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Commodity Super-Cycle and Decline

Commodity slump could finally bring balance to Canada’s economy – Hamid Faruqee, Lusine Lusinyan and Andrea Pescatori (Globe and Mail – February 3, 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.

Since last fall, oil prices have plunged 50 per cent and nervousness is running high about a slowing Canadian economy. Lower oil prices will unambiguously hurt growth and the latest data on GDP point in that direction. About one-quarter of Canada’s exports and private investment (excluding housing) are tied to the energy sector that, itself, accounts for about 10 per cent of GDP.

Weakness in the oil and gas sector could also spill over to the wider economy. In response, the Bank of Canada surprised markets on January 21 and cut its policy rate – which had been on hold at 1 per cent since September, 2010. The currency fell and interest rates eased. The loonie currently is near a 6-year low against the U.S. dollar. So is the economy in trouble?

In the IMF’s annual report on Canada released last week, forecasts for growth have been marked down. A further downgrade is likely to come given that oil prices have fallen further since the forecasts were made. The oil shock has been noteworthy in terms of its nature, size and sharpness – perhaps, best resembling 1986’s supply-driven price decline, when Canada was not a large oil exporter.

So it is hard to know with high confidence just how deep the effects might be. What is clear is that the energy sector is on the front lines and will take a hit. Recent announcements from the oil industry confirm plans for layoffs and scaling back investment in the near term.

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Metals supercycle remains intact, says Bay Street analyst Ray Goldie – by Peter Kennedy (Stockhouse.com – January 28, 2015)

http://www.stockhouse.com/

One of Canada’s most seasoned commodities analysts says the long term outlook is bright for key base metals, including nickel, copper and zinc.

Raymond Goldie, Vice-President, Commodity Economics with Salman Partners was in Vancouver Tuesday to talk about the “super cycle,” a term that was often used in the early part of this century when metal prices kept going up in a seemingly relentless fashion.

“We have been in a super cycle since 2004,’’ Goldie told the CFA Society of Vancouver during a lunchtime speech.

But even though the price of key metals has weakened in the past two years, it doesn’t mean the current supercycle is over. Rather it is caught in a “mid-cycle trough,” he said. “The rebound lies ahead.”

The veteran Bay Street analyst, who was widely known for his coverage of iconic Canadian mining companies like Falconbridge and Inco Ltd. before they were swallowed up in the globalization process, said the near term outlook is brightest for nickel.

He said supply is constrained by an Indonesian ban on exports of raw ore, which is affecting China’s ability to produce nickel pig iron, a low grade ferronickel invented in China as a cheap alternative to pure nickel for the production of stainless steel.

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Mining Deals Seen Bouncing From Lowest in Decade Last Year – by Firat Kayakiran (Bloomberg News – January 27, 2015)

http://www.bloomberg.com/

(Bloomberg) — Mining mergers and acquisitions are set to bounce after declining to the lowest in a decade last year as companies shied away from large deals and private-equity funds were slow to complete transactions, Ernst & Young LLP said.

The value of mining mergers and acquisitions fell 49 percent to $44.6 billion, the lowest since 2004, E&Y said in a report today. The number of deals declined 23 percent to 544. That excludes Glencore Plc’s takeover of Xstrata Plc in 2013.

“We expect an uptick in 2015; we expect to see more deals from private capital,” Lee Downham, global mining transaction chief at E&Y in London, said in a phone interview. “But I don’t think there will be $10 billion plus or $20 billion plus type of deals happening. It will still be a gradual entry into the market.”

Former bankers and executives including Mick Davis, a past Xstrata chief executive officer, Barrick Gold Corp.’s ex-CEO Aaron Regent and former JPMorgan Chase & Co. banker Lloyd Pengilly have set up companies and funds to bid for assets put up for sale by the world’s biggest mining companies.

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PRESS RELEASE: Most Commodity Prices Expected to Continue Declining in 2015, in Rare Occurrence, Says WB Report

Click here for the report: http://www.worldbank.org/content/dam/Worldbank/GEP/GEPcommodities/GEP2015a_commodity_Jan2015.pdf

WASHINGTON, January 22, 2015 – This year may well see a rare occurrence for world commodity markets – a decline in all nine key commodity price indices, says the World Bank’s latest Commodity Markets Outlook, released today.

While oil prices have seen the most dramatic decline, the third largest since World War II, other commodities have also been gradually weakening in recent months. And this broad-based weakness is expected to continue throughout 2015, before beginning a modest turn around in 2016.

