Global Commodities Outlook

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http://www.cnbc.com/id/102020473

Metals malaise weighs on equity markets
Matt Clinch | @mattclinch81
2 Hours Ago
CNBC.com

The prices of a range of commodities slid further Monday, dragging down stocks as investors feared more pain ahead for the asset class.
Spot silver was the standout laggard, slouching to a low of $17.34 an ounce on Monday, reaching a four-year low. Data on Friday from the Commodity Futures Trading Commission confirmed that money managers had turned negative on the commodity. Spot gold also dipped, to $1,208.70 per ounce, and effectively wiped out all of its gains this year as the precious metal traded at levels not seen since early January.
Other metals were also lower with platinum extending losses and hitting new nine-month lows and palladium also slipping to levels not seen since mid-May. A London benchmark for copper hit a 3-month trough and Reuters reported that Chinese steel and iron ore futures slid to record lows on Monday. Soft commodities like wheat, corn and soybean are all lower for the trading year and prices eased again on Monday morning. Oil benchmarks and natural gas also saw weakness as the trading week began.
Read MoreSilver slumps to 4-year low; gold looks likely to test $1,200

"The liquidation is universal," Dennis Gartman, a commodities trader and editor and publisher of the Gartman letter, told CNBC via email. "Today may be quite ugly around the world as deflation, rather than inflation, is the order of the day."


AMY COOPES | AFP | Getty Images
The malaise in the metal markets was felt across the broader equities indexes. Shanghai shares widened losses on Monday to close down 1.7 percent. In Sydney, shares saw hefty losses in mining majors which helped drag Australia's benchmark S&P ASX 200 lower on the first day of the trading week. Fortescue Metals and Rio Tinto lead declines with losses of 4.8 and 2.5 percent each as iron ore prices slumped.
In Europe, the basic resources sector lost around 2.5 percent in early deals and stocks like Anglo American, Rio Tinto and Glencore suffered heavy losses. The latter's fall was accentuated by an announcement that it was in a contract dispute with another mining firm.
Read MoreFed heads may ease Wall Street confusion this week
A slew of reasons were given for the weak sentiment. In the fields, economic reports have reinforced an expectation that there are massive harvests ahead. There's also the stellar rally for the U.S. dollar. The greenback has climbed to trade at two-year highs, with anticipation of an interest rate hike in the U.S., and commodities have had to duly readjust with this currency strength.


And then there's also China. The Asian powerhouse, renowned for its large consumption of commodities, has seen some weak data points recently. The People's Bank of China has had to add more stimulus to the world's second largest economy and investors are cautious ahead of Tuesday's preliminary reading on the country's manufacturing sector, which could provide more evidence of a slowdown.
"Chinese data which we have been receiving is also driving the traders to sell the commodities," Naeem Aslam, a market strategist at brokerage firm Avatrade told CNBC via email. "In terms of gold, the results of Scottish referendum have evaporated the uncertainty and this has dampen the mood for safe heaven."
However, over the longer term there could be some rebound, according to Aslam. He told CNBC that industrial metals could do especially well given what he expects to be a "fresh QE (quantitative easing) injection by the Chinese central bank and the ongoing commitment by the ECB (European Central Bank)."
Read MoreShortsellers target China from the shadows
For silver in particular, Richard Perry, a market analyst at Hantec Markets, believes that it could see some further pain in the near term. Perry has a price target of $16.70 per ounce for silver and said this could be reached within the next month.
For both silver and gold he sees "consistent selling pressure" with "incredibly weak" indicators as price floors are being continuously wiped out.
"(There are) a collection of really significant sell signals," he told CNBC Monday regarding gold. He believes the next big test for the metal could be $11.8450.

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Price volatility dampens nickel miners’ gathering
THE AUSTRALIAN OCTOBER 03, 2014 12:00AM

Paul Garvey

Resources Reporter
Perth
Poseidon Nickel chief executive David Singleton expects the nickel market to fall into a Poseidon Nickel chief executive David Singleton expects the nickel market to fall into a ‘substantial deficit’ next year Source: News Corp Australia < PrevNext >
••
THE steep plunge in the nickel price witnessed in recent weeks cast a pall over yesterday’s Australian Nickel Conference, with an industry that would have felt it was safely out of the doldrums a month ago now detecting the return of a faint hint of unease.

