Twitter

Commodity Super-Cycle and Decline

Commodities under pressure as China continues economic realignment – Simon Rees (MiningWeekly.com – October 9, 2014)

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

TORONTO (miningweekly.com) – Commodity prices will continue to face near-term challenges that are linked to the dip in Chinese growth. However, support is likely to come from the country’s new economic agenda, Scotiabank VP and commodity market specialist Patricia Mohr told attendees at the recent Global Chinese Financial Forum.

Gold will come under greater pressure as the US recovery gathers pace, while some opportunities are apparent in base metals, particularly with zinc. “In addition, because of the tremendous expansion in US and Canadian oil and gas production, there are some excellent prospects in the pipeline and railways sectors,” Mohr said.

NEW ORDER

China dominates the global base metals market, accounting for 46% of global demand. Given this, the country’s economic fortunes are closely monitored, with any dip in growth potentially representative of a reduced metals uptake. Chinese gross domestic product (GDP) growth for 2014 will be over 7%, which compares with 7.7% in 2013, Mohr said.

In the long term, support for commodities will come from China’s new economic agenda that was born out of a leadership change in 2013. One of the agenda’s central goals is to spur greater urbanisation to underpin growth and boost further infrastructure investment.

Read more

New report finds mining industry poorly prepared for the demographic time bomb – by Will Coetzer (Stratum International – October 3, 2014)

http://www.stratum-international.com/

Stratum International’s latest research report suggests the mining industry recognises the threat of forthcoming demographic changes but is not well-prepared for the potential impact on future leadership. The reasons are complex and sometimes it’s about short-term survival rather than complacency. But those who can should start to prepare now.

The Demographic Time Bomb in Mining, published today (3 October 2014) is a new research report from Stratum International, based on the results of a survey of more than 900 mining professionals. The report considers the impact of forthcoming demographic changes in the industry from the perspective of leadership and succession strategies, and finds the sector has work to do to secure the next generation of leaders.

Several respondents made the point that for some firms – particularly juniors and mid-tiers, short-term survival is the priority in the current economic environment. So it is unsurprising that long-term leadership needs are not currently troubling them.

Even taking this into account, the findings suggest more could be done in many companies to ensure the leadership of the organisation will be in safe hands in the future. In fact only 1% of the 900 respondents believe the mining industry is well prepared for the demographic changes ahead.

Nearly four fifths believe the industry is completely or somewhat unprepared. This rises to nearly nine out of ten of board executives, who arguably have the most power to put appropriate plans in place.

Read more

COLUMN-Time to buy commodities? Maybe, but not the old ways – by Clyde Russell (Reuters U.K. – October 6, 2014)

http://uk.reuters.com/

LONDON, Oct 6 (Reuters) – Crazy or brave? That might be the most logical thought if anybody told you now was a good time to invest in commodities, given the sharp declines in the main indexes in the past few months.

But that’s exactly what the overwhelming majority of fund managers and bankers were advocating at last week’s World Commodities Week conference in London.

Their optimism was in contrast to the clutch of analysts who presented at the meeting, who generally reinforced the current bearish theme by pointing to softness in demand in top importer China, as well as plentiful supply for many commodities.

The fund managers and bankers do have more than just blind optimism (and a desire for fresh funds to manage), and can point to a raft of reasons why they believe prices are near a bottom.

But the question remains as to who has the most compelling argument, and whether institutional and other major investors are prepared to buy into an asset class that most would view as having a disappointing recent track record.

While commodities had a good start to the year, outperforming equities, they have since struggled, with the Bloomberg Commodity Index down 13.2 percent from its 2014 peak in late April, and the S&P GSCI 14.9 percent weaker from its June high.

Read more

Investors Head for Exit as Commodities Extend Slump – by Luzi Ann Javier (Bloomberg News – September 30, 2014)

http://www.bloomberg.com/

Investors are betting that the worst isn’t over for commodity prices that already are the lowest in five years.

