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Commodity Super-Cycle and Decline

Are concerns about China overblown? – by Patrick Cairns (Mineweb.com – September 15, 2015)

http://www.mineweb.com/

The Chinese economy is in better shape than headlines suggest.

CAPE TOWN – In the wake of the recent market volatility a lot of the talk has been about the Chinese economy. Much has been made of how China is coming off the boil and may even be in some kind of crisis.

Headlines around the world tell a story. “The Chinese economy is on a slippery road to nowhere” was one in Australia, while MarketWatch carried the warning that “China’s economy may be in worse shape than people think”. The Wall Street Journal even ran an article under the headline: “A global recession may be brewing in China” and Forbes asked “Will China collapse?”.

The largely accepted narrative is that China’s economy is not only slowing, but also heading into a debt crisis. The big drop in Chinese stocks during August and the decision to devalue the yuan have been taken by many as confirmation that the economy is in big trouble.

However, this view is not universal. Although largely drowned out by the negative sentiment, a number of other headlines propose a different view of the situation.

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Nickel, aluminium expected to trade higher in mid-September – by Anne Lu (International Business Times – September 15, 2015)

http://www.ibtimes.com.au/

Markets research firm Angel Commodities said base metals nickel and aluminium would experience a price hike by the middle of this month due to various positive global cues. Nickel, for instance, would be highly affected by Indonesia’s decision to continue its ban on unprocessed metals.

“ We expect nickel prices to trade higher in September 15 as Indonesia decided to retain its export ban on nickel ore, contrary to media reports suggesting the country may relax curbs to prop up its slowing economy,” a representative from Angel told Commodity Online .

Aluminium, on the other hand, will get a price boost on production upgrade from a giant Russian bauxite producer.

“ We [also] expect aluminium prices to trade higher in September 15 as supply glut concerns will likely get a breather as Russia’s Rusal, the world’s top aluminium producer, is considering capacity cuts of 200,000 tonnes a year this year,” the firm added.

Earlier this year, Rusal executive said that bauxite producers across the globe are forced to either cut production or completely shut operations down due to the losses obtained from weak global prices.

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Rio Tinto CEO Sam Walsh still a China bull – by John Kehoe (Australian Financial Review – September 12, 2015)

http://www.afr.com/business/

The chief executive of global mining giant Rio Tinto, Sam Walsh, has expressed strong confidence in the Chinese government pulling “levers” to keep the economy on track, as he revealed that Rio’s internal economic measures for the nation were broadly in line with Beijing’s official estimates.

Mr Walsh admitted the world economy had become far more “volatile” and that potential “shocks” are in store for commodity markets, but was overall upbeat on China in the face of growing unease about its prospects.

Speaking in Washington on Friday, Mr Walsh pointed to reassurance from Chinese Premier Li Keqiang at the World Economic Forum on Thursday that China would avoid a hard landing and that Beijing will meet its 7 per cent growth target this year.

“Rio Tinto endorses that. We believe it will be around that,” Mr Walsh said, after delivering a speech at the US Chamber of Commerce.

“I am positive about China and I am positive about the Chinese leaders and what they can do in relation to pulling the levers they need to pull to keep the economy motoring,” he added.

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Political leadership vacuum exacerbates Brazil’s economic crisis – by Stephanie Nolen (Globe and Mail – September 14, 2015)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

RIO DE JANEIRO — When Standard & Poor’s downgraded Brazil’s sovereign debt last week, the news had a certain feeling of inevitability here – just the latest in a seemingly unending streak of terrible economic news.

The real closed at its lowest value in 13 years against the U.S. dollar on Friday, at just $0.258. That’s a drop of almost 40 per cent from a year ago and 60 per cent from 2011 levels. Meanwhile the GDP is expected to contract by 2.4 per cent this year, the worst recession in 25 years. Other investment ratings are expected to follow S&P to junk status imminently. Inflation is higher than it has been since the turn of the century. The jobless rate nearly doubled in the first five months of this year.