The conference had been shaping up as a celebratory affair — the spot price of nickel soared by 57.7 per cent over the first half of the year but has since retreated by a fifth, from just under $US20,000 a tonne to just over $US16,000 a tonne, in a bloody past 3½ weeks of selling.

The steep volatility in nickel prices this year reflects the broad mix of factors behind both the cases for and against nickel.

The bull case revolves around Indonesian nickel pig iron, a cheap and crude source of nickel that had acted as a break on nickel prices in recent years. Indonesian authorities earlier this year implemented legislation banning the export of unprocessed nickel ore, triggering the startling price increase of the first half.

The Philippines is another major source of nickel pig iron, and authorities there have started talking about the possibility of a similar export ban.

On top of that, a new generation of costly new nickel developments continue to struggle to get anywhere near their expected levels of output.

And the years of delays and the billions of dollars in cost blowouts at those projects means any similar developments are unlikely to get the go ahead for at least another decade.

On the downside, the levels of nickel stockpiles held in the warehouses of the London Metal Exchange remain well in excess of anything ever seen before.

The potential ban on nickel pig iron exports from The Philippines could take several years to implement, and output from the country is actually growing in the meantime. Chinese companies are already building nickel smelters in Indonesia in an effort to bypass the export ban there.

And while those big new nickel mines are still producing well short of expectations, their output is growing, not shrinking.

Despite the recent weakness, Western Areas managing director Dan Lougher said conditions in the nickel sector now were still far better than a year ago.

He said his reception at a recent roadshow to North America, London, Sydney and Melbourne was the best for “at least” five years. “We’re making a lot more money in this half of the year than we did in the whole past two years,” Mr Lougher said.

He is confident the nickel price can resume its upward run by the end of the year.

“There is an oversupply at the moment. The turnaround that we all anticipated with the drop-off in nickel pig iron, obviously some of that is being picked up by the Philippines volumes going into the Chinese market. Is the Filipino ore filing the gap? It can’t. I’m very confident that towards the end of the year we will start to see some of that eroded.”

Alto Capital research analyst Casey Smith has recognised the headwinds facing the sector, but is still tipping nickel to average $US20,000 a tonne next year.

“Between 2013 and the end of next year, China is forecast to have lost 300,000 tonnes of its ore sources of nickel,” Mr Smith said.

The three-year rise in LME stockpiles to record levels doesn’t worry Poseidon Nickel chief executive David Singleton, who expects the market to fall into a “substantial deficit” next year.

“I think we can confidently expect that by the end of this year, the very early part of next year, we would start to see those LME stockpiles come down. That will really be the trigger for the nickel price next year.”

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Platinum drops to five-year low
AAP OCTOBER 03, 2014 9:45AM

Prices for platinum and palladium fell to new lows Thursday, as slowing growth in Europe and China sparked concerns about demand for the precious metals.

The most actively traded platinum futures contract fell to its lowest level since September 4, 2009.

January platinum settled down $US19.20, or 1.5 per cent, to $US1,270.40 a troy ounce on the Comex division of the New York Mercantile Exchange.

Palladium fell two per cent to $US768.65 a troy ounce, the lowest price since April 7. For both metals, the drop was the steepest since June 12.

Prices for the metals, which are used in automotive exhaust filters, have fallen sharply in the past few months amid concerns of slowing growth in Asia and Europe.

Gold for December delivery closed down US40c at $US1,215.10 a troy ounce.

Silver was off 1.2 per cent to $US17.047 a troy ounce, the lowest settlement since March 26, 2010.

Investors will be keeping a close eye on Friday's US employment figures, which many believe offer the most reliable snapshot of the economy's performance in the past month.

A weaker-than-expected number would give investors an excuse to lock in profits on recent bets against gold and other precious metals, and push prices higher, analysts said.

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Flat commodities may be investors' chance
Resources Alexandra Cain
969 words
16 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
The drop in the iron ore, oil and coal prices has spooked the local market, prompting a selloff of local resources businesses. While the outlook for these commodities remains subdued, this could prompt buying opportunities if shares whose prices are affected by movements in commodity prices continue to fall.

Ric Spooner, chief market analyst at CMC Markets, explains iron ore prices are suffering from rising supply and slowing demand.

