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Commodity Super-Cycle and Decline

Learn from Alberta’s mistake – by Madelaine Drohan (Canadian Business Magazine – March 18, 2013)

http://www.canadianbusiness.com/

Provinces should save resources.

As they put together their 2013 budgets, the Canadian and Alberta governments complained mightily that lower-than-expected commodity prices were forcing them to make tough choices between spending and deficit reduction. Yet they wouldn’t be in this fix if they weren’t counting on volatile resource revenues to fund their spending plans in the first place.

What both governments should do instead—what every province in Canada should consider—is follow the lead of our global peers and treat non-renewable resource revenue as capital to be saved and invested, rather than income to be spent. In other words: establish sovereign wealth funds.

There have been feeble attempts to do this in Alberta and Quebec. British Columbia looks set to join them if the Liberal government lasts and follows through on its budget promise to set up a Prosperity Fund for natural gas revenues. And the Northwest Territories has put a structure in place for its own Heritage Fund.

Yet every government in Canada that collects significant revenues from oil, gas or minerals—in other words, nearly all of them—should have such a fund. And those that exist should be implemented with a great deal more rigour. This was, in fact, one of the International Monetary Fund’s recommendations in its latest review of the Canadian economy.

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THE END OF THE COMMODITY SUPER-CYCLE? – by Dieter Helm (Terra Firma – May 30, 2013)

http://www.terrafirma.com/index.html

PROFESSOR DIETER HELM, UNIVERSITY OF OXFORD

Commodities have had a good run. Despite the biggest economic crisis for half a century or more, commodities have marched ever upwards. The reasons might be many and various – from a flight to safety (gold) to Chinese demand (oil, copper and iron ore) – but the trends have been common. Now there has been a wobble. Does this mean the commodity super-cycle has come to an end?

As with every bull market, there are always those who claim “this time it is different”. To believe that commodity prices will go ever upwards, there needs to be a structural explanation. Something fundamental has to have changed, stopping the history of cycles repeating themselves. There are two such theories: firstly, that resources are finite and hence will inevitably run out – in the process driving up prices; and secondly, China.

The finite resources brigade holds esoteric ideas such as ‘peak oil’ and applies them more widely across commodities. It is all very simple: there is a finite amount of oil; we know how much and where it is – hence there is a maximum supply. If demand then keeps going up and supply is fixed, up goes the price. The same logic is applied to copper, iron ore and gold.

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Top 40 miners anxious about future of junior greenfields exploration – by Dorothy Kosich (Mineweb.com – June 6, 2013)

http://www.mineweb.com/

Although mining companies are doing their best to manage productivity and improve efficiencies to maximize returns, a confidence crisis still permeates among mining investors, says a new PwC study.

“Miners are faced with a confidence crisis and they’re focused on trying to restore confidence,” said Mining leader for Canada and the Americas, John Gravelle, in the latest PwC report, Mine: A confidence crisis.

The report observed that the market has lost confidence in mining’s ability to control costs, to exercise capital discipline, that new CEOs can deliver on their promises, and fear that commodity prices will collapse.

Investors also fear that the industry will pile back into too many new projects or expensive deals when commodities prices rebound.

Nonetheless, Gravelle suggests, “Across the board, there’s a renewed focus on [mining companies] maximizing returns from existing operations through managing productivity and improving efficiencies.”

“The importance of returning to a lower cost base rather than relying on higher commodity prices should be on every miner’s agenda,” Gravelle stressed.

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NEWS RELEASE: Flat revenues, falling profits, and plunging share prices — Global mining industry faces confidence crisis

 Revitalizing the industry starts with renewed focus on productivity

TORONTO, June 5, 2013 — While the Top 40 mining companies increased volumes by six per cent, softer commodity prices meant that 2012 revenues of $731 billion was only the second year in a decade that mining revenue did not increase, according to the latest PwC report: Mine: A confidence crisis.

The Mine report highlights a range of activity causing stakeholders to question the mining sector’s value proposition:

  • Net profits were down 49% to $68 billion
  • Gold equities declined despite steady gold price increases
  • Mining stocks in the first four months of 2013 fell nearly 20%

“Miners are faced with a confidence crisis and they’re focussed on trying to restore confidence,” says John Gravelle, Mining Leader for Canada and the Americas, PwC. “Across the board, there’s a renewed focused on maximizing returns from existing operations through managing productivity and improving efficiencies. Looking at the leadership changes last year, it reflects an industry that values experience and operational understanding over deal-making and growth.”

Gravelle adds, “The importance of returning to a lower cost base rather than relying on higher commodity prices should be on every miner’s agenda. Miners must deliver this while operating in an environment of intense resource nationalism where we see governments in traditional mining jurisdictions legislating substantial tax increases and emerging mining jurisdictions ignoring mining contracts after substantial investments are made.”

