Global Commodities Outlook

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#51
  • Nov 9 2015 at 3:56 PM 
Commodities hoping for a dovish Fed when December comes
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[img=620x0]http://www.afr.com/content/dam/images/g/j/o/h/m/6/image.related.afrArticleLead.620x350.gku2ux.png/1447050965537.jpg[/img]Commodities companies will be watching the US Federal Reserve's December rate decision like hawks - hoping for doves. AP
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by Vesna Poljak
Commodities face more pain ahead if the United States Federal Reserve lifts interest rates next month for the first time in almost a decade.
The hike, which markets now estimate to be around a 70 per cent chance of going ahead, is bullish for the US dollar and could point to further appreciation of the greenback in 2016. That means iron ore, copper and oil are less affordable for buyers who trade with other currencies.
After a better than expected outcome for US employment data on Friday, commodities sold-off as anticipation of a rise in interest rates before the end of 2015 grew. On Monday, ASX-listed miners followed suit. Iron ore was down 1 per cent to $US48.21 a tonne and Brent crude oil declined 1.17 per cent to $US47.42 a barrel.
BHP Billiton declined 3.7 per cent to $21.86; Rio Tinto declined 2.5 per cent to $49.53; Woodside Petroleum was down 2.1 per cent to $29.36 and Origin Energy lost 5 per cent to $5.13.
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"The correlation between the dollar and commodity prices has stood the test of time this year," said Ray Attrill, National Australia Bank's global co-head of foreign exchange strategy. "If you are a non-US dollar based buyer of commodities, it costs you more."
Slowing activity in China and downgrades to global growth have been bad news for commodity prices in 2015. The supply side of the equation has been slow to respond to changing demand dynamics, exacerbating the collapse in prices.
What strategists and economists have to figure out is how much of the Fed's likely December rate hike is "priced in" to the value of the US dollar? That won't be clear until the Fed's December 15-16 meeting is concluded because market reaction will be dictated by Fed chair Janet Yellen's statement and the Fed's new forecasts for future rate hikes.
With that in mind, commodities will be counting on the Fed to deliver with a dovish bias. But any improvement in US economic data between now and then might call for a more hawkish central bank as markets head into the new year.


"What sort of Fed tightening are we getting in December? One view is this will be the most dovish tightening in US history," said NAB's Mr Attrill. "It's not inconceivable that the dollar goes down if the Fed hikes."
Alternatively, "The other risk is you could argue they should say the economy looks strong enough to withstand a full blown tightening cycle. On that basis, it's reasonable to think the ascendancy of the US dollar continues."
Since Friday, the US dollar rallied against almost every currency; the Australian dollarwas fetching US70.53¢ on Monday afternoon.
As the prospects of a Fed hike dipped and rose over the past 12 months, foreign exchange markets tended to reflect more optimism than rates markets of the Fed's ability to lift rates off the zero bound (the range between zero per cent and 0.25 per cent).

However for Asian economies and the Australian dollar, there is another variable at play. Any further devaluation of China's yuan could mean the rest of the region follows China's currency lower.
"That link from China to the broader emerging markets currency universe to Australia is seen to be alive and kicking," Mr Attrill said. "To some extent, the Fed and the dollar is a little bit incidental."
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#52
New Bradken chairman says mining downturn to last until 2018
DateNovember 10, 2015 - 8:59PM
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Simon Evans
Senior Reporter


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Nick Greiner bows out as Bradken chairman with the company in the doldrums and the new chairman warning the mining sector won't recover until 2018. Photo: Christopher Pearce