It is hard to imagine the situation could get much worse – and yet there is a sense here that it almost certainly will.

Consumer demand is in free fall, which will only drive unemployment higher, in an ugly spiral. The real is expected to continue its fall, with some analysts predicting it will drop by another 16 per cent. And rather than a knuckled-down government attempting to navigate the crisis, Brazil has a gaping leadership vacuum and a political stalemate.

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What the influencers are saying about commodities – by Frank Holmes (U.S. Investors) (Mineweb.com – September 9, 2015)

http://www.mineweb.com/

All the big names are making investments – Soros, Druckenmiller, Icahn and Faber.

A few legendary influencers in investing are making huge bets right now on commodities, an area that’s faced—and continues to face—some pretty strong headwinds. What are we to make of this?

I already shared with you that famed hedge fund manager Stanley Druckenmiller made a $323-million bet on gold, now the largest position in his family office fund. It’s also come to light that George Soros recently moved $2 million into coal producers Peabody Energy and Arch Coal. Meanwhile, activist investor Carl Icahn took an 8.5-percent position in copper miner Freeport-McMoRan, which we own.

My friend Marc Faber, the widely-respected Swiss investor and editor of the influential “Gloom, Boom & Doom Report,” is now plugging for the mining sector and precious metals. Speaking to Bloomberg TV last week, Faber claimed that investors are running low on safe assets and suggested they revisit mining companies:

If I had to turn anywhere where… the opportunity for large capital gains exists, and the downside is, in my opinion, limited, it would be the mining sectors, specifically precious metals and mining companies… like Freeport, Newmont, Barrick.

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First Steel, Now Copper: Rio Stays Optimistic on Chinese Growth – by Jasmine Ng (Bloomberg News – September 7, 2015)

http://www.bloomberg.com/

Rio Tinto Group isn’t just bullish about China’s steel demand, it’s also upbeat about copper use in the world’s biggest consumer.

Signs of improvement in China’s property market are boosting prospects for the metal, Jean-Sebastien Jacques, head of Rio’s copper and coal operations, said in an interview in Singapore. The government will also implement more stimulus measures if the world’s second-largest economy slows too much, he said.

Rio’s optimism stands out amid views from Glencore Plc that mining companies were wrong-footed on a slowdown in China, with demand getting tough to call. The country’s grappling with overcapacity, a downturn in property investment and a volatile stock market that threaten Premier Li Keqiang’s growth target of about 7 percent for this year.

Rio has a direct insight into the Chinese market through its Oyu Tolgoi operations in Mongolia, located north of the Chinese border, Jacques said.

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Hubris led to destruction of investors’ money by mining groups – by Kunal Bose (Business Standard – September 7, 2015)

http://www.business-standard.com/

The onset of boom led the world’s leading mining groups to be on a capital expenditure binge to dig out new mines

Inspired by one single factor of voracious Chinese appetite ranging from oil to all minerals used in making metals, the now-ended commodity boom began in 2003. The onset of boom led the world’s leading mining groups to be on a capital expenditure binge to dig out new mines.

But the slowdown of the world’s second largest economy, as Beijing turns focus from investment to consumer-led growth, gives the feeling that earlier, long years of high mineral prices supported by growing demand led miners to drink Chinese potion to reach iridescent highs.

Their thought then was Chinese demand would continue to grow at high rates far into the future to justify colossal investments in mines’ capacity building. Chinese growth has now downshifted to a level not seen in a quarter century and that is proving to be a hard awakening for miners from their hallucinatory past.

Not very long ago, mining chief executives thought their investment in dredging more and more iron ore from the earth stood no chance of going wrong, since China was expected to be a one billion tonne (bt) steel producer by 2030.

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Glencore Investors Force CEO Glasenberg to Prepare for Doomsday – by Javier Blas and Jesse Riseborough (Bloomberg News – September 8, 2015)

http://www.bloomberg.com/

After a breakfast meeting with a small group of hedge funds in New York last week, Glencore Plc Chief Executive Officer Ivan Glasenberg concluded that investors could no longer stomach his famously bullish outlook.