"It's been a long time coming but we have passed the inflection point where supply capacity exceeds demand. In these circumstances it can be very difficult to forecast where prices will bottom. Theoretically, high cost producers should cease loss-making operations, bringing the market back into balance. But this sort of process often takes longer than many expect, meaning prices can drop well below consensus forecasts," he says.

Spooner says the same dynamic was evident as iron ore prices rose. "Supply capacity took longer to come on board than forecast and prices stayed stronger for longer than the consensus view."

He says most predictions call for iron ore to average out somewhere between $US80 and $US100 a tonne over coming years with prices forecast to recover from current lows in November or December this year, as inventories are restocked.

"However, the risk to these forecasts is to the downside with the potential for China's demand growth to soften as a property oversupply is worked through."

David Bassanese, ETF provider BetaShares' chief economist, agrees rising supply and softer demand from China for local iron ore has caused a slump in prices.

"Iron ore prices have already fallen faster and further than many anticipated, largely due to a reticence by high cost producers – as in China – to cut back capacity.

"My outlook is for prices to stabilise around current levels as inefficient producers eventually exit the market and China's economy stabilises."

One business with a vested interest in, and first-hand knowledge of, the factors driving the iron ore price is Carpentaria Exploration, a small listed iron ore producer. Managing director Quentin Hill recently attended the China Iron and Steel Association's conference in Dalian, giving him insight into what's driving the price of this commodity.

"At the CISA conference in Dalian, it was clear that China's focus on reducing pollution is being treated seriously by steel mills, with stringent standards expected to be introduced next year. This is putting significant pressure on the steel industry in China," said Hill.

"Steel mills will be looking to improve efficiency and reduce emissions and this will lead to increased demand for high grade, low impurities products that meet these needs. There is no doubt there is a short term oversupply, but the medium and long term fundamentals are good, especially for higher grade products."

Another commodity whose prices have come under pressure recently is oil. Spooner explains oil prices have also been driven lower by an underlying supply/demand overhang.

"This has been prompted by a rising US dollar and the fact that geopolitical risk premium has been stripped out of markets. The US shale oil phenomenon has had a major impact on this market over the medium term," he says. American shale oil rigs have flooded the market with supply in recent years.

According to Spooner, growth in demand for oil is unlikely to outstrip supply capacity in the near future. He says this could prompt further falls in the oil price. But there are also mitigating factors that affect the outlook for oil.

"A couple of contingencies need to be kept in mind with oil. The first is the ever-present risk of a major loss of supply capacity from the Middle East or Russia. The second is the OPEC cartel's role as a swing producer. These factors are likely to create a base for Brent Oil around $US90. But the geopolitical situation carries the risk of significant price spikes occurring out of the blue."

The Organisation of Petroleum Exporting Countries pursues a policy that encourages oil-producing countries to co-ordinate the price of oil, to stabilise prices in this market.

Bassanese agrees oil prices tend to spike at times due to tensions in the Middle East. Nevertheless, he says the outlook for oil is for prices to remain relatively subdued. "This is due to ample global capacity, rising US non-conventional supply and only moderate global economic growth."

As for coal, Dan Morgan, UBS commodities analyst, says high quality metallurgical coal appears to have a flattish price outlook until North American mine closures tighten the trade.

"Expect a lift in 2015 back to$ US130 to $US140 a tonne from supply rebalancing and modest demand growth."

He says the price for thermal coal has bottomed out at about $US60 a tonne. "We could see prices lift from October 1 from disruption to Indonesia's trade from government moves to enforce a new export licence regime. The November-December seasonal restock may also support prices. Expect spot prices to return to $US70 to $US75 a tonne in early 2015."

So how will the price movements in the various commodities affect the major Australian mining securities?

Bassanese says further declines in commodity prices – long expected by markets – are likely. Although, like Spooner, he says the recent declines have been quicker and deeper than anticipated: "That said, local producers remain among the most diversified and lowest cost producers in the world and should hold up well in the inevitable industry shake-out. Rising volumes and a renewed down-trend in the Australian dollar will also support profits. The current backdrop, however, is not one in which we should expect mining sector share prices to rise strongly; they are likely to continue trading within their current ranges."