The new chairman of battling mining services and engineering firm Bradken says the downturn in the mining sector is likely to last until 2018 and the company has done all of its strategic planning based on that bleak scenario.
Phil Arnall, who took over as chairman from Nick Greiner on Tuesday at the completion of Bradken's annual meeting in Newcastle, says business is even softer than it was in June this year, when the company opted for a $70 million balance sheet injection from Chile's Sigdo Koppers and private equity firm CHAMP, and embarked on merger talks that ultimately amounted to nothing.
Mr Greiner, a former NSW premier from 1988 to 1992, had served on the board since 2004 andhis departure comes as Bradken shares hit a record low on Tuesday after the company revealed a continued poor outlook and said that subdued order intake from customers would mean sales revenue in 2015-16 would be below 2014-15.
Bradken shares tumbled to 89¢ in intra-day trading before closing at 91¢, down 4.2 per cent for the day. Bradken shares were at $3.85 this time a year ago.
Managing director Brian Hodges, who is preparing to depart at the end of calendar 2015 after 18 years running the company, told Fairfax Media after the meeting on Tuesday that orders were at low levels but had stabilised.
"Order intake's been relatively lower but stable," he says.
Mr Hodges also says that Bradken is progressively selling off about $30 million in surplus assets, mainly property holdings, to cut debt in a difficult market.
Two other Bradken directors, Eileen Doyle and Peter Richards, resigned from the board on November 6. New York hedge fund Litespeed Management holds 11.9 per cent of Bradken and has been increasingly influential.
Mr Arnall said in his speech to shareholders the "last few months have been very sobering" and "we have felt the discontent of our shareholders".
"Partly as a result of this, there has now been significant change to our directors," he said. The search for a replacement for Mr Hodges was continuing for a "suitable person" to replace him by the end of the year.
Sigdo Koppers and CHAMP had a 60-day exclusivity period to try and hammer out a merger deal with Bradken from June, 2015. But the merger talks were officially called off at the start of September with the Bradken board refusing to grant a request to extend the 60-day period.
Mr Greiner was in an uncomfortable position because he had dual roles at both CHAMP and Bradken. He is deputy chairman of CHAMP. He removed himself from discussions on the merger proposal by appointing a three-person independent committee from Bradken
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#53
Economist Saul Eslake says the mining boom may be the last ever
DateNovember 10, 2015 - 3:50PM
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Peter Ker
Resources reporter

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The mining industry may have witnessed its last boom. Photo: Bloomberg

The final commodities boom in "human history" may have just finished, according to prominent economist Saul Eslake.
In a gloomy opening to the International Mining and Resources Conference in Melbourne on Tuesday, Mr Eslake said the downturn in mineral commodity prices had probably not reached its nadir, and there was little prospect of the recent China boom being repeated in the future.
While the mining industry often touts the future growth potential from urbanisation and development in nations like Indonesia, Vietnam, Pakistan and African giants like Nigeria, Mr Eslake said those nations could not match the population impact of China's recent rise.

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Drier weather will mean mining operations suffer from less flooding and damage.

"The countries that are still to develop are much smaller than China and India are, they are not, in most cases, starting from as far back on the development curve as China was in 1979 or India was in 1991, and most of them are much more self sufficient in commodities than China or India ever were," he said.
"So it could well be, in my view, that the commodities boom Australia has just experienced in the last 12 or so years is the last of its kind in human history unless unforeseen technological developments ordain otherwise."
Mr Eslake said the gloomy outlook meant Australia had to diversify its economy, and he saidrecent free trade agreements would help but would not alone fix the problem.

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Economist Saul Eslake has given miners a bearish outlook of the future at the IMARC conference in Melbourne

"Australia needs to broaden and deepen its economic development with Asia if it is to prosper from the next phase of Asian economic and social development. That means we need to increase our exports of agricultural commodities and services as well as maintain or improve our market share in minerals and energy commodities," he said.
"The free trade agreements that Australia has signed with some Asian economies will be helpful in that regard but they are not magic bullets."
The comments come after a bad start to the week for mineral commodities, with prices for copper, gold, nickel and zinc all falling over the weekend.
Mr Eslake said he expected further downside for many commodities over the next 12 to 24 months.
"In the case of iron ore and coal in particular I don't think we have seen the bottom of prices yet even though there may be some basis for being a bit more optimistic about the outlook for base metal prices," he said.
"In the case of coal Australia is not necessarily in the most favourable position in international cost curves, and maintaining Australia's competitive position in coal and in other energy commodities, LNG among others, will be a major challenge for the boards and managements of Australian companies this year and for the forseeable future."
New figures published by ANZ suggest the number of Australians employed in the mining sector has fallen by 50,000 since it peaked in 2012.
ANZ estimates that about 230,000 Australians are now employed in the mining industry, but they expect that number to decline by a further 40,000 over the next two years.
Copper was fetching $US2.24 a pound on Tuesday while Gold was fetching $US1093 an ounce.
Iron ore was steady at $US48.24 a tonne while Brent crude was fetching $US47.22 a barrel.
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#54
Commodities markets brace for a more severe El Niño
  • LUCY CRAMER
  • THE WALL STREET JOURNAL
  • NOVEMBER 11, 2015 8:54AM


