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Commodity Super-Cycle and Decline

Mine Sales in Bear Market Brings Private Equity on Prowl – by Brett Foley & Elisabeth Behrmann (Bloomberg News – May 9, 2013)

http://www.bloomberg.com/

“I haven’t seen anything like it in more than 20 years,” said Tim Schroeders, who helps manage about $1 billion in equities, including BHP and Rio Tinto (RIO) Group, at Pengana Capital Ltd. in Melbourne. “Mining companies have done pretty well buying assets at the bottom of the cycle and turning some over near the top, but this is completely the other way around.”

BHP, the world’s biggest mining company, and London-based Rio Tinto are leading the global asset disposal and may sell businesses or stakes in mines for as much as $35 billion, according to Deutsche Bank AG. Private-equity firms are finding that tempting, raising almost $9 billion in 16 months for mine investment, more than the previous four years combined, according to data compiled by Bloomberg.

Aaron Regent, who was fired last year as chief executive officer of Barrick Gold Corp. (ABX), the biggest producer of the metal, started a company to invest in mining assets, according to two people familiar with the matter. KKR & Co. (KKR), the firm run by Henry Kravis and George Roberts, is considering a bid for Rio’s stake in an Australian copper and gold mine, two people with knowledge of the matter said last month.

Steve Okun, a spokesman for KKR in Hong Kong, said the firm doesn’t comment on market speculation.

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What On Earth Are “Commodity Super-cycles” And Why Do They Matter? – by Marcelo GiugaleWorld (Huffingotn Post – May 9, 2013)

http://www.huffingtonpost.ca/

Marcelo GiugaleWorld is the World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa

The average developing country lives off exporting commodities like oil, gas, copper, cocoa or soybeans. The sale of these resources brings both revenue to the government and foreign currency to import what is not produced at home–which, in these places, tends to be most things. So whatever happens to the price of those commodities matters a great deal for development and, even more, for the war on poverty. The problem is that those prices are famously volatile.

They can jump up and down seemingly at random, from year to year, month to month, even within a single minute. This makes life miserable for those who have to plan public investments in schools, hospitals or roads. Statisticians and investors have studied the problem to death, not least because there is a lot of money to be made if you can find a predictable pattern. And despite all their efforts, they have come up mostly empty-handed.

Mostly. There has always been suspicion that, if you took a really long view–we are talking centuries here–you might uncover periods of about forty years when commodity prices steadily climb for a decade or two, only to fall slowly back to where they were. That is, you might uncover “super-cycles”. It may sound crazy but, before anyone could actually find one, plenty of theories were put forward to explain why super-cycles happened and what to do about them.

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Canada’s precarious dependence on the commodity price super-cycle – by Alex Carrick (Journal of Commerce – May 7, 2013)

http://www.journalofcommerce.com/

Chief Economist, CanaData

Mid-April was not a good time for Canada’s raw materials sector. In the course of just a couple of days, an already weakening price of gold surrendered all restraint and plunged the most in three decades.

Falling from its most recent high of $1,900 per ounce to a low of $1,350 per ounce, gold has exhibited a “bear” market. The usual definitions of “bull” and “bear” markets are asset value swings of at least +20% and -20% respectively.

From its previous peak to most current trough, the price of gold fell by nearly 30%. It has since recovered slightly.
Three primary reasons are cited for the floor-dropping air pocket.

First, inflation is still nowhere to be found. Canada’s latest year-over-year increase in the Consumer Price Index (CPI) was only +1.0%. In the U.S., April’s inflation rate was a slow +1.5%.

Gold is usually seen as a hedge against rapid price run-ups. Central banks around the world have been keeping interest rates low while rapidly expanding the money supply. The Federal Reserve in the U.S. has been buying $85 billion per month in bonds and the Bank of Japan is about to embark on a similar 7.5 trillion-yen per month ($75 billion U.S.) bond-purchase spree.

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The Oil and Gold Booms Are Over – by Ruchir Sharma (Bloomberg News – May 5, 2013)

http://www.bloomberg.com/

The wreckage caused by China’s great, juddering slowdown continues to spread far beyond the country’s shores. Although most commodities enjoyed a bounce on May 3, after better-than-expected U.S. employment data, the plunge in their prices over the past few months suggests the past decade’s rally is truly broken.

For those of us not in the mining industry, this is actually good news — one of the best signs yet that the global economy is returning to normal.