Fairfax Media Management Pty Limited

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Proven assets going cheap trump exploration
THE AUSTRALIAN NOVEMBER 05, 2014 12:00AM

A DRAMATIC slump in asset values across the resources sector has made it significantly cheaper to buy proven assets rather than carry out exploration — a phenomenon that has sparked a quiet frenzy of deal-making at the smallest end of the market.

The billions of dollars raised by small mining companies over the course of the mining boom has been funnelled into early- stage exploration projects around the world, but a drop in commodity prices and a plunge in investor interest in the sector have left those assets worth only a fraction of their previous value.

Junior companies have begun buying up assets that received tens — and in some cases hundreds — of millions of dollars in exploration and engineering work for often piecemeal prices, accumulating projects in the hope that a future recovery in commodity prices may restore their former valuations.

Uranium company Toro Energy this week became the latest junior to follow the strategy, handing over about $3 million in shares for what should become a controlling stake in Canadian uranium assets that have been on the receiving end of more than $C125 million in exploration work in recent years.

Similarly, Crusader Resources recently paid about $800,000 for the Juruena gold project in Brazil — where about $23m has historically been spent on exploration — while Metals X has bought the Meekatharra gold operations from Reed Resources for $9.9m. Some $117m has been spent on Meekatharra in the past.

Morgans analyst James Wilson said that for companies that believe they can survive the ­current downturn, there are ­numerous asset acquisition opportunities available.

“A lot of guys are looking to Canada, at the TSX companies, to go and pick up stuff. These were assets where a lot of money was spent during the boom times, but now they can be picked up at a fraction of the cost,” Mr Wilson said.

While the deals often do not come with headline-grabbing price tags, Mr Wilson said the activity was beginning to reach a crescendo.

“One of the companies was telling me today that they’re trying to do M&A, but they’re being beaten to the punch by private equity or other companies,” he said.

“It’s not for lack of trying, but some of them are having their grass cut by others. It’s getting quite frantic.”

While price tags for exploration assets are at a fraction of the value of their historic exploration spend, the amount of money spent on exploration at a project is an imprecise measure of value even in boom times given exploration dollars are not always spent smartly or efficiently. Spending more money on exploration will not make a project that is fatally flawed any more adequate.

But buying a project that has received extensive exploration work does remove one of the biggest risks facing any early stage exploration project — namely geological vagaries.

Private equity group Denham Capital recently launched a new $170m venture called Auctus Resources which is looking to pick up unloved assets and turn them into mines.

The group’s managing director in Australia, Bert Koth, estimates that successful gold exploration results in today’s market would probably be valued at a 60 to 70 per cent discount to the money spent finding it.

“A few years back, if you discovered a copper porphyry or a gold deposit in West Africa, you’d make back 10 times your money,” he said.

“Now the market has completely shifted. When you have exploration success, in most cases the market doesn’t care and you might not even be able to make your money back even if you’re successful.”

Undeveloped iron ore deposits, he says, were once valued by the market at $10 to $12 per tonne of resource. Now those deposits are valued at about 50c per tonne.

Similarly, African gold deposits used to be valued by the market at about $40 per ounce, compared with a typical discovery cost of $20-25 an ounce. Today, those same resources are valued by the market at about $5 to $10 per ounce.

“We’re in a market anomaly where actually successfully getting something into cashflow and harvesting the cashflow for three or four years might be more successful financially than successful exploration results.”

Companies taking advantage of distressed asset prices face little prospect of generating a return from their purchases unless they can develop the deposits and get into cashflow, Koth says.

“That is a huge paradigm shift in the market. A few years ago, if you have a scoping study and an attractive deposit, you were almost guaranteed that you could sell it at an attractive valuation. That game is gone,” he said.

For many of the companies buying up exploration assets, the strategy will be as simple as getting hold of the deposits and waiting for the market to improve.

Toro, for example, has little expectation of seeing the Matoush uranium project in Canada, in which it recently acquired an interest, pushed into development soon. Instead, Toro will wait. Given the owner of Matoush, Strateco Resources, was once worth $850m when uranium prices were more favourable, the possible upside is obvious.

“When you’re at the bottom of the market, your exploration dollars are not going to bring out the same value as your acquisitions dollars,” Toro managing director Vanessa Guthrie said.

