be a slowdown it will be a minor one. In other words, it's too early to open up a can of gloom.
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If you can conceive it and believe it, you can achieve it. -Napoleon Hill
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 10/24/2006 : 19:52:02
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I am always reluctant to post the same thing in more than one topic area, but this information is worth repeating.
This, of course, is the condensed version.
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China in a Bull Shop
1) Unusual Length
……... We won’t know just how long China’s (or India’s or …) secular expansion lasts until it’s come to an end. What we do know is that if it looks like recent periods of above trend growth in the region, namely Japan and South Korea, it will last for at least 25-30 years. ……… Similar growth periods moving through mass industrialization in both Europe and North America had similar time frames. . …….
2) Unusual Strength
Another common concern is that the growth rates being experienced by China are so high that they must denote an overheating economy. Again, there is no evidence to support the idea that growth rates are unusually high, especially if one lops a percent or two off the “official” numbers, as most observers do.
China’s growth has averaged about 9% over the past 20 years………… other Asian countries managed the same feat. Japan grew at an annual rate of 8% for 30 years (1950-1980) and Hong Kong and South Korea managed averages of 7.7% and 8.1% respectively for over 35 years from 1960 until 1995. There is nothing “magical” about China’s performance. It is not out of line with its Asian neighbors or, for that matter, with North America during its late 19th - early 20th century industrialization.
3) Zero Sums
Basically, the zero-sum argument holds that any increase in commodity usage is merely a diversion of resources from other countries. In other words, China is acting as a giant assembly line, which is partially true, and most of the “usage” is simply parts and sub assemblies that are moved from other places to be fitted together and shipped out again.
………Yes, there is a lot of assembly and remanufacturing going on in China but that is not the main area of commodity consumption.
A boat load of DVD players or kid’s shoes does not contain a lot of metal.
Power lines, wiring, and sewer pipes do.
That is where the bulk of the consumption ends up.
It is not substitution; its addition. More to the point, it’s additions to infrastructure and durable goods.
4) It’s inherently unstable
This argument is based on concerns about economic imbalances and overinvestment. It’s another popular one with politicians which usually leads to them blaming the US Current Account deficit on “excess saving” elsewhere on the planet. Excess saving?
Although this argument sounds the silliest it’s ironically closest to the truth. …………. High levels of savings were the most consistent predictive data across all the economies that saw extended surges of growth in the past 50 years.
High savings levels that allow for high investment levels at a relatively low cost of capital are the secret to the success of one Asian tiger after another. All of the countries noted earlier in this article have and had extremely high levels of savings in relation to GDP. Most of them range from 30-40%It’s All About Savings……….
(Maybe the metals bubble isn’t about to burst after all.) |
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 10/25/2006 : 19:49:39
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I guess this fits in this topic section.
Metals downturn, or just bears talking trash?
“Subsequent developments have proved them wrong.”
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China boom is ‘exhilarating and frightening’
The China factor has played a key role in the economic and financial benefits flowing into Papua New Guinea as a result of record or near-record prices for crude oil, copper and gold.
Booming commodity prices in recent years has been due to China’s seemingly insatiable demand for its burgeoning economy and rapid industrial growth.
For a long while economists have been warning that China’s economy was overheating and that it would be forced to slow down with a hard landing likely if the government did not undertake some corrective action.
Subsequent developments have proved them wrong.
One of the earlier targets for analysts, particularly the US government and the International Monetary Fund, has been the relative value of China’s currency, the Yuan, which was deemed to be highly undervalued.
In July last year, China finally dropped its peg to the US dollar in a managed float that has seen the currency gain 2.6% since then with 7.9 Yuan now equivalent to US$1.
One of the biggest US concerns about an undervalued Yuan is the apparent inability for American manufacturers to compete with China, resulting in a huge and greatly widening trade surplus for China.
China, on its part, was using an undervalued Yuan just as Japan had done successfully for many years, to encourage greater exports and to underpin its strong economic growth.
The untying of the US-Yuan peg showed China has been paying heed to its critics but remained concerned about maintaining high rates of economic growth to build on its success in rescuing more than two hundred million people from poverty.