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PRESS RELEASE: China: Wood Mackenzie Says Thermal Coal Demand Will Reach Nearly 7btpa by 2030

http://www.woodmacresearch.com/

SINGAPORE/EDINBURGH/HOUSTON, 4th June 2013 – Wood Mackenzie’s report titled ‘China: The Illusion of Peak Coal’ says that despite efforts to limit coal consumption and seek alternative fuel options, China’s strong appetite for thermal coal will lead to a doubling of demand by 2030. China’s demand will grow to approximately seven billion tonnes per annum (btpa) of thermal coal which is contrary to speculation that China’s thermal coal demand may be reaching a peak in the next decade.

“It is very unlikely that demand for thermal coal in China will peak before 2030,” states Mr. William Durbin, Wood Mackenzie’s Beijing-based President of Global Markets. “Why? Because China’s aggressive investment program for nuclear, natural gas and renewables capacity is centred in the coastal region while coal-fired capacity grows in the central and western provinces. Indeed, there are also a plethora of coal-intensive conversion projects being built or planned that are significantly adding to demand.”

“Wood Mackenzie’s analysis already takes into account a rapid improvement in energy efficiency the likes of which have not been seen. We expect power demand per unit of GDP to fall by half in just 17 years, an extraordinary achievement for an economy experiencing such sustained growth. In spite of this efficiency improvement, power demand is still set to nearly triple to 15,000 Terawatt hours (TWh) by 2030. Indeed, if expected efficiency improvements do not materialise, then in the absence of alternatives, coal demand could increase further.”

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Farming boom [for Northern Ontario] on the horizon – by Benjamin Aubé (Timmins Daily Press – June 5, 2013)

The Daily Press is the city of Timmins broadsheet newspaper.

TIMMINS – Mayor Mike Milinkovich of Black River-Matheson made the 45-minute drive up Hwy. 101 to Timmins city council on Monday to talk about the future of farming in the region.

Though Northern Ontario’s Claybelt is synonymous with mining and forestry, the Northeast Community Network (NeCN) has been exploring agriculture as a third staple industry for the region. An Agriculture Steering Committee has been created, funded by various regional partners.

Milinkovich is on the NeCN board of directors. He explained how in the past year or so, Mennonite families from Southern Ontario have been among those purchasing and building on more than 15,000 acres of arable land in Black River-Matheson (see story from back in November here: www.timminspress.com/2012/11/30/bright-future-for-farming-in-the-north).

Add that to the 184 farms already in production sitting on 75,000 acres in the Cochrane District, and you’ve already got an interesting foundation. But in Milinkovich’s estimation, that’s just the tip of the proverbial iceberg. He said there exists close to 1.2 million acres of privately owned land in the district that remains to be explored.

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Man Says Commodities Divergence Increasing Supply-Demand Role – by Nicholas Larkin (Bloomberg News – June 4, 2013)

http://www.bloomberg.com/

Diverging prices for raw materials and other “risk assets” is a sign that traders will once more focus on supply and demand, said Scott Kerson, the head of a commodities unit at Man Group Plc (EMG) in London.

The Standard & Poor’s GSCI (SPGSCI) gauge of 24 commodities fell 3.9 percent this year, while the MSCI All-Country World Index of equities rose 8.3 percent. The 30-week correlation coefficient between the two measures is at 0.56, down from as much as 0.88 in 2010. A figure of 1 means the two move together.

“What’s going on in commodity markets right now, and in particular the de-linkage between commodities and other risk assets, is actually a positive thing for trend followers generally and specifically for systematic commodities traders,” said Kerson, who heads commodities at Man Systematic Strategies and AHL. Assets under management at the two funds were $16.3 billion at the end of March 2013. About 25 percent of the funds’ assets are allocated to commodities.

The S&P GSCI gauge declined this year after an almost fourfold gain since the end of 2001 spurred new mines, oil wells and crop acreage. This year will probably signal “death bells” for the raw materials supercycle as China’s economic growth slows and the nation focuses less on infrastructure and urbanization, Citigroup Inc. said May 20.

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Warning: ‘Prepare’ for Commodity Supercycle End – by CNBC’s Katrina Bishop (CNBC.com – June 3, 2013)

http://www.cnbc.com/

With multiple investment banks signposting the end of the commodity supercycle, a World Bank director has warned developing countries that have benefited from the surge to protect themselves against a price crash. Marcelo Giugale, the World Bank’s director of economic policy and poverty reduction programs for Africa, told CNBC that states which have gained from the commodity boom should prepare for a slump.