In oil markets, a “perfect storm” of conditions has led to a plunge in prices since mid-2014: growth in unconventional oil production, decline in demand, appreciation of the U.S. dollar, receding geopolitical risks, and a major redirection toward maintaining market share rather than targeting prices by the world’s oil cartel, Organization of the Petroleum Exporting Countries (OPEC). Oil prices have dropped 55 percent in seven months, from the most recent high of $108 per barrel in mid-June 2014 to $47 two days ago. Should the current slide continue, it could surpass the previous records of a 7-month decline of 67 percent, set in 1985/86, and a 75 percent drop in 2008.

In addition, the World Bank’s three industrial commodity price indices – energy, metals and minerals, and agricultural raw materials – experienced near identical declines between early 2011 and the end of 2014, of more than 35 percent each, and will continue to contract this year.

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There is no green energy without mining copper: Kovacevic – by Tommy Humphreys (CEO.ca – January 14, 2015)

 

http://ceo.ca/

Electrician turned mining entrepreneur Gianni Kovacevic has two important reminders for investors bailing on the copper sector this morning.

The first is that no force in the world can prevent the ascent of man. Over the next decade, another 500 million people will be lifted from abject poverty, Kovacevic says, putting incredible demand on natural resources, especially copper.

“We in the West have wants, they in emerging markets have needs.” The entrepreneur says 100% of people in poor communities are willing to pay for electricity. His second message is for nature-lovers to wake up about renewable energy and join him as a self-proclaimed “Realistic Environmentalist.”

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GUIDELINES FOR EXPLOITING NATURAL RESOURCE WEALTH – by Rick van der Ploeg (University of Oxford – December 2013)

 http://www.oxcarre.ox.ac.uk/

I. Introduction

What is the wealth of a nation? One way of looking at it is that it consists of the total assets owned by citizens, businesses and government of a particular country minus all the liabilities of these parties. The net financial claims such as shares, bonds, commodities owned by the nation are certainly part of a nation’s net wealth, provided one is careful to net out government bonds owned by own citizens. From an
accounting point of view, the year-to-year change in net financial claims must correspond to the current account of the nation.

Hence, if the nation produces more than it consumes or exports more than it imports and earns interest income from abroad, its current account will be positive and the nation will be getting richer in terms of the net financial claims held on the rest of the world. We will refer to this as the net financial wealth held overseas.

But this is not all what determines the wealth of the nation. The wealth of the nation also consists of physical capital, natural capital, human capital, and its creative wealth. Physical capital consists of factories including machineries and transport vehicles, but also the physical infrastructure (irrespective of whether it is provided publically or privately) of a country. Human capital is defined as the earning power of the working population of a nation and corresponds to the present discounted value of all future wageincome that can be earned in future years by the working population (Hamilton and Liu, this issue).

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COLUMN-China 2014 growth the template for years to come – by Clyde Russell (Reuters U.S. – January 20, 2015)

 http://www.reuters.com/

LAUNCESTON, Australia, Jan 20 (Reuters) – The important thing from China’s economic deluge isn’t that fourth quarter growth was slightly higher than expected, or even that growth over the whole of 2014 was the weakest in 24 years.

These are merely the headline grabbers. What really matters is that 2014 provided the template for what China’s economy is going to look like in the next decade.

The trends that started to come to fore in the past year are likely to continue, and these include an economy less reliant on export-led manufacturing, slower growth in commodity consumption and imports and a lesser role for state stimulus spending. There will be those who bemoan the slower growth, having grown accustomed to China’s extended and rapid expansion over the past three decades.

However, a gradual slowing of the Chinese growth rate has to be seen as an overall positive, lowering the risk of creating unsustainable bubbles in the economy and transitioning the world’s most populous nation from the source of the world’s cheap labour to being the engine of middle-class consumerism.

Fourth-quarter gross domestic product (GDP) expanded 7.3 percent, above expectations for a gain of 7.2 percent and matching the third quarter number, according to official data released Tuesday.

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Mining sector will find reward by addressing risk – by Simon Rees (MiningWeekly.com – January 16, 2015)

http://www.miningweekly.com/page/americas-home

TORONTO (miningweekly.com) – Consider the resource supercycle; it was a once-in-a-generation event driven by China becoming the world’s workshop. The country’s demand for commodities seemed insatiable and pushed many metal and mineral prices to historic highs.

The mantra for most mining seniors became “big is beautiful” and their mergers and acquisition (M&A) activity was soon geared towards fulfilling this.

Today, the supercycle is on hiatus and subdued prices are likely to last for some time to come. The industry continues to clean out its Augean Stables and, just like the Herculean labour, the task has been both messy and necessary, with the spate of write-downs, divestments and spin-offs reflecting this.

Compounding matters are the ongoing economic headwinds, the unnerving volatility and the ability for some prices to sink still further. For example, the iron-ore sector continues to struggle after the price plunge during the second half of 2014.