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The looming age of low-cost global energy

BUSINESS SPECTATOR NOVEMBER 20, 2014 9:02AM

STEP back and look at what is really happening to energy supply and demand. Suddenly you can see the real possibility of an extended period of low-cost global energy.

And although they will not want to take credit for it, the extreme Greens have played a role in creating this looming low energy cost world. I set myself the task of writing five pieces inspired by the G20. This is the third and it is clearly the most unexpected.

This commentary, like the next two, was inspired by a remarkable video conversation I had with one if the world’s pre-eminent energy future analysts, Dr Roland Busch of Siemens.

We have boosted the supply of energy dramatically without taking into account the fact that major advances in technology would enable the world to use far less energy to achieve the same or better outcomes.

The energy supply increases have been created by a convergence of separate forces. The biggest driver of energy supply was energy subsidisation in China, where the price of power is less than a third of Australia’s and a quarter of the electricity costs of Germany. That’s how China captured world manufacturing. Energy suppliers projected forward, and so we have seen a very big rise in the production of coal, gas and oil.

At the same time, the push for lower carbon and less pollution has seen big rises in Chinese nuclear power, plus wind and solar. And, in the rest of the world, we have seen big rises in energy capacity via low carbon gas, plus wind and solar. (One of the few countries in the world that has really messed this up is Australia, because we exported all our gas and put curbs on the development of new fields for the East Coast domestic market).

Globally, in energy, we are now seeing the typical price falls that come when any commodity is oversupplied. What we have not appreciated is that technology is capable of slashing demand.

Dr Busch explains that about 40 per cent of our energy is used in buildings, and this can be cut by between 20 and 30 per cent with the cost of the new technology being paid back between two to five years. Siemens is, of course, in the energy efficiency business and is illustrating what it can do by slashing energy consumption at the MCG by 20 per cent using these quick payback systems. Almost every office or apartment tower can make a two to five-year payback investment to cut energy usage and costs by between 20 and 30 per cent. The protesters should be attending the annual meetings of property trusts demanding the investment.

And, of course, it underlines the brilliance of the Australian government’s direct action plan, which is designed to encourage this type of investment. Amazingly, many extreme Greens hate direct action.

Meanwhile, similar energy usage reductions are available in traffic management by using the new traffic flow technologies. And we could go on.

Keith Orchison pointed out that the International Energy Agency’s energy efficiency plan is to reduce annual oil demand in 2040 by 22 per cent below “business as usual”, to cut gas consumption by 17 per cent and to cut coal demand by 15 per cent.

It is clear that we now have the technology to achieve those goals in a much shorter time frame — if we have the will to invest in that technology.

And, of course, if we go hard at such investments it will help achieve G20 growth targets.

So, we now have the real prospect of reducing carbon but not destroying our economies with high-cost energy. But sometime in the future China will need to stop subsidising energy consumption. That will be a huge political problem, which means that it will need to duplicate a version of Australia’s direct action.

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Commodities holdings expose big banks to risk: report
AP NOVEMBER 20, 2014 11:32AM

THREE big Wall Street banks that have owned commodities such as aluminium exposed themselves to risk and in some cases manipulated prices in a way that raised costs for consumers, a US Senate investigation has found.

The heavy involvement of Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley in the business of storing and moving commodities like oil, aluminium, uranium and copper also gives them unfair trading advantages in financial markets, according to a report issued by the Senate Permanent Subcommittee on Investigations.

Aluminium cans that hold beverages like soda or beer are held up as an example. Goldman has used its stockpile of aluminium — in a cluster of warehouses near Detroit — to cause delivery delays to create shortages and inflate the metal’s price, according to the report. The price for beverage makers and ultimately consumers is forced higher, it said.

Goldman maintains there has been no shortage of aluminium and prices have fallen substantially since 2008. In addition, the bank says, more than 75 per cent of the aluminium it holds in storage doesn’t go into “queues” that can back up and delay deliveries.

The three banks, among the biggest in the US, have faced increased scrutiny in recent years of their activities in commodities. Lawmakers and federal regulators are asking whether banks should be allowed to control power plants, warehouses, oil refineries and pipelines. The Federal Reserve proposed earlier this year restricting banks’ activities in markets for physical commodities. Under current Fed rules, banks that engage in commodities activities must hold capital to absorb potential losses from the activities.