China’s voracious demand for every conceivable raw material — oil, steel, soybeans, gold, to name a few — once seemed to spell a future of endlessly rising commodity prices and falling living standards in developed nations. This was a Malthusian vision of scarcity: Rising demand from the growing economies of the emerging world would couple with shrinking supplies to drive up the prices of natural resources. Gas prices would never come back down; gold would cost thousands of dollars an ounce.

The response, for many international investors, was to bet big on China. Because it is hard to buy directly into China, many instead bought into the commodities that were being sucked into the gaping maw of the country’s economy: oil from Russia, iron ore from Australia and so on.

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China’s ruthless foreign policy is changing the world in dangerous ways – by Jonathan Kay (National Post – April 30, 2013)

The National Post is Canada’s second largest national paper.

Are we witnessing the end of the “American age”? It depends whom you ask. But one thing is certain: Thanks to the near-bankruptcy of the American welfare state, Washington is losing both the means and desire to project power across the world. Inevitably, nations with deeper pockets — China, most notably — will fill the void.

This process already is underway in many parts of the world. That includes large swathes of Central Asia, where Beijing’s billions are beginning to revolutionize regional infrastructure and alliances — in dazzling but potentially dangerous ways.

Analyzing Beijing’s foreign policy is a relatively simple exercise. That’s because, unlike the United States and other Western nations, China doesn’t even pretend to operate on any other principle except naked self-interest.

On one hand, China has courted Israel as a partner in developing Mediterranean gas fields — but it also has been happy to do business with Israel’s arch-enemy, Iran, and has sold weapons that ended up in Hezbollah’s arsenal. In South Asia, meanwhile, China has cynically helped Pakistan check India’s regional role, even as China’s state-controlled press has warned Pakistan that Beijing may “intervene militarily” in South Asia if Pakistani-origin jihadis continue to infiltrate Muslim areas of Western China.

In the east, China’s policy has been to claim every square inch of the South China Sea, and intimidate every smaller country that dares to oppose its claims.

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Upheaval in mining sector a test for private equity – by Anjuli Davies and Clara Ferreira-Marques (Reuters U.S. – April 29, 2013)

http://in.reuters.com/

LONDON – (Reuters) – With the world’s largest miners flocking to sell assets, cost cuts across the industry and a virtual drought in buyers, private equity funds may finally be tempted into a sector long seen as potentially lucrative but risky.

Industry veterans say the coming months will be a test of whether private equity funds can turn intentions into investments and become more than niche players in an industry that has traditionally relied on public markets for cash.

“Interest from private equity in the sector is the highest I have ever seen,” one veteran industry banker said.

Another senior industry adviser described a “now or never” moment despite volatility in commodity prices, citing what could be a drawn out period of low valuations in which traditional buyers – largely, other miners – are kept out by demands they refocus and cut back rather than grow. Volumes certainly point to increased interest.

According to research and data group Preqin which studies private equity, eight natural resources funds focused solely on mining raised an aggregate $8.5 billion in 2012, more than the years 2006-2010 combined, though data did not show how much was spent on acquisitions.

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Why the Commodity ‘Supercycle’ Might Only be Halfway Done – by Dr. Alex Cowie (Money Morning.com – May 1, 2013)

http://www.moneymorning.com.au/

What if I told you that mining boom hadn’t even got started yet? …Or that commodity prices have another fifteen years to keep rallying? It’d be music to the ears of resource investors who have had a tough few years.

It’s tough to imagine in this bearish environment, but this is exactly what we heard from an expert in an exciting new presentation with our buddy Dan Denning recently… Phillip J Anderson, of businesscycles.biz, sat down in front of the cameras with Dan a couple of weeks ago. Most of the talk revolved around Phil’s theory on property cycles.

It’s a cracking interview. We haven’t been exactly bullish on Australian property here at Money Morning. But Phillip made an interesting bullish argument based on a predictable 18-year cycle.

He sees the US property market leading the Australian market by about a year and a half, and as US prices are starting to pick up slightly, he’s very bullish on Australian property.

In a way he’s more of technical trader of the property market — less focused on the fundamentals, and more on the technical aspects of property. I don’t want to steal his thunder. Watch the video if you get a chance (it’s available as a Strategy Session for all subscribers of any of Port Phillip Publishing’s paid services).