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A cane harvester cuts sugar cane at Holloways Beach, near Cairns in Australia. Sugar prices have risen 33 per cent over the past three months, partly due to El Niño fears. Source: News Corp Australia
[b]The El Niño weather pattern in place over the Pacific Ocean could be one of the worst in decades, and a number of agricultural commodities are feeling the pressure.[/b]
Ocean and atmosphere indicators that measure the strength of El Niños and other weather phenomena are now comparable with the significant events of 1997-1998 and 1982-1983, Australia’s Bureau of Meteorology said yesterday. Japan’s Metrological Agency said ocean temperatures last month were the highest for an October since 1950.
An El Niño occurs when winds in the equatorial Pacific slow down or reverse direction. That causes waters to warm over a vast area, which in turn can up-end weather around the world. The severity of the phenomenon is measured by ocean temperatures and atmospheric convection activities.
El Niños typically reduce rainfall across parts of southern and Southeast Asia, while at the same time bringing precipitation to the western US and parts of South America.
The events can lead to severe drought in parts of Southeast Asia and heavy flooding in parts of North and South America, all of which cause challenges for farmers and other commodity producers.
In October, there were warmer-than-normal conditions in India and the northwestern part of South America.
There were cooler-than-normal conditions in the southern part of South America and drier-than-normal conditions in Indonesia and from Australia to the western part of the South Pacific, the Japanese weather agency said.
A number of agricultural prices have rallied off their lows on fears of weather-related supply shortages. Sugar prices have risen 33 per cent over the past three months. Dairy is up 56 per cent and palm oil has gained 13.3 per cent over the same period.
In India, the lower-than-normal monsoon rains have put significant pressure on the prices of vegetables and pulses in the country.
Prices for chana, also known as chickpeas, have risen nearly 20 per cent since mid-September on supply concerns, and India’s National Commodity and Derivatives Exchange has introduced a special margin on its November, December and January contracts in a bid to temper volatility.
The El Niño weather pattern is expected to peak before the end of the year before gradually easing in the first quarter of 2016, according to the two weather services
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#55
More commodities carnage to come


Stephen Bartholomeusz
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Business Spectator Columnist
Melbourne