Aside from cutting costs and reducing cash burn, the seniors are also focusing on improving their productivity and their competitive edge. This was identified as the number one issue in multinational professional services firm EY’s ‘Business risks facing mining and metals 2014 to 2015’.

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India on brink of “quantum leap”, Modi tells investors – by RUPAM JAIN NAIR and AMAN SHAH (Reuters India – January 11, 2015)

http://in.reuters.com/

GANDHINAGAR – (Reuters) – Prime Minister Narendra Modi promised on Sunday to pursue predictable policies and ensure stable taxes, in a speech that sought to address concerns for foreign investors in Asia’s third-largest economy.

U.S. Secretary of State John Kerry led a roll call of leaders, including U.N. Secretary General Ban Ki-moon and World Bank head Jim Yong Kim, converging on Modi’s home town of Gandhinagar for the Vibrant Gujarat business summit. U.S. President Barack Obama visits India later this month.

Eight months into Modi’s rule, his failure to lift the economy from its longest growth slowdown in a generation has raised questions about how much substance there is behind his promise of “red carpet, not red tape”.

“We’re trying to complete the circle of economic reforms speedily,” Modi told the event that he founded when he was chief minister of the industrial state.

“We are also keen to see that our policies are predictable. We’re clear that our tax regime should be stable,” Modi said, speaking in English but making the occasional aside in Hindi.

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BRICs Will Be Cut to ICs if Brazil and Russia Don’t Shape Up, Warns Phrasemaker (Bloomberg News – January 9, 2015)

http://www.bloomberg.com/

Brazil and Russia’s membership of the BRICs may expire by the end of this decade if they fail to revive their flagging economies, according to Jim O’Neill, the former Goldman Sachs Group Inc. chief economist who coined the acronym.

Asked if he would still group Brazil, Russia, India and China together as emerging market powerhouses as he did in 2001, O’Neill said in an e-mail “I might be tempted to call it just ’IC’ or if the next three years are the same as the last for Brazil and Russia I might in 2019!!”

The BRIC grouping will be dragged down by a 1.8 percent contraction in Russia and less than 1 percent expansion in Brazil, according to the median estimate of economists surveyed by Bloomberg News. China is seen growing 7 percent and India 5.5 percent.

The BRICs were still booming as recently as 2007 with Russia expanding 8.5 percent and Brazil in excess of 6 percent that year. The bull market in commodities that helped propel growth in those nations has since ended, while Russia has been battered by sanctions linked to the crisis in Ukraine and Brazil has grappled with an unprecedented corruption scandal involving its state-owned oil company.

“It is tough for the BRIC countries to all repeat their remarkable growth rates” of the first decade of this century, said O’Neill, a Bloomberg View columnist and former chairman of Goldman Sachs Asset Management International.

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China’s Big Year Ahead – by Jim O’Neill (Bloomberg News – January 7, 2015)

http://www.bloombergview.com/

Halfway through a decade in which China set out to rebalance its economy, it is poised to drastically enlarge its role in the world. Let me explain why.

Back at the start of the decade, I made certain assumptions about how the so-called BRIC economies — Brazil, Russia, India and China — would perform in the 10 years ahead. Five years on, China is the only one of the four to have either met or possibly slightly surpassed my expectations.

Assuming that China’s soon-to-be-published fourth-quarter gross domestic product number will come in at or close to 7.3 percent, as many experts assume, then from 2011 to 2014, China will have averaged real GDP growth of just less than 8 percent. I had assumed it would be 7.5 percent for the full decade (as did Chinese leaders back in 2011), and China could achieve this if its economy continues to grow by 7 percent for the next five years.

If so, it will have become a $10 trillion economy in current nominal U.S. dollars, well more than half the size of the U.S. (probably even bigger, adjusting for purchasing power), twice the size of Japan, bigger than Germany, France and Italy put together and not far off one and half times the size of the other three BRIC economies put together.

Brazil and Russia, for their part, have significantly disappointed my expectations. Indeed, their economic performance supports skeptics of their long-term potential, who attributed earlier growth primarily to high commodity prices. India also disappointed, but its growth rate accelerated in 2014.

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Slowdown in China Bruises Economy in Latin America – by Eduardo Porter (New York Times – December 16, 2014)

http://www.nytimes.com/

SANTIAGO, Chile — Few people are as intensely worried about the slowing Chinese economy as Latin Americans. Not only does China buy nearly 40 percent of Chile’s copper, but its once-insatiable demand helped push copper prices from $1 to $4 a pound.

Meanwhile, Beijing plowed billions into Peruvian mines and fisheries and spent billions more buying soybeans from Argentina and Brazil. And it propped up the Venezuelan government to the tune of $50 billion in loans, to be paid in shipments of oil.