The meeting capped two weeks of discussions with shareholders from North America to Europe after the Swiss miner and trader reported a 56 percent decline in profit. His plan to trim Glencore’s $30 billion debt by 10 percent by the end of next year wasn’t enough to halt a plunge in the company’s market value, which has more than halved to about 17 billion pounds ($26 billion) this year. On Monday, the company announced a strategy to reduce debt much more quickly.

“This is definitely the first time you get the impression that shareholders are the most important voice in the room versus management,” Ben Davis, a mining analyst at Liberum Capital Ltd., said by phone from London. “Until now, a lot of the market has seen Ivan as the smartest guy in the room.”

The U-turn was unprecedented for the 58-year-old South African billionaire, who has run Glencore almost single-handedly from the sleepy lakeside Swiss city of Zug for a decade and a half.

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‘This market downturn is worse than ’08’ – Scotiabank – by Kip Keen (September 1, 2015)

http://www.mineweb.com/

Comparing this downturn with others in recent memory.

HALIFAX – The last major downturn in commodities – during the 2008/09 financial crisis – was the central focus of Scotiabank analyst Patricia Mohr’s latest missive on metals and energy commodities.

Mohr – Scotiabank’s commodities guru – noted that Scotiabank’s commodities index, comprising, energy, metals, and fertilizers, dropped below levels last seen during the relatively brief rout in commodities seven years ago.

“The All Items Index is now well below the bottom touched during the ‘Great Recession’,” Mohr pointed out in a recent report.

“While many commodity prices remain above 2008/09 recessionary lows, current weakness is broader based and reflects a prolonged period of sub-par global growth.”

In particular, she highlights the latest weakness in oil prices amid declining metal prices. “An ongoing battle for market share in oil — recently exacerbated by heightened concern over a further slowing in the Chinese economy — combined with consternation over possible Fed monetary policy tightening in September have largely accounted for commodity price weakness.”

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COLUMN – Weak China PMIs won’t automatically lower commodity imports – by Clyde Russell (Reuters India – September 1, 2015)

http://in.reuters.com/

China’s various purchasing managers’ indexes gather significant attention as indicators of the health of the world’s second-biggest economy, but they are less useful as a predictor of commodity imports.

The official Purchasing Managers’ Index (PMI) fell to a 3-year low of 49.7 in August, in line with market expectations and down from a reading of 50 in July.

The drop below the 50-level that separates expansion from contraction will be viewed as another sign that China is struggling for growth momentum, and raises further questions over whether 2015’s official target of a 7-percent increase in gross domestic product can be realised.

The Caixin/Markit PMI dropped to 47.3 in August, the weakest since 2009 and down from 47.8 in July.

The official PMI focuses on large, state-controlled companies, while the Caixin/Markit measure encompasses more small- and medium-sized enterprises.

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Editorial: Why the commodities super cycle was a myth (Financial Times – August 31, 2015)

http://www.ft.com/

Falling prices show the world is not running out of resources

In 1980, the economist Julian Simon challenged doom-mongering biologist Paul Ehrlich to a bet that the prices of any five metals would be lower in 10 years’ time. He won, and made his point: over the long run, technological progress means commodity prices are likely to fall in real terms.

From the early 2000s, many investors forgot that lesson. The idea that there are decades-long “super-cycles” in commodity prices has some respectability: a 2012 paper by Bilge Erten of the UN and José Antonio Ocampo of Columbia University found evidence for four such cycles during the period 1865-2009. But in the bastardised form that became popular in the 2000s , the concept gained less honourable currency, as a story that commodities were a one-way bet upwards.

With oil down about 57 per cent from its peak last June, and copper and iron ore down about 50 and 70 per cent respectively from their peaks in early 2011, it has become clear that story was profoundly misleading. Whether or not the supercycle exists, the regular old cycle definitely does, and there is nothing very super about it at all.