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Copper prices hit a six-year low overnight. Source: Supplied
[b]This year’s sell-off in commodities and the consequent plunge in the prices of resource stocks has turned into a full-scale rout.[/b]
While there are some company-specific factors — Glencore’s debt, the doubts over BHP Billiton’s dividend policy and, more recently, the open-ended cost of its exposure to the tailings dam collapse in Brazil — resource companies and their share prices have been undermined by the continuing collapse in commodity prices.
Shares in the largest miner, BHP, have fallen 43 per cent since March. Rio Tinto’s are down 31 per cent in the same period. Glencore’s are down a staggering 68 per cent and Anglo American’s 63 per cent.
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While recent commentary has focused on the fact that BHP shares are now trading at levels last seen well before the global financial crisis and the start of the China-led boom in commodities and resource stocks, company-specific analysis tends to underplay the role of the major driver in the implosions of their stock prices.
It isn’t just share prices that have tumbled back to pre-crisis lows. Commodity prices generally are also back to their pre-crisis levels. Oil is trading around $US44 a barrel, iron ore at $US47 a tonne. Copper hit a six-year low of $US4835 a tonne overnight to levels last seen during the worst of the financial crisis.
Bloomberg’s commodity index, which tracks more than 20 commodity futures, is also back to 2009 levels, as is the London Metals Exchange index.
There are some obvious supply/demand influences at play. Across all the commodities, the post-crisis soaring of all commodity prices, driven largely but not entirely by China’s massive infrastructure-focused stimulus program, sparked massive expansions in supply.
China’s weaker growth as it tries to reorient the composition of its growth away from investment and towards domestic consumption has, in the absence of meaningful economic growth elsewhere, generated surplus of supply across the entire suite of commodities. OPEC’s market share war on US shale oil is a feature specific to the energy market.
Another factor in both the spectacular spikes in commodity prices in that post-crisis period and in their subsequent implosions was the “financialisation” of commodities that occurred during the boom years.
Fuelled by ultra-cheap funding in an era of unconventional monetary policies and the leveraged search for returns, a lot of capital flowed into direct and indirect commodity exposures in trades that have been reversing as commodities prices have fallen and the prospect of a US “normalisation” of its monetary policies has neared.
This year, as the start of the “lift off” in US rates has loomed larger in the markets’ consciousness, it isn’t surprising that commodity prices have fallen further and the US dollar has strengthened against all major currencies, with negative impacts on emerging market economies that have been exacerbated by the pricing of all the major commodities in US dollars. The raw materials for their growth have become more expensive.
The markets are now pricing in the first increase in the US Federal Reserve’s federal funds rate since it embarked on its quantitative easing programs in 2009 when the Fed’s board meets in the middle of next month.
With China’s growth rate slowing and its currency gradually being allowed to weaken, Japan going nowhere and Europe still grappling with problems that should have been addressed five years ago, the global economic outlook isn’t for sufficient growth to stabilise commodity markets.
The severity of the falls in commodity prices, the carnage that has created for resource companies and the pressures the slowdown in China and the strength of the US dollar are imposing on developing economies could, however, accelerate the supply-side adjustment required for stability to emerge.
Glencore has already cut production in a number of its marginal or cash-bleeding operations and investment across the resource sector has been cut back quite savagely.
There will inevitably be more of that to come.
It would, for instance, be no surprise if, given the new pressures on its cash flows that have emerged in Brazil, from the Australian Taxation Office and from the Queensland Government, BHP shut down its US onshore oil and gas business entirely to save an already reduced capital expenditure budget of $US1.4 billion and preserve, for a little longer, its much-debated progressive dividend policy.
The extent and breadth of the price declines will put even more intense pressure on higher-cost producers and/or those with overly-leveraged balance sheets to exit the sector and to defer anything other than vital maintenance capital investment. It ought to accelerate the process of eventually balancing supply and demand.
The financial crisis and the policy responses of the major economies to it — the responses of the US, Europe, China and Japan — created some anomalous flow-on effects in economies and markets that, as China tries to pivot and the Fed Reserve nears lift-off and a very gradual shift to a more conventional rate structure, are being more aggressively unwound.
In the longer term, that’s probably a good thing. Unconventional monetary policies distorted risk-pricing and encouraged risk-taking on an extraordinary scale. But in the near term it could have (and indeed is very definitely already having) some very nasty, company and wealth-destroying effects.
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#56
  • Nov 21 2015 at 12:15 AM 
Don't jump back in too soon, resource investors warned
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[img=620x0]http://www.afr.com/content/dam/images/g/h/b/e/d/3/image.related.afrArticleLead.620x350.gl07kq.png/1447982692521.jpg[/img]Some investors turned to gold after the terrorist attacks in Paris but their interest quickly waned and gold prices dropped to a five-year low.
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by Karen Maley
Perhaps it was the price of BHP shares dipping below the $20 mark, or perhaps it was the US oil price flirting with $US40 a barrel. Whatever the reason, some investors were lured back into resources stocks this week thinking that if commodity prices were plumbing six-year lows, they must be ripe for a rebound.
Certainly, the mood in commodity markets continues to be one of unrelenting gloom. The price of copper traded as low as $US4573 a tonne this week, a fresh six-year low, as investors worried about a global supply glut and dwindling demand in China, the world's biggest consumer.
It's a similar story for iron ore, a big source of profits for mining groups such as BHP Billiton and Rio Tinto, where prices have fallen to just over $US45 a tonne, close to the record lows in June. Traders are worried that the Chinese steel industry continues to struggle at a time when global iron ore supplies are about to be boosted by shipments starting from Gina Rinehart's huge Roy Hill mine.
Other metals were also dragged lower, with zinc hitting its lowest level in six years and while nickel trading at its lowest level in seven years.