About $907 million was pulled from U.S. exchange-traded products backed by raw materials this month, the most since April, data compiled by Bloomberg show. Expanding surpluses, a surging dollar and slowing growth in China helped send the Bloomberg Commodity Index to the lowest since 2009, reversing first-half gains fueled by a polar vortex and dead pigs in the U.S., and escalating tensions in Ukraine and the Middle East.

Banks from Societe Generale SA to Citigroup Inc. expect the losses for many raw material to continue. U.S. farmers are collecting the biggest corn and soybean crops ever, and global stockpiles of nickel are at an all-time high. Americans are producing the most oil since 1986, compounding a global surplus. China, the largest consumer of grains, energy and metals, is poised for its slowest expansion in two decades.

“The commodity complex as a whole did really well for a long time, and as a result, a lot of money poured in across the board and created oversupply and over-capacity,” said Peter Sorrentino, a Cincinnati-based fund manager who helps oversee $1.8 billion at Huntington Asset Advisors Inc. “It definitely has been an asset class that people have been withdrawing money from. Hedge funds congregate in momentum trades, and over the last two years, commodities have been sources of cash.”

Read more

Commodity super cycle turning downward, says RBI – by Rajesh Bhayani (Business Standard – September 30, 2014)

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

In latest commodity super-cycle, inflation-adjusted prices of commodities rose 60-500% between 1999 and 2010

Mumbai – Global commodities prices have already reached inflexion points and are headed downward, according to the RBI (Reserve Bank of India). The central bank, as a part of its monetary policy announced today, published the analysis based on the last five decades’ data of prices of commodity both energy and non-energy, to show that commodity super cycle may be turning downwards.

Commodity super-cycles are long and rapid rises in prices across commodities, propelled by persistent increases in demand that outstrip supply. The policy statement said that, “since 1894, four super-cycles have been identified, with the last one starting from the late 1990s and attributed to rapid and sustained industrialisation and urbanisation in China and other emerging economies”.

During this latest commodity super-cycle, inflation-adjusted prices of commodities rose in the range of 60 to 500 per cent between 1999 and 2010, the year in which they peaked. Oil price rose by 467 per cent, metals by 202 per cent and agricultural prices by 77 per cent — the largest price increases among all the four commodity super-cycles. The sharp rise in prices are after adjusting for inflation and hence the issue of whether the super cycle is ending arises.

Nic Brown, Head of Commodities Research at London based Natixis said, “We would agree that weak global growth (“stable but secularly lower levels of growth”) is one of the key characteristics behind the relative weakness of commodity prices over the past few years.”

Read more

COLUMN-The real problem for commodity nations is currency, not prices – by Clyde Russell (Reuters India – September 15, 2014)

http://in.reuters.com/

LAUNCESTON, Australia, Sept 15 (Reuters) – The pressing problem for some resource-rich countries isn’t that prices for commodities have dropped sharply, it’s that their currencies haven’t dropped in tandem.

The plight of Australia and Indonesia, the major commodity exporters in the Asia-Pacific region, is driven home by the fact that their currencies have actually gained against the U.S. dollar this year, even as commodity prices have plunged.

This is a body blow to earnings in those countries and defies both economic logic and precedent, which should have seen the Australian dollar and Indonesian rupiah start to drop as revenue from resource exports declined.

While the Australian dollar did slip almost 4 U.S. cents last week to trade around 90 cents early on Monday, it is still stronger than it was at the end of last year, when it fetched 89.03 cents. In contrast, Australia’s two major export earners, iron ore and coal, have dropped dramatically. Spot Asian iron ore .IO62-CNI=SI has fallen 39 percent so far this year, hitting $82 a tonne on Sept. 12, a five-year low.