“We don’t want another wasted opportunity,” he said. “This time around, things should be done differently. The material bonanza has the potential to become a human bonanza – whereby the standard of living for many people across these developing countries can be raised.”

The high prices of commodities, such as industrial metals and oil, have boosted the revenues of countries rich in these resources. But notoriously volatile commodity markets have had catastrophic consequence for countries in the past. The so-called Commodity Crisis of the 1980s saw countries in Latin America and Africa battle financial, social and political instability, following rapid, commodity-driven expansions.

Economists describe the apparent pattern in these price booms and busts as the commodity supercycle, with decades of rising prices followed by a crash.

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Citibank calls the end of the Supercycle – by Trish Saywell (Northern Miner – June 3-9, 2013)

The Northern Miner, first published in 1915, during the Cobalt Silver Rush, is considered Canada’s leading authority on the mining industry.

A new report from Citi Research, a division of Citigroup Global Markets, says returns have peaked for the mining sector, and that this is the year that “the death bells ring for the commodity supercycle after its duly noted ‘sunset.’”

The report states that “this year should provide full affirmation that the commodity supercycle has finally ended. The ‘commodity supercycle sunset’ appeared on the horizon shortly after the 2008–2009 recession, and celebrations for the ‘supercycle funeral’ began in 2011, with 2013 perhaps ushering in a ‘supercycle funeral after-party’ in which investors could revel in new opportunities.”

In the supercycle’s place comes “a new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators, such as equities or currencies,” the report states.

The authors of the 25-page report — who are metals and mining analysts at the bank’s London and New York offices — also point out that the recent separation of commodities from equity markets in some ways represents “a return to normalcy,” given “the sensitivity of commodity prices to coincident conditions and of equities to anticipatory economic changes.”

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The Commodity Supercycle Decelerates – by Ari Charney (Investing Daily – May 22, 2013)

http://www.investingdaily.com/

This week offered a flurry of news signifying the end of Australia’s resource boom. Of course, that doesn’t mean the mining space won’t rebound in the years ahead. Commodities are famously volatile, and the steep correction that inevitably results from overinvestment and a glut of production will itself eventually correct.

But in the near term, the sector is definitely contracting. Even the uber-wealthy are hurting. Pundits have delighted as porcine plutocrats Nathan Tinkler and Gina Rinehart watched their fortunes drop precipitously over the past year. Tinkler is now merely a former billionaire, while Rinehart’s wealth declined by a staggering AUD7 billion, to AUD22 billion, over the past 12 months.

Their plight might be more entertaining if Australia’s economy weren’t so dependent on the mining industry. The Bureau of Resources and Energy Economics (BREE) recently detailed a significant increase in projects being deferred or cancelled, as well as a decline in investment for exploration. Altogether, roughly AUD150 billion in projects have been delayed or cancelled over the past year.

However, there are still AUD268 billion in projects at the committed stage, which is near record-high levels. Of course, the BREE notes that 11 percent of that figure is due to cost increases. Even so, the agency projects that committed investment will fall by just AUD8 billion next year, a number that supports the Reserve Bank of Australia’s forecast that resource investment would peak this year, but that the peak would be sustained over a number of months.

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COLUMN-Commodity companies’ cost-cutting stampede yet to work – by Clyde Russell (Reuters U.K. – May 20, 2013)

Clyde Russellis a Reuters market analyst. The views expressed are his own.

http://uk.reuters.com/

LAUNCESTON, Australia, May 20 (Reuters) – If you ever needed an example of the corporate herd mentality, then look no further than the stampede of cost-cutting among commodity producers started by BHP Billiton.

Since the Anglo-Australian miner moved last August to scrap or delay projects and slash operating costs, mining and energy companies have been rushing to do the same.

In the past few months, no less than $15 billion of cuts in capital and operating expenditures have been announced, and this is likely just a small percentage of reductions still to come.

What started as concern among investors in BHP Billiton and its fellow Anglo-Australian miner Rio Tinto over excessive capex amid slowing demand growth for commodities from top consumer China has spread across the world.

In recent weeks several Canadian miners have announced cuts to capex, and newly-merged Glencore Xstrata has promised aggressive cost-cutting, with some investors confident it will exceed its target of $500 million in reductions.

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Signs emerge that the commodity super-cycle isn’t over – by Martin Mittelstaedt (Globe and Mail – May 14, 2013)

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.

Is it too early to pronounce the so-called commodity super-cycle over?

Just maybe. Two Canadian commodity indexes came out Monday, and they both suggest that raw materials are going through a modest stumble, not the huge blow up being forecast by the commodity doom and gloom crowd.

The indexes are from Toronto-Dominion Bank and Bank of Nova Scotia, whose top commodity analyst gave a relatively sanguine observation on the overall trend, despite April’s swoon for precious metals.