The US crude oil price dipped below $US40 a barrel several times this week as traders worried about the growing supply glut. The US benchmark, West Texas Intermediate, fell to a low of $US39.89 a barrel, while North Sea Brent, the international benchmark, traded around $US44 a barrel.
Both WTI and Brent have averaged less than $US55 a barrel this year, the lowest level in at least a decade.
And the gold price tumbled in sympathy as investors worried about the looming US rate rise. Although some investors turned to gold after Friday night's terrorist attacks in Paris, their interest quickly waned and gold prices dropped to a five-year low.
Enthusiasm for the precious metal has also been savaged by the weakness in the broader commodities complex, from copper to aluminium to oil. The Bloomberg Commodity index, a basket of 22 commodity futures, has dropped 16 per cent this year to its lowest level since 2009.


The widespread weakness in commodity prices has hammered resources stocks, dragging down the prices of mining blue chips such as BHP Billiton, Rio Tinto and Woodside.
Prices plummet, dividend yields soar
But this sharp share price drop has led to the unusual situation where some resources companies are offering dividend yields that put traditional yield plays, such as the country's major banks, to shame.
For example, BHP is trading on a dividend yield of around 8.3 per cent while Woodside Petroleum is around 9 per cent. In contrast with these rich dividend yields, the major banks appear somewhat parsimonious, with Commonwealth Bank offering investors a dividend yield of 5.3 per cent, while Westpac boasts a yield of 5.9 per cent.

The question for investors, however, is whether the country's big mining companies will be able to maintain such generous dividend payouts even though their earnings are under strain from falling commodity prices.
The issue reared its head this week, with a number of high-profile fund managers questioning BHP's progressive dividend policy, under which the company promises never to cut dividends in US dollar terms.
BHP's chairman Jac Nasser acknowledged these concerns at the mining giant's annual general meeting in Perth this week. He said the company considered that maintaining a strong balance sheet came before its commitment to paying out $US6.6 billion in dividends each year, and did not commit to maintaining the progressive dividend policy beyond February.
But regardless of dividend levels, some investors are positioning themselves to take advantage of a rebound in resources stocks as commodity prices finally recover.

Betting on the rebound
And with prices of raw materials from oil, copper, coal and zinc trading around their lowest levels since the dark days financial crisis, they estimate that this is likely to occur some time during the next 12 months.
Their optimism has increased as some major miners have decided to cut output in response to lower prices. For instance, the Anglo-Swiss commodity giant Glencore has already unveiled plans to reduce its annual production of zinc by a third.
At the same time, they're hopeful that stimulus measures in China – including six interest-rate cuts in the past year – will boost Chinese growth, and that this will translate into stronger demand for commodities.
Commodity bulls are also cheered by signs that China's big steel companies – which are primarily state-owned – appear to have succeeded in persuading Beijing to boost its infrastructure spending. And they argue that Chinese property construction is likely to pick up as a result of lower interest rates and the pressure that Beijing is exerting on banks to relax their rules on mortgage lending.
But such optimism could prove premature.
Commodity prices tipped to stay low for longer
This week Goldman Sachs, a major influence in commodity markets, warned that prices for natural resources have not bottomed and could fall further unless demand improves or unless supply is further reduced.
"Supply adjustments to date are still insufficient, and demand has done too little to offset this slow adjustment," a Goldman report said. "This sustains the need for lower prices for even longer, keeping us underweight commodities for the next 12 months."
Goldman is not alone in urging caution. In its 2016 global outlook, Barclays predicted that commodities would continue to "bump along the bottom" until global economic growth recovers.
The bank also noted that in previous cycles, oil, copper and gold have spent much longer trading at depressed levels than so far this cycle.
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#57
Weak trade still a drag on emerging markets
DateNovember 23, 2015 - 6:15PM
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Mark Mulligan
Senior markets and economy writer