Activities like oil refining and uranium mining “expose major banks to catastrophic risks that are poorly understood,” Senator Carl Levin, the subcommittee’s chairman, told a news conference.

The costs from an oil spill, mine explosion or power plant disaster could exceed a bank’s capital reserves and insurance coverage, potentially forcing taxpayers to bail it out, Levin warned.

“There’s great risk to the economy,” he said. “We need to restore the separation of commerce and banking.”

The three banks maintain that they manage their commodities businesses prudently against risks.

“Morgan Stanley is proud of its comprehensive approach to risk management, which has enabled the firm to manage its commodities business prudently and effectively over the last three decades,” the bank said in a statement.

In some cases, they have sold physical commodities businesses to nonbank companies and are in the process of selling others.

The report doesn’t specifically allege price manipulation by Morgan Stanley. It says the bank’s involvement in oil storage and transport gave it access to valuable non-public information about shipments and pipelines that it could profit from in trading.

Goldman says it’s in the physical commodities business because that enhances its key role as a middleman for producers, consumers and investors in the financial markets linked to the products. The risks cited by the Senate report are actually “quite limited and manageable,” in Goldman’s view.

JPMorgan, the biggest US bank, says it holds enough capital to cover it in the event of a physical disaster that caused its liability to exceed its insurance coverage.

Executives of the three banks’ commodities divisions are scheduled to testify at a hearing tonight (AEDT) by the investigative subcommittee.

As an example of price manipulation, the report cites JPMorgan’s involvement in the electricity market. In July 2013, the bank agreed to pay $410 million to settle accusations by US energy regulators that it manipulated electricity prices between September 2010 and November 2012. The FERC said JPMorgan used improper bidding strategies to squeeze excessive payments from the agencies that run the power grids in California and the Midwest.

AP

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Time to reconsider those unloved resource stocks

Market monitor Patrick Commins
760 words
22 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Patrick Commins

The riskiest sector of the market right now – resources – may prove to be the safest in the years ahead.

The carnage in the listed mining sector has confirmed what many investors already knew: stay away.

But carefully adding some exposure to resources now may actually help reduce risk in your portfolio by hedging against one of the biggest outside risks to markets – a sharp rise in bond yields.

This week the share prices for BHP Billiton and Rio hit their lowest for more than a year. Fortescue plumbed depths not seen since mid-2009 as the price of iron ore threatened to break below $US70 per tonne, which also threatened the viability of smaller producers' mines.

That continues a multi-year trend of underperformance by the resources sector. As the chart shows, the resources component of the market is down by about 30 per cent since the beginning of 2011 in total return terms, against a gain of more like 70 per cent for the balance of the top 200 index.

This year, the Big Australian has single-handedly subtracted 76 points from the benchmark ASX 200 Index. Fortescue and Rio are also in the top five detractors, subtracting 22 and 19 points respectively.

But investors broadly still don't see compelling value in the heavily sold-down sector.

"All of the sentiment-type indicators are staying out of resources," confirms State Street Global Advisors head of active equities Olivia Engel. But nor are traders looking to make money on further falls. Resource stocks are "not heavily shorted", reckons Engel, pointing out that to make money out of shorting the sector you have to "find new investors to hate the miners" – and everybody already hates them.

Not that Engel is jumping back into the sector. Instead she has been "dipping her toes" back into resources over the past 12 months, to now be "less underweight" in her portfolio.Outlook still grim

So the outlook for miners and commodity prices remains grim, with little expected in the way of earnings growth in the coming year. So why not get rid of all your resources exposure?

"It's about bringing balanced sources of return to your portfolio," Engel explains. And that idea resonates particularly powerfully now, both here and abroad.

More than 80 per cent of the world's equity market capitalisation is supported by zero interest rate policies, while 50 per cent of all government bonds in the world yield 1 per cent or less, Bank of America Merrill Lynch analysis shows.

The impact on the local sharemarket has been dramatic, as investors have chased yield at the expense of growth.

About 60 per cent of the large-cap Australian sharemarket is acting as a "quasi-yield or income trade", say strategists at UBS. The other two key "macro drivers" are commodities and the Australian dollar, but both pale in comparison with the exposure to interest rates – as the chart shows.