China’s voracious hunger for Latin America’s raw materials fueled the region’s most prosperous decade since the 1970s. It filled government coffers and helped halve the region’s poverty rate.

That era is over. For policy makers gathered here last week for the International Monetary Fund’s conference on challenges to Latin America’s prosperity, there seemed to be no more clear and present danger than China’s slowdown.

“The commodity boom allowed governments and companies to avoid hard choices,” Andrés Velasco, Chile’s finance minister from 2006 to 2010, told me. “For goodness’ sake even Argentina grew by 5 to 6 percent per year for almost a decade.”

Copper is back under $3. As commodity prices continue to swoon, driven in large part by China’s weaker demand, the going will get much tougher.

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The Chinese Century – by Joseph E. Stiglitz (Vanity Fair – January 2015)

http://www.vanityfair.com/

Without fanfare—indeed, with some misgivings about its new status—China has just overtaken the United States as the world’s largest economy. This is, and should be, a wake-up call—but not the kind most Americans might imagine.

When the history of 2014 is written, it will take note of a large fact that has received little attention: 2014 was the last year in which the United States could claim to be the world’s largest economic power. China enters 2015 in the top position, where it will likely remain for a very long time, if not forever. In doing so, it returns to the position it held through most of human history.

Comparing the gross domestic product of different economies is very difficult. Technical committees come up with estimates, based on the best judgments possible, of what are called “purchasing-power parities,” which enable the comparison of incomes in various countries. These shouldn’t be taken as precise numbers, but they do provide a good basis for assessing the relative size of different economies. Early in 2014, the body that conducts these international assessments—the World Bank’s International Comparison Program—came out with new numbers. (The complexity of the task is such that there have been only three reports in 20 years.)

The latest assessment, released last spring, was more contentious and, in some ways, more momentous than those in previous years. It was more contentious precisely because it was more momentous: the new numbers showed that China would become the world’s largest economy far sooner than anyone had expected—it was on track to do so before the end of 2014.

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After conquering iron ore, BHP and Rio move to dominate in copper – by James Regan (Yahoo Finance/Reuters – December 14, 2014)

http://finance.yahoo.com/

SYDNEY, Dec 15 (Reuters) – Rio Tinto and BHP Billiton are amassing vast copper holdings in a push to capture a greater chunk of the $140 billion world market, apparently aiming to squeeze out high-cost producers just as they did in the global iron ore business.

Separately and in joint ventures, Rio and BHP intend to mine millions of additional tonnes of copper, despite seeing an oversupplied market for the next few years.

“For both companies, this is about wielding the greatest influence possible over the global marketplace,” said Gavin Wendt, senior resources analyst for Sydney-based consultants MineLife.

“Having said that, unlike in the highly concentrated iron ore space where the focus is squarely on one market owned in large part by Rio and BHP – China, copper is sold much more widely, leaving room for smaller producers to stay in the game,” Wendt said.

Several smaller producers contacted by Reuters declined to comment, saying it was too early to gauge the impact of the expansions. There have been no suggestions that BHP and Rio are working in concert to seize overriding control of global copper supply.

A worldwide supply surplus of 300,000 tonnes is forecast in 2015 by Australia’s Bureau of Resource and Energy Economics, equivalent to half a year’s output by South Korea.

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Germany hopes to ‘beat China with CETA’ in race for raw materials – by Dario Sarmadi (Euractiv.com – December 10, 2014)

http://www.euractiv.com/

On many issues, the free trade agreement between the EU and Canada is caught in the crossfire. But if the agreement fails, Europe is likely to lose the race for economically essential raw materials, analysts in Germany and Canada predict. EurActiv Germany reports.

Although the final text of the free trade agreement between the EU and Canada has been set for over one month now, critics are not giving up.

Among them is the organisation Campact, campaigning against the controversial arbitration courts and putting pressure on national parliaments to have CETA rejected in its current form. But Europe’s politicians see CETA as the beginning of a new era.

By removing trade barriers, the European Commission is hoping for €12 billion in additional growth. And industry also has high expectations for the measure; Canadian raw materials are particularly important for Germany’s automotive, chemical and high-tech industries.

“Where do the batteries for our electric cars come from? What about the nickel for our airplanes? Demand for critical raw materials is growing and that is why CETA is so essential,” explained Tim Aiken, CEO of the Nickel Institute, at the EurActiv Europe+Canada workshop last week. The Nickel Institute represents the combined interests of Nickel producers worldwide.

At the same time, Aiken warned against China, the sleeping giant seeking to challenge Western dominance in the competition for raw materials, and the fastest-growing economic power in the world.

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