“Financial market concern over the outlook for commodity markets was overblown,” said Patricia Mohr, Scotiabank’s vice-president of economics.

A big worry for commodity bears is that China’s red-hot growth rate is slowing, but Ms. Mohr noted that while the Asian powerhouse’s first-quarter gross domestic product has slowed slightly, “actual demand for raw materials was robust in China. The double-digit growth of China’s passenger car market, up 20 per in [the first quarter], reinforces its importance as a driver of growth in worldwide auto demand and related commodities such as copper.”

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Gold Bears Pull $20.8 Billion as BlackRock Says Buy: Commodities – by Elizabeth Campbell (Bloomberg News – May 13, 2013)

http://www.bloomberg.com/

Hedge funds increased bets on lower gold prices after investors pulled a record $20.8 billion from bullion funds this year while BlackRock Inc. (BLK), the world’s biggest money manager, said it’s still bullish.

Speculators held 67,374 so-called short contracts on May 7, 6.4 percent more than a week earlier, U.S. Commodity Futures Trading Commission data show. The net-long position dropped 10 percent to 49,260 futures and options. Net-bullish wagers across 18 U.S.-traded raw materials climbed 5.8 percent to 582,265, with gains for cocoa, cotton and hogs.

Gold is having its worst start to a year since 1982 after dropping 15 percent and sliding into a bear market in April. Holdings in exchange-traded funds backed by bullion tumbled to the lowest since July 2011 even as central banks print money on an unprecedented scale to boost growth. BlackRock’s President Robert Kapito said May 9 he would still buy the metal, echoing billionaire John Paulson, who’s sticking with a bullish view even after losing 27 percent in his Gold Fund last month.

“People have been told the world is going to end for five years, and it hasn’t, so they’re finally moving on,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees $325 billion of assets. “So even when crisis flashes now, you don’t get the same upside, and then in good times, you get more downside, and that’s what you’re getting in gold as the Armageddon premium is coming out.”

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Could gold’s fall be the start of a broader resources slump? – by Chris Sorensen (MacLean’s Magazine – April 30, 2013)

http://www2.macleans.ca/?cid=navlogo

Resource prices have driven the Canadian economy for over a decade. Are the good times coming to an end?

For investors and producers alike, gold’s recent rout was as devastating as it was unexpected. The price plummeted by $200 an ounce over a two-day period last week, suffering its biggest single-day drop in 30 years. Though it eventually stabilized at around $1,400 an ounce, stocks of gold mines—many of them Canadian—continued to be hammered by investors for days afterward, with some reports suggesting that as many as 15 per cent of the world’s gold mining companies are now wallowing in red ink.

There are many theories as to what caused gold to fall so far, so fast. They range from rumours that Cyprus planned to sell off some of its reserves to pay for its bailout, to the easing of fears that central bankers are destroying currencies with their unprecedented stimulus measures. “People thought loose monetary policies lead to rampant inflation,” says Keith Head, a professor at the University of British Columbia’s Sauder School of Business. “But gold prices stayed high, even when the underlying theory was repudiated by actual evidence, and that’s a vulnerable situation to be in.”

The big question now is whether other commodity prices will follow suit. Though gold, which traded as high as $1,888 an ounce in 2011, is unique in many respects—it is valued mostly as a way to store wealth, as opposed to as an industrial input—prices of everything from aluminum to zinc have slumped over the past several years after hitting historic highs, creating fears of a broader crash.

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The commodities supercycle is far from dead – by Nitesh Shah (Financial Times Adviser – May 13, 2013)

http://www.ftadviser.com/

The commodities supercycle, that started in the late 1990s, is far from over.

The main fundamental drivers of the commodities supercycle are still in force and recent commodity price weaknesses are more related to business-cycle fluctuations and short-term commodity-specific supply increases than a change in structural fundamentals.

Resource-intensive economic growth in emerging markets, led by urbanisation and industrialisation, has been the main force behind the rise in commodity demand and prices in the past 10 years.

This process is expected to continue for the next 10 to 20 years. The rise in commodity demand in the past 10 years has occurred most strongly in China and India. Both remain in the early stages of industrialisation and urbanisation. With per capita GDP in these countries projected to triple by 2030, absolute demand for the commodity inputs necessary to produce the investment and consumption goods they will demand in this period is expected to be significant.

The size of the middle class in emerging markets is expected to rise at a rapid pace in the next decade, and with it so will their consumption of commodity-intensive goods. Offices, middle-class housing, automobiles, roads, trains, airports and related infrastructure, refrigerators, washing machines, computing devices and meat for example are all highly commodity intensive to produce.

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