Over the medium term, that obviously leaves shareholders at risk of a reversal in the trend – a sharp rise in bond yields.Choose companies carefully

So there's an argument to put your money in a sector that is at least trading on fundamentals. But if the answer is upping your exposure to resources, the next question is: where? Engel is sticking to the high-quality, cash-generating parts of the sector, with a preference for the largest names.

"We always look at quality [companies] within hated sectors, and that's been our approach in the resources sector," echoes Perpetual small cap fund manager Jack Collopy.

That means sticking with low-cost operators with long-life mines and strong balance sheets and which are cash generative, he says.

Among the smaller plays, Collopy highlights Alacer Gold.

"We like that half the company's market cap is in cash," he says, adding that Alacer is one of the lowest-cost operators, with an all-in cash cost of $US750 per ounce of gold.

Collopy also likes PanAust, miner of "the modern metal", copper. There is some takeover speculation around the company, which also has some gold exposure and remains "a little out of favour" with investors, he says.

Don't expect any rapid reversal in the yield trend. Engel says she has been reducing exposure to yield-sensitive stocks, but only slowly.

Still, when it comes to a potential jump in global bond yields, investors would be wise to adopt the Boy Scouts motto: "Be prepared".


Fairfax Media Management Pty Limited

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Commodities now caught up in a ‘super-down’ cycle
THE AUSTRALIAN NOVEMBER 24, 2014 12:00AM

Robin Bromby

Business columnist
Sydney
WE’RE still in a super commodity cycle — except that Credit Suisse says it’s a “super down” cycle.

And have we got further to fall? Perhaps, considering that oil ­prices are still 35 per cent above their 40-year inflation-adjusted norm, and minerals are 41 per cent above.

Real commodity prices are not that low. Credit Suisse shows that, in real terms and over a trajectory of the past 50 years, present prices are still well above the norm. In fact, on only four occasions since 1964 have commodities in real terms been higher than now: during the two oil shocks of the 1970s, then in the 2007 culmination of the recent commodity boom and finally during the temporary recovery surge after the GFC. We’re still well ahead of what miners and oil drillers received right from the early 1980s through to about 2005.

The one piece of good news in the Credit Suisse report is that iron ore prices might soon level off. In the previous iron ore bear market prices fell 54 per cent. This time they are down 55 per cent.

What has got the analysts at Credit Suisse really worried, though, is the Chinese triple bubble: credit, real estate and investment. China’s private sector debt to GDP ratio is 30 per cent above trend; property prices are down six months in a row; China’s investment share of GDP is now 48 per cent, significantly higher than in Japan and South Korea at similar stages in their industrialisation.

“We think there is a high probability of a hard landing for China at some point over the next three years,” the report concludes.

Everyone seemed as happy as Larry at China’s action on Friday to cut its one-year lending and deposit rates. On the back of that, copper put on $US60 a tonne to $US6725 a tonne, aluminium soared, nickel added $US270 a tonne to $US16,625, zinc and lead rose, while tin saw a $US285 a tonne rise to $US20,575.

Yet copper stocks in Shanghai rose by 7200 tonnes last week and London Metal Exchange warehouses now have a new record high inventory of nickel — 394,770 tonnes.

China is on many minds. Until Friday, the general view was that Beijing was set on a path of monetary tightening. Yet suddenly they’re easing again. British weekend press reports quote a UBS analyst as saying the People’s Bank of China is acting under duress as housing starts continue to fall. He adds: “China is not safe until they put the credit genie back in the bottle, but that is going to be very difficult to do.”

Meanwhile, Daniel Hynes and Rosey Kaur at ANZ are cautioning that the impact of the Australia-China free-trade agreement will be limited for our resources sector. Tariffs aside, Chinese coking coal imports have been slowing due to the deteriorating housing market while China’s appetite for thermal coal remains muted. The effect on the alumina sector will be minimal: China already gets 90 per cent of its alumina from Australia; there is an 8 per cent duty on that commodity but it has not been applied since 2008. As for copper, we will now be on a par with Chile, which has been shipping the red metal since 2005 under its FTA with China (and has the largest market share).

The ability of the Australian resources sector to withstand further commodity price declines will be critically affected by cost structures here, costs which Warwick Grigor of Far East Capital has described as “out of control”. “The wage structure is unsustainable and engineering companies have been feathering their nests with huge profit margins,” he told clients. The fall in the dollar will help but costs have to be cut.