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Top miners wrestle with $202b of debt as profits shrink – by Jesse Riseborough and Thomas Biesheuvel (Australian Financial Review – August 28, 2015)

http://www.afr.com/business/

As tumbling commodity prices erode earnings for the world’s biggest miners, investors are focusing on how the industry will cope with its near record levels of debt. It’s looking increasingly ugly.

While overall borrowings from the 10-largest mining companies fell slightly last year, it’s still close to an all-time high of $US145 billion ($202 billion). At the same time, profits are expected to drop to a six-year low, according to Bloomberg estimates, hampering their ability the pay down the debt pile.

Against a backdrop of a deteriorating outlook for economic growth in China, the industry’s biggest customer, investors have retreated from the world’s largest producers.

“The debt pigeons are coming home to roost at many heavily indebted mining companies,” analysts at Investec wrote in a note Wednesday. “The heady days of the super-cycle were fuelled by cheap debt, which was eagerly taken on by mining companies in order to buy (overpriced) assets or to build new mines.”

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Zimbabwe’s Mugabe seeks help from West as growth slows across Africa – by Geoffrey York (Globe and Mail – August 27, 2015)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

JOHANNESBURG – After furiously spitting fire at the West for decades, Robert Mugabe abruptly changed his tone this week. With his economy in tatters and unemployment soaring, the Zimbabwean autocrat now wants help from Western creditors and investors.

“My government values re-engagement of the Western world in the Zimbabwe economy,” Mr. Mugabe told the Zimbabwean Parliament on Tuesday in an unusually conciliatory speech. He pledged to “repeal all laws that hamper business,” and he called for stronger relations with the World Bank and the International Monetary Fund.

The 91-year-old President can’t afford his traditional disdain for the West any more. In recent weeks, more than 20,000 workers have lost their jobs in Zimbabwe and its earlier 3.2-per-cent economic growth forecast for 2015 has been cut to just 1.5 per cent.

Zimbabwe is just one of many African economies suffering from bleak economic news this month.

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Global economy now on verge of perfect storm – by Gwynne Dyer (London Free Press – August 27, 2015)

http://www.lfpress.com/

Good things come in threes, but so do bad things. Especially in economies. The financial crisis everybody has been waiting for is a “hard landing” of the Chinese economy, the world’s second-biggest. It now seems to have arrived, though the Chinese government is still denying it.

The second crisis is a credit crunch sabotaging economic growth in almost all developing countries except India. Since commodity prices have collapsed, their dollar earnings from exports have collapsed, and in many cases their currencies have fallen to historic lows against the dollar.

A third crisis is looming in the developed economies of Europe, North America and Japan, which can see another recession on the horizon before they have even fully recovered from the effects of the banking crash of 2007-08.

These crises are all connected. When the huge mistakes and misdeeds of American and European banks caused the Great Recession of 2008, China escaped the low growth and high unemployment that hurt Western countries by flooding its economy with cheap credit. Between 2007 and 2014 total debt in China increased fourfold.

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COLUMN-Worried about China? Ask a metals trader – by Andy Home (Reuters U.S. – August 26, 2015)

http://www.reuters.com/

Aug 26 (Reuters) – Everyone’s worried about China. Collective concern about what exactly is happening in the world’s second-largest economy is roiling all parts of the financial universe.

Industrial metal markets have not been immune and the price of copper, viewed by many investors as a proxy for industrial activity, hit a fresh six-year low of $4,855 per tonne on Monday.

But while the rest of the world seems shocked that all is not as it should be in the industrial powerhouse that is China, metal traders have been grappling all year with the implications of a Chinese slowdown.

The omens were there as early as January, when London copper prices fell almost 12 percent in two days after a bear attack led by Chinese funds. They were expressing what with hindsight looks a good call on the impact on Chinese demand of weakness in key metallic parts of the economy such as construction, automotive and manufacturing.

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