Thermal coal at Australia’s Newcastle Port, an Asian benchmark, dropped to $66.07 a tonne in the week ended Sept. 5, a five-year low and down 23 percent from the start of the year. What is clear is that commodity currencies have failed to respond this year to weaker commodity prices in the way they did in the 2008 global recession.

Read more

Will We Have Enough New Mines? – by Henry Bonner (Daily Resource Hunter.com – September 3, 2014)

http://dailyresourcehunter.com/

As metals prices boomed during the last decade, small explorers and big miners spent billions of shareholder dollars seeking new deposits. Investors wanted the high rewards of a discovery as metals soared in price. At $1,900 per ounce of gold, even mediocre finds could make money.

Richard Schodde, of MinEx Consulting, has studied past exploration cycles in detail. He says we are seeing a tightening of the sector, as the availability of capital has plummeted. Costs of exploration are coming down as companies cut back on high-salaried employees and reduce operating costs.

The amount of money spent exploring rose during the last decade from $2.9 in 2002 to $29.4 billion in 2012, before falling back to $21 billion in 2013 says Mr. Schodde. Over the time-frame 2002-12 $136 billion was spent world-wide on non-bulk exploration, resulting in 647 significant new discoveries, of which only 18 are considered to be ‘top tier.’

Despite a 10-fold increase in the amount of money spent on exploration over the last decade, the amount of new discoveries was relatively unchanged – meaning that more money was spent per new discovery. Mr. Schodde explains that as more money went into the sector, expenses related to exploring went up. Geologists and engineers demanded higher salaries. Drilling equipment and operators became more expensive, and money was spent liberally on general and administrative expenses.

Read more

Glencore to Buy Back $1 Billion of Stock as Profit Gains – by Jesse Riseborough (Bloomberg News – August 20, 2014)

http://www.bloomberg.com/

Glencore Plc (GLEN)’s billionaire Chief Executive Officer Ivan Glasenberg underscored his belief in the longevity of the global commodities boom by beating his biggest rivals in handing out surplus cash to investors.

Glencore, the third-largest miner by market value, today announced a $1 billion share buyback after first-half profit gained 8 percent on higher production. Investors in BHP Billiton Ltd. (BHP) sent the stock down the most in more than three years in London yesterday after the world’s biggest mining company chose to retain cash because of weaker commodity prices.

Global mining investors have been demanding greater returns following a period marked by failed acquisitions and spending on mine expansions that flooded metals markets. After a decade of explosive price gains fueled by Chinese demand, often defined as the commodities supercycle, mining companies are contending with slower growth by spurning mergers and cutting costs.

“The supercycle ain’t over, China is still buying, demand for commodities hasn’t tapered off, it’s even higher than it’s ever been,” Glasenberg said today in an interview. “The demand is pretty good. We’ll grow. We may do acquisitions where you’re not creating more supply in the market.”

Read more

Africa’s middle-class boom is real, study shows – and it’s gaining speed – by Geoffrey York (Globe and Mail – August 20, 2014)

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 — The rise in Africa’s middle class has been over-hyped in recent years, but it is still a genuine phenomenon that is generating huge commercial and political opportunities, a new study says.

The analysis released on Tuesday by Standard Bank, a South African bank with operations across Africa, estimates that the African middle class has tripled in size over the past 14 years – and the boom is gathering speed.

The study analyzed 11 of the biggest economies in the region, accounting for about half of sub-Saharan Africa’s population and GDP. Those economies have grown tenfold since 2000, reaching a collective GDP of more than $1-trillion today, compared with a growth of just 25 per cent between 1990 and 2000.

Using a more rigorous definition of “middle class,” the study concludes that earlier estimates were much exaggerated. But it still finds dramatic growth, from about 4.6 million households in 2000 to almost 15 million households today in the 11 focal countries, if the middle class and lower-middle-class categories are both included.

Read more

COLUMN-Is China’s economy like Clouseau’s inflatable parrot? – by Clyde Russell (Reuters U.K. – August 14, 2014)

http://uk.reuters.com/

Clyde Russell is a Reuters columnist. The views expressed are his own.