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Stacking up: trade volume growth has been sluggish since the global financial crisis, but may have hit bottom. Photo: Bloomberg Photo: Brent Lewin/Bloomberg

Sluggish trade volumes will keep a brake on emerging market growth next year, but there will be a mild pick-up in economic activity across the developed world, according to recent forecasts.
Morgan Stanley's co-head of global economics Chetan Ahya says current trade data points to further pain for emerging markets, which have been battered by declining commodity prices, US monetary tightening, China's slowdown and domestic imbalances.
Global export volumes have grown just 2 per cent year-on-year so far in 2015, compared with an average of 2.6 per cent for the past four years and 7 per cent during the 15 years before the global financial crisis.
Russia and Brazil have been worst hit by flagging commodities demand from China, and look set to remain in recession deep into next year, according to a recent report by the Organisation for Economic Cooperation and Development.
Despite the gloomy picture, however, global recession will be avoided, argues Morgan Stanley's Ahya, thanks to the careful management of China's slowdown and to monetary policy settings across the developed world.
Skirt recession
"The weakness in emerging markets is raising fears about the next global recession, specifically fears around whether the adjustment process in emerging markets still has another downward leg and whether the spill-overs into developed markets can tip the global economy into recession," he says.

"While risks exist, we think that the global economy will once again skirt recession. 

"The accelerated pace of both monetary and fiscal easing is stabilising growth in China, while developed markets' central banks are also actively managing their monetary policy stance in a way that supports domestic demand so that the inflation targets are not compromised," he says.
His comments chime with the majority view that China will avoid a "hard landing", despite mounting bad debts in the banking system, an oversupply of property, and receding industrial activity.
The OECD sees growth in China slowing from 6.8 per cent to 6.5 per cent next year and 6.2 per cent in 2017. The economies of  Russia and Brazil will contract again next year, by 0.4 per cent and 1.2 per cent, respectively, after shrinking by 4 per cent and 3.1 per cent, respectively, this year.
India's growth, however, is seen steady at more than 7 per cent for the next two years, according to the OECD.
Societe Generale says in a research note on Sunday that recent shipping statistics provide further evidence of a marked slowdown in global trade volumes.
Baltic Dry
The Baltic Dry Index, which tracks global freight prices, on Friday hit a its lowest point since it was created in 1985
Societe Generale's Global head of economics Michala Marcussen says the index low reflects depressed commodities demand from China, although an oversupply of shipping capacity may also be a factor.
"Low oil prices have made it profitable to run older vessels - that may otherwise have been scrapped - for longer," she says.
"Low oil prices also allow vessels to run faster - in a bid to capture more client business - adding further to excess capacity."
Despite the sluggishness, she expects to see signs of a recovery in trade volumes next year as demand from developed economies picks up and China stops slowing.
"Looking ahead, we expect to see some bottoming out of purchasing manager indices for emerging economies over the coming months," she said. 
"In China, in particular, we expect policy to help secure that the current weakness bottoms out, leading notably to better stabilisation and then some slow improvement of the secondary sector - that is, manufacturing and construction, which are both import intensive," she says.
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#58
If China Killed Commodity Super Cycle, Fed Is About to Bury It
Kevin Crowley CrowleyKev
November 25, 2015 — 8:01 AM HKT Updated on November 25, 2015 — 7:26 PM HKT





Has the Commodities Supercycle Run Its Course?





  • Raw-material losses worst since 1999, before China buying boom
  • Higher U.S. rates mean stronger dollar, further eroding demand
For commodities, it’s like the 21st century never happened.
The last time the Bloomberg Commodity Index of investor returns was this low, Apple Inc.’s best-selling product was a desktop computer, and you could pay for it with francs and deutsche marks.
The gauge tracking the performance of 22 natural resources has plunged two-thirds from its peak, to the lowest level since 1999. That shows it’s back to square one for the so-called commodity super cycle, a hunger for coal, oil and metals from Chinese manufacturers that powered a bull market for about a decade until 2011.