To cool its economy, Chinese authorities have this year implemented a series of measures to boost interest rates and dampen borrowing, but in spite of these changes, its economy still grew by 10.4% in the September quarter, down from 11.3% in the June quarter.
This was still the fastest rate of quarterly growth in the past decade.
Analysts with western financial institutions are now suggesting China may ease up on monetary tightening and look to the policy arena for further reforms.
Whatever happens, there appears to be no likelihood the behemoth Chinese economy,
now the fourth largest in the world,
is going to let up on its hectic pace of development, which is aided by massive inflows of foreign direct investment.
One reason why China is likely to allow the Yuan to increase further in value, hand in hand with restructuring of its long-troubled financial services sector, is the status of its foreign exchange reserves, which are about to hit US$1 trillion or K3.125 trillion.
It is hard to imagine such a sum of money – it equates to K520,000 for every man, woman and child in Papua New Guinea.
There were some concerns in May this year after a slide in commodity prices hit stock markets around the world but many analysts correctly perceived this as a market correction after very rapid share price increases.
The oil price has now slid from a record high of US$80 a barrel to less than US$60 a barrel, causing the Organization of Petroleum Exporting Countries (OPEC) to announce plans to cut production by 1.2 million barrels a day.
In view of prices that prevailed only a couple of years ago, this is just a sign of the greed caused by near record prices that eventually will encourage development of alternate fuels such as bio- diesel and ethanol.
Exploration for oil and gas will be stepped up and significant activity can be anticipated in the Papuan Gulf from around 2008 onwards.
There have been some fears that the twin deficits in the United States – a huge budget deficit and a burgeoning trade and services deficit – could spark recession that could also impact on China and other countries.
For the moment, this appears unlikely given the continuing strength of the US economy in a comparatively low inflation environment, and the China factor will continue to underpin high commodity prices for at least a couple more years.
China’s booming economy and double digit growth is generating an almost insatiable appetite for a variety of minerals and metals.
Rio Tinto, one of the world’s biggest copper miners with an interest in the huge deposits at Escondida in Chile and Grasberg in West Papua, has been a big beneficiary of an unprecedented four-fold increase in copper prices over the past five years.
Rio’s chief executive for copper and exploration, Tom Albanese, told a recent conference the big leap in copper prices was due largely to growth in Chinese demand.
“Since 2000, Chinese copper growth has generated 107% of the world copper growth,” he said, suggesting that in this period China’s copper usage was growing while consumption in the rest
of the world was declining.
At present China uses 22% of total world copper and mines only 5% locally.
The solid price increases has helped Ok Tedi, which is 82% PNG owned, to last year produce its first K1 billion profit with even better results likely this year.
The high prices should encourage Xtrata, as the new owner of Canada’s Falconbridge, to exercise its option to commence feasibility studies at the huge Frieda River copper-gold deposit in January.
It will assist Marengo to speed up work at its Yandera copper-gold prospect.
Steel is another industry pointing to China’s voracious appetite with demand rising by a massive 153% in the last five years
to 315 million tonnes, representing one fourth of all steel used worldwide.
The secretary general of the International Iron and Steel Institute, Ian Christmas, has described China’s pace of growth as “both exhilarating and frightening for the world steel industry”.
PNG has faced some of the cost pressures created by the surge in global steel demand, as evidenced by the much higher costs of building the proposed PNG gas pipeline to Australia.
While it is unable to benefit from the massive price increases for coking coal and iron ore, as Australia has done, PNG is on the threshold of becoming an exporter of nickel, used in the growing stainless steel market.
Once again the China factor, as well as recent industrial disruptions, has caused nickel prices this month to soar to US$30,750 a tonne compared with an average of about US$11,000 last year.
China’s Metallurgical Construction Company is scheduled to begin construction later this year on Highland Pacific’s Ramu nickel project and could, barring any unexpected turn in global economic fortunes, continue to enjoy exceptionally high prices if it comes on stream in 2009 as scheduled. |
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Coming Industrial Metals Downturn
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