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Slower world growth gives commodity investors cold feet – by Claire Milhench and Barani Krishnan (Reuters U.S. – April 29, 2013)

http://www.reuters.com/

LONDON/NEW YORK – (Reuters) – Investors are staying away from commodities, fearing that the worst is yet to come after prices plunged in April on signs of slower world economic growth.

Wealth managers have been pulling money from commodities since the start of the year, culminating in a major sell off in April when investors dumped gold, copper and oil.

Poor economic data from China, Europe and the United States has hit global growth forecasts, making investors reassess the demand for raw materials.

The 19-commodity Thomson Reuters-Jefferies CRB index was down almost 6 percent following April’s rout and is still off some 4 percent since the start of the year. Investors say it is too soon to pick up a bargain.

“We are neutral to mildly underweight commodities now and we are not exactly itching to get straight back in there,” said Johan Jooste, chief market strategist at Merrill Lynch Wealth Management, EMEA, which manages some $1.76 trillion globally. “The macro story is just less supportive of commodities now.”

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China’s slowing growth sending shockwaves through commodities sector – by John Shmuel (National Post – April 27, 2013)

The National Post is Canada’s second largest national paper.

China’s economy this month decelerated much faster than many economists had anticipated, sending shock waves throughout the commodity sector. Copper, known as the bellwether metal because it is particularly sensitive to changes in global economic growth, plummeted into a bear market last week. And Brent crude prices have contracted about 9% since peaking in late January.

The world economy depends on China to import more and more metals and oil to keep global demand healthy. The country has, after all, the world’s second-largest economy and it’s the biggest consumer of metals and energy. It’s a dependency that’s been in place for the better part of the past decade and that has helped fuel commodity prices and the stocks of the companies that produce them.

But China’s economy is clearly slowing. From double-digit growth just a few years ago, Chinese officials now expect the country’s gross domestic product to increase by 7.5% this year. And, of course, somewhere down the line, China’s economy will transition to an upper-income and slower one.

When that eventually happens, the global market will need another source of demand to fill the giant hole left behind by China. Which begs the question: Can another country ever become a China, so to speak? If not, alternative investors focused on commodities may be out of luck.

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Lower mineral, energy prices bound to hurt B.C., economist says – by By Gordon Hamilton (Vancouver Sun – April 25, 2013)

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

Analysts differ on timing and effect of the end of commodities ‘super-cycle’

Commodities, the lifeblood of the British Columbia economy, are at the beginning of a long, downward trend that is bound to affect both government and households, says a Simon Fraser University economist.

“We have seen the best days in terms of dramatic increases in commodity prices,” David Jacks, an economic historian at the university, said in an interview.

He said commodities, particularly minerals and energy, are characterized by long-term trends related to global industrialization and urbanization. That growth runs up against capacity constraints, particularly in minerals and energy, leading to rising prices. New capacity to meet the new demand then leads to prices easing.

The current cycle, which has been going on since 1998, is being driven by Asian, specifically Chinese, economic growth and urbanization. Jacks has written a paper, From Boom to Bust, on the super-cycle, which he prepared for a recent conference in Australia on commodity price volatility. Jacks said his is not the only voice warning that commodities are beginning to trend downward in price — investment bankers Goldman Sachs and Citybank have done the same.

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Commodities: What next after the ‘super-cycle’? – by Shanaz Musafer (BBC News – April 23, 2013)

http://www.bbc.co.uk/news/

A large group of men stand huddled together, gazing intently at screens, hands occasionally raised in the air, shouting out numbers, with the odd expletive thrown in for good measure.

And so another day’s trading begins in the “pit”, or floor, of the New York Mercantile Exchange, the home of the city’s energy and metal trading in downtown Manhattan.

The number of traders on the floor is a far cry from what it was 10 years ago, with the advent of electronic trading meaning more and more people now trade from offices or even the luxury of their own homes.

More recently, the commodities – or raw materials – market has undergone a different kind of change – what many are referring to as the end of the “super-cycle” – the run of gains seen in prices.

The price of gold, for instance, soared to record highs above $1,900 an ounce in August 2011, and as recently as October 2012 was trading at about $1,800. But since then it has dropped off to about $1,400.

Last week, commodity prices fell across the board. Gold, oil, copper and aluminium were all sharply lower after China’s economic growth in the first quarter failed to live up to market expectations.

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China’s cooldown: Charting a new path for commodities – by Carolynne Wheeler and Barrie McKenna (Globe and Mail – April 20, 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.