LAUNCESTON, Australia, Aug 14 (Reuters) – Why does the Chinese economy remind me of Chief Inspector Jacques Clouseau?

One of the many memorable scenes featuring the late Peter Sellers as the bumbling French detective comes in the Revenge of the Pink Panther, when he disguises himself as a peg-legged Swedish sailor, complete with an inflatable rubber parrot on his shoulder. [here ]

Problem is the parrot leaks, requiring Clouseau to flap his arm to operate a pump to re-inflate the bird, which eventually pops off as too much air is put in.

The connection to the Chinese economy is that once again a set of softer-than-expected economic numbers has the market anticipating that the authorities will act to boost activity. Like Clouseau’s parrot, every time the economy loses some air, the expectation is that it will be pumped up again and it will return to health.

The release of economic data that failed to meet expectations on Wednesday is the latest case in point. Credit figures showed that the amount of money flowing into the Chinese economy fell to a six-year low in July, while growth in investment, retail sales and bank lending was short of the market consensus.

Read more

The Brics bank is a glimpse of the future – by David Pilling (Financial Times – July 30, 2014)

 

http://www.ft.com/home/us

If the postwar order is being upended, the right response is ‘hear, hear’

Thirteen years ago, Brics was a marketing ploy dreamt up by Jim O’Neill, then chief economist at Goldman Sachs. Now it is a bank. Next thing you know, it will have its own line of designer handbags.

This month in Fortaleza, the five Brics nations – Brazil, Russia, India, China and South Africa – agreed to establish a development bank. They also set up a $100bn swap line, known formally as a contingent reserve arrangement, a deal that gives each country’s central bank access to emergency supplies of foreign currency. To borrow a phrase from Anton Siluanov, Russia’s finance minister, the five countries are attempting to conjure a mini-World Bank and a mini- International Monetary Fund.

The Brics’ plan is good for the world, although you would not know it from the sniffy reaction in the west. There have been two default positions. One is to scoff at the very idea of five such disparate nations organising anything coherent or staying the course. The other is to worry that the world order reflected in the two US-led institutions set up at the Bretton Woods conference of 1944 is about to crumble.

Read more

Jim O’Neill: What Jokowi’s Win Means For Jakarta’s Market? – by Shuli Ren (Baron’s Magazine – July 23, 2014)

http://online.barrons.com/home-page

The following is a guest post by my colleague Assif Shameen:

“Jokowi’s victory is potentially as important as Modi’s was for India,” says Jim O’Neill, former Chairman of Goldman Sachs Asset Management and the man who coined the term BRICs or the world’s largest emerging markets. O’Neill has long regretted not including Indonesia among the emerging giants.

As the world’s third largest democracy, O’Neill says Indonesia can’t just be dependent on the global commodities cycle. “Indonesia has huge potential and a guy like Jokowo could just be the one to unleash it but he has to be bold and take on vested interests and those that allow corruption as well as other forms of misallocation of capital,” he says.“Indonesia needs a Modi-type figure to galvanize its young dynamic population to deliver on its potential,” O’Neil says.

But the former Goldman Sachs economist notes “expectations in Indonesia are now as high, if not higher than they are in India” in the wake of Jokowi’s victory. “India and Indonesia now need to deliver or otherwise the scope for disappointment in both places is obvious, specially in the short term. If the changes are for real in Indonesia and India then the case for further re-weighting in both those markets is huge,” he says.

Year-to-date Jakarta Composite Index is up 21.1% . The market has risen 9.1% over the past 12 months. But stocks may have gotten ahead of themselves. Sam Le Cornu, Senior Portfolio Manager at Macquarie Funds Group who co-manages the Macquarie Asia New Stars Fund in Hong Kong says while the macro picture in Indonesia looks encouraging the only problem now is valuations.