“In China, you had 1.3 billion people industrializing -- something on that scale has never been seen before,” said Andrew Lapping, deputy chief investment officer at Allan Gray Ltd., a manager of $33 billion of assets in Cape Town. “But there’s just no way that can continue indefinitely. You can only consume so much.”
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If slowing Chinese growth, now headed for its weakest pace in 25 years, put the first nail in the coffin of the super cycle, the Federal Reserve is about to hammer in the last.
The first U.S. interest rate increase since 2006 is expected next month by a majority of investors, helping push the dollar up by about 9 percent against a basket of 10 major currencies this year. That only adds to the woes of commodities, mostly priced in dollars, by cutting the spending power of global raw-materials buyers and making other assets that generate yields such as bonds and equities more attractive for investors.
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The Bloomberg Commodity Index takes into account roll costs and gains in investing in futures markets to reflect actual returns. By comparison, a spot index that tracks raw materials prices fell to a more than six-year low Friday, and a gauge of industry shares to the weakest since 2008 on Sept. 29. The biggest decliners in the mining index, which is down 31 percent this year, are copper producers First Quantum Minerals Ltd., Glencore Plc and Freeport-McMoran Inc.

With record demand through the 2000s, commodity producers such as Total SA, Rio Tinto Group and Anglo American Plc invested billions in long-term capital projects that have left the world awash with oil, natural gas, iron ore and copper just as Chinese growth wanes.
"Without fail, every single industrial commodity company allocated capital horrendously over the last 10 years,” Lapping said.
Drowning in Oil
Oil is among the most oversupplied. Even as prices sank 60 percent from June 2014, stockpiles have swollen to an all-time high of almost 3 billion barrels, according to the International Energy Agency. That’s due to record output in the U.S. and a decision by the Organization of Petroleum Exporting Countries to keep pumping above its target of 30 million barrels a day to maintain market share and squeeze out higher-cost producers.
A Fed move on rates and accompanying gains in the dollar will make it harder to mop up excesses in raw-materials supply. Mining and drilling costs often paid in other currencies will shrink relative to the dollars earned from selling oil and metals in global markets as the U.S. exchange rate appreciates. Russia’s ruble is down more than 30 percent against the dollar in the past year, helping to maintain the profitability of the country’s steel and nickel producers and allowing them to maintain output levels.
"The problem with lower currencies is operations that were under water a year ago are all of a sudden profitable on a cash basis," said Charl Malan, who helps manage $31 billion at Van Eck Global in New York. "Why would you shut them?"
While some world-class operators such as Glencore plan to cut copper and zinc output, others like iron-ore producers BHP Billiton Ltd., Vale SA and Rio Tinto are locked in a "rush to the bottom" as they seek to drive out competitors by maintaining supply even as prices slump, according to David Wilson, director of metals research at Citigroup Inc.
“With the momentum on the downside, it’s very difficult to say that we’re reaching a bottom,” Wilson said.
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#59
Emerging economies will power expansion and growing wealth
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Price change.
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In a speech in Sydney yesterday, Jean-Sebastien Jacques, the chief executive of Rio Tinto’s copper and coal division, maintained what some would argue was a predictably bullish stance on commodities.