BEIJING AND OTTAWA — Zhang Lianjin remembers the 2008 global financial crisis well. It nearly shuttered his brand-new metal casting factory in Wuhan, the steel centre of China.

Sales for the firm, SAFE-Cronite Asia, have been recovering slowly since the crisis. But while orders are still rising, so far this year they’re growing at only about half the pace the company was expecting. The company’s automotive business is strong, but there’s been a drop-off in orders tied to heavy machinery. And the broader steel industry in China is a worry.

“Many steel mills are really impacted. Some are even closing. There is too much [capacity] in steel mills in China, the economy is slowing down, the market doesn’t need so much and the production is much higher than the market needs,” said Mr. Zhang, the Beijing-based general manager of the European-owned company.

On top of overcapacity and massive overstocking, some competitors are also caught in a shadow banking crisis in which companies borrowed money against their inventory and find themselves unable to repay.

Now, firms like Mr. Zhang’s are having to adjust to the reality that China’s economy is maturing, and double-digit growth is a thing of the past.

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End of the supercycle looms as commodities, stocks sell off – by Nathan Vanderklippe and Carolynne Wheeler (Globe and Mail – April 16, 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.

CALGARY AND BEIJING – For months now, worries have mounted that the end was approaching for the near-decade of dizzying good times in a commodities boom that saw companies rush to build mines and oil fields to feed surging global demand.

But for some it wasn’t until Monday, amid a rout in gold, copper, oil and a host of other commodities, that it became undeniably clear the so-called “supercycle” has expired.

“The alarm bell has been ringing for a while for the supercycle, but today looks to be the day the world woke up to the reality,” said Douglas Porter, chief economist at BMO Nesbitt Burns, as a free-fall in gold prices led broad selling fuelled by unease over the prospects for the global economy.

Commodities fell hard on Monday, led by a 9-per-cent drop in gold and a 12-per-cent plunge for silver. Copper and other metals slumped along with wheat, coffee and other crops. Oil prices sank about 3 per cent, continuing last week’s retreat. The selloff spread to stocks, as the S&P/TSX composite index dropped more than 332 points or about 2.7 per cent, and the Canadian dollar, often tied to commodities, sank more than a penny against the U.S. dollar.

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Analysis: South Africa mine wage talks may be toughest yet – by Ed Stoddard and Sherilee Lakmidas (Reuters India – April 15, 2013)

http://in.reuters.com/

JOHANNESBURG – (Reuters) – Wage talks across South Africa’s mining sector starting in May will be among the toughest ever with strikes a certainty given inflation, worker militancy and shrinking company margins.

There is also real risk of a repeat of the labor violence and wildcat action that led to over 50 deaths last year, costing companies and the state billions of dollars in lost revenue.

Emboldened by the high settlements some received after the illegal 2012 strikes, labor militancy has spread from platinum to gold and coal. Some miners have downed tools even before talks start.

Their income is being devoured by rising prices but wages account for over 50 percent of company costs and they have paid above-inflation wage rises in recent years.  “The gold companies cannot afford anything above inflation,” said David Davis, mining investment analyst at SBG Securities.

“Just escalate $1,150 by 12 percent per year and by 2015 the gold price will have to be around $2,000 an ounce for the producers to make a 20 percent margin,” he said. Spot gold is currently at 2-year lows around $1,425 an ounce.

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Commodity Super Cycle Is Dead: Citi – by Matt Clinch (CNBC – April 15, 2013)

http://www.cnbc.com/

The super cycle in commodities has come to an end, according to researchers at Citi, who downgraded several mining stocks on Monday as metals prices have continued to decline since the start of the year.

Gold fell below the $1,400 an ounce level on Monday, its lowest since March 2011. This follows a decline of 5 percent on Friday, its biggest one-day slide since 2008. The precious metal has slipped around 14 percent so far this year, after a 400 percent mega-rally over the last 12 years.

Silver, platinum and palladium have also been hit by heavy selling and copper’s gains in recent weeks have been wiped out in the face of weak Chinese data. Oil has also hit multi-month lows with futures falling more than $2 on Monday.

“Citi expects 2013 to be the year in which the death knolls ring for the commodity super cycle, ushering in 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,” research analysts said in a note on Monday.

“The forecast prices of key base metals of aluminum, copper and nickel have been cut between 5-10 percent for 2013 and between 8-13 percent for 2014. The gold price has seen the biggest change with a cut of around circa 13 percent for the next three years.”

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