Read more

Goldman Forecasts Lower Commodity Prices as Cycle Ends – by Glenys Sim (Bloomberg News – July 16, 2014)

http://www.bloomberg.com/

Commodities from iron ore to copper and Brent crude will drop over the next five years as global supplies climb, according to Goldman Sachs Group Inc., which highlighted oil’s recent losses as a sign of increased output.

There will be substantial declines in some metals, energy and bulk commodities, analysts including Chief Currency Strategist Robin Brooks wrote in a report. The period of continued year-on-year price rises for most commodities is over, they said in the report, which was dated yesterday.

Banks from Citigroup Inc. to Deutsche Bank AG have called an end to the commodities super-cycle, when China’s surging demand combined with supply constraints to more than double prices in the 12 years through 2010. Raw materials rallied this year from three annual losses as a lack of rain in Brazil lifted coffee and a ban of ore exports from Indonesia spurred a rally in nickel. The drop in energy prices since last month showed the impact of higher global output, Goldman said in the report.

“A prolonged period of elevated commodity prices has catalysed a supply response,” the analysts wrote. “We do not expect a collapse in global commodity prices. But we do anticipate substantial declines.”

Copper was forecast to drop to $6,600 a metric ton over five years, while iron ore was seen at $80 a ton and Brent may be $100 a barrel, according to Goldman.

Read more

Why the Resource ‘Super-Cycle’ is Still Intact – by Rick Rule (MoneyMorning.com.au – July 13, 2014)

http://countingpips.com/

Rick Rule is Chairman of Sprott Global Resource Investments

I believe we are still in a resource ‘super-cycle’ — a long period of increasing commodity prices in both nominal and real terms.

The market conditions of the past two years have made many observers doubt this assertion. But I believe the current cyclical decline is a normal and healthy part of the ongoing secular bull market.

The most striking analogy to the current situation occurred in the epic gold bull market in the 1970s. You may recall that gold prices advanced from US$35 per ounce to $850 per ounce over the course of that decade.

You may also recall that, in 1975 and 1976, a cyclical decline saw the price of gold decline by 50% — from about $200 per ounce down to about $100 per ounce. It then rebounded over the next six years to $850 per ounce.

Investors who lacked the conviction to maintain their positions missed an 850% move over six short years. The current gold bull market, since its inception in 2000, has experienced eight declines of 10% or greater, and three declines, including the present one, of more than 20%.

This volatility need not threaten the investor that has the intellectual and financial resources to exploit it.

Read more

Mining sector tipped to rise again – by David McKay (Miningmx.com – July 3, 2014)

http://www.miningmx.com/

[miningmx.com] – THE long-standing adage about mining is that it consists of a hole in the ground with a fool at the bottom and a liar at the top.  As derogatory as that may sound to an industry where its top 40 largest companies turn over $731bn, and provide the minerals crucial to modern life, the loss of investor confidence in the sector since 2012 suggests many among the investment ranks were prepared to believe it.

Mining companies spent $348bn between 2005 and 2012, but generated only $126bn in net cash returns. It was a poor performance that was reflected in how resource equities fared. The HSBC Global Mining index shed 46% of its value from 2011 to 2013 as the reality of how little had been returned in yield by the big-spending mining companies hit home.

That’s why at a market capitalisation of $157bn, Facebook is worth nearly double Rio Tinto ($86bn) even though the Anglo-Australian miner generated $50bn from continuing operations during its 2013 financial year.

In comparison, the social media phenomenon generated $2.5bn in the first quarter of this year and some $641m in profit whereas Rio Tinto produced an annual loss of $3bn, including impairments and currency exchange losses.

The market forces that affect Facebook and Rio Tinto are, of course, vastly different, but the fact remains that in a universe of investment, the promises of riches that would flow from China’s industrialisation in the early 2000s had, in the hands of the diversified mining companies, resulted in very little.

Read more