Mr Jacques is an industry insider — he would think that. Right?
Well, for those prepared to look at the bigger picture, the whole canvas, what becomes clear is that Jacques’ view likely doesn’t reflect the naive wishes of a mining executive. Rather, it is a shrewd assessment, in a world where it’s all too easy to be sour, of real prospects for the commodities sector.
Yes of course that sounds absurd right now. The rout in commodity prices appears relentless. Iron ore is down at 10-year lows, while copper and aluminium are hitting six-year lows. But then again, the thought of $US40 a barrel oil back in 2008 would have seemed absurd. Peak oil, remember?
Now, the dominant paradigm is that Chinese growth is on a long-term downward path, while the outlook for the emerging markets in general is soft.
To many, the BRIC phenomenon is over. And not to forget that global growth more broadly is weak and fragile, and that secular stagnation has taken hold. As a consequence, there is little scope for a rebound in commodities.
That’s all well and good if you’re a hedge fund or a short-term investor in the market looking for a punt. The trend, and the fashion of the day, is your friend, as they say. Yet for real players in the market, like the CEO of Rio’s coal and copper operations, such short-term analysis is inadequate. Take copper as an example. There’s a glut right now, everyone knows it.
Yet the Rio chief’s expectation is that this will be worked away over the next few years, and that the real challenge for the industry is to meet longer-term demand. Why would they think that? Because scarcity is still the real issue confronting the world.
To see this, consider that the world’s current “feeble” growth equates to a lift in annual global income of $US5 trillion or more (on a PPP or purchasing power parity basis) — that’s a new China every three or four years.
What’s more, that increase is nearly double the annual average seen over the previous two decades. The world is getting rapidly richer, exponentially so. Global per capita incomes are still rising rapidly even now, and that trajectory isn’t about to change.
The reason for that is that the concept of the BRICs — the emerging market — isn’t just some fashionable meme that permeated the financial markets for a time. It wasn’t manufactured — it was and is a real observable phenomenon, and it hasn’t finished.
Urbanisation rates in China and many of the ASEAN economies are half those — or lower — of the advanced world. Similarly, those rapidly rising per capita incomes aren’t even a quarter of the high income economies. Freed from the growth-destroying shackles of communism, many nations are now actively pursuing growth and wealth.
That’s probably the key factor differentiating this commodities cycle from previous ones. So it’s not likely that this cycle will be like others — boom, followed by a protracted bust and a sizeable, multi-decade consolidation. This time, the correction really is different.
That is, it’s more likely to be a temporary, cyclical response to a lift in supply — at a time of weak global investment. Not to forget the stronger US dollar. That 40 odd per cent drop in the CRB commodities index, for instance, coincides exactly with a 25 per cent rally in the US dollar. Yet that US dollar spike is very likely a temporary phenomenon, a reflection of global monetary divergences between the US Federal Reserve and central banks in Europe and Japan. Commodities may not gain reach lofty pre-GFC heights, but it’s unlikely the current levels will last either.
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#60
Miners digging deeper into debt, says Ernst & Young [*]
Big miners have continued to push record debt levels higher in recent years despite falling profits, lifting net debt to about $US350 billion last year and limiting their ability to absorb further financial shocks, according to a new study from Ernst & Young.

The growing debt to earnings ratios could spark more asset sales and provide an opening for cashed up private equity firms that have been patiently sitting on the sidelines waiting for cheap deals, the big four accounting firm says.
EY said the world’s biggest 88 miners lifted net debt by about 60 per cent to about $US350bn between 2011 and 2014 to pay for capital spending and returns to shareholders, despite combined earnings falling by about 60 per cent to around $US220bn.
“This is the first observable period of such a disconnect between debt and earnings progression,” EY global mining and metals transaction head Lee Downham said.
“With net debt/EBITDA (pre-tax earnings) ratios at the highest levels since the turn of the century, leverage is increasingly stretching balance sheets and will limit flexibility to absorb financial shocks.”
The report comes as debate rages about whether BHP Billiton (BHP), and to a lesser extent Rio Tinto (RIO), should borrow more to fund their progressive dividend policies, which commit to increasing, or at least holding steady, their payouts.
Since the end of 2014, BHP and Rio have held fairly steady on net debt but Glencore has embarked on a $US10bn debt reduction program and Fortescue Metals Group has paid some of its down direct to bondholders at reduced rates.
There are also more assets coming onto the market as miners try to strengthen their balance sheets.
“Management’s focus on the risks of leverage across the sector has become significantly more acute in recent months, reflected in the large number of assets put on the market as companies try to raise capital and free up future cash commitments,” Mr Downham said.
“Deal activity feels like it could increase as we enter 2016 ... private equity capital funds have been patiently looking for opportunities for some time but until now sellers have not had the burning platform required to force through a deal.”
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