Wallets are closing. Late Friday saw East Africa oil explorer Swala Energy (SWE) withdraw its shareholder purchase plan, the share price having tumbled following the SPP announcement in October. Silver miner Alycone Resources (AYN) called in the administrators after failing to find a source of fresh cash after a fund pulled its $25 million financing offer. More aspiring miners might have to follow the example of mineral sands play Diatreme Resources (DRX), which has just sharpened its pencil and managed to shave $77m off its $223m capital budget for developing the Cyclone project (along with $11m sliced off annual operating costs).

Uranium recovers

SO are there any bright spots? Well, uranium for one. Perhaps.

The spot price has taken off, rising from $US28 a pound in June to $US44 a pound last week. That’s a 57 per cent rise in five months. Uranium SA (USA) chairman Alice McCleary told her annual meeting on Friday she believed the spot uranium price had bottomed and a genuine recovery was under way. Earlier in the week USA reported its Samphire project on Eyre Peninsula was looking good for increased uranium tonnages and higher grades.

Forte Energy (FTE) is pressing ahead with its uranium plans in Slovakia, aiming to put together a JORC resource but also looking at rare earths as a byproduct.

No sooner was everyone celebrating the latest price rise than French nuclear giant Areva said it may have to seek government assistance due to poor sales and a lacklustre demand for uranium.

What the market gives with one hand, it takes away with the other. And $US44 a pound is still a long, long way from the price threshold needed for most waiting-in-the-wings mine projects.

robin.bromby@news.com.au

No investment advice is implied and investors should seek professional guidance. The writer does not own shares in any company mentioned.

[greengiraffe]

HSBC chief counters commodities gloom

Angela Macdonald-Smith
1191 words
4 Dec 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

The global head of commodities at the world's biggest trade bank has rejected the growing pessimism around the future competitiveness of Australia's liquefied natural gas, insisting the country has a "tremendous" advantage in competing against the United States and others.

Jean-Francois Lambert, the London-based head of commodities and structured trade financing at HSBC, said the costs involved in investing in LNG supply facilities in the US and the expense of shipping and logistics were being underestimated. US exports were also taking longer to start up and reach the market than initially anticipated.

"Whatever happens in the States, it is not going to happen fast, and even if the States were going to move into a very aggressive export of LNG, which I doubt, I think the competitive edge of Australia is going to remain massive," Mr Lambert said in an exclusive interview in Sydney.

Mr Lambert also said the sentiment about oil demand, amid the sharp drop-off in crude oil prices, was overly pessimistic, pointing to higher crude oil prices down the track. He said it was not in anyone's interest, including Saudi Arabia's, for crude prices to fall much further, signalling the likelihood of some action to turn around the decline.

Brent crude oil prices fell to a five-year low of $US67.53 a barrel on Monday after last week's decision by the Organisation of Petroleum Exporting Countries (OPEC) not to rein in production to tackle a supply glut.LNG strategy 'sound'

Mr Lambert didn't rule out a further move down, noting that "when markets go bearish, they find every good reason to get more bearish".

But based on world oil demand still growing at more than 3 per cent, including at 1 per cent in the large euro zone, growth is "not that bad", he said. "It can well be that there is a good equilibrium around $US80 to $US85 maybe for a while, but long term, more oil needed, more energy needed, more everything needed in the commodity space."

With Australian LNG revenues directly linked to crude oil prices, the slump in crude has raised doubts around the profitability of the $200 billion wave of new supply projects under construction in Queensland, the Northern Territory and Western Australia.

Mr Lambert said while the strategy of tying LNG sales against crude oil under long-term contracts was not so comfortable in a low-oil price environment, it was a "sound" one that would stand Australian ventures in good stead over the long term.

"I don't see that the States has positioned themselves to be a very large exporter of LNG," Mr Lambert said.

"I think that all in all it will be a new supply of gas, but is this going to be a cheap resource? No, it will [just] be a new supplier. Australia is going to retain a huge competitive advantage in the commodity space versus the rest of the world."Benefits in low prices

HSBC is the world's biggest trade intermediary, speaking for about 10 per cent of global trade finance, giving Mr Lambert an insight into the perspectives of commodities buyers and sellers around the globe.

He said the drops in crude oil and iron ore prices, down 47 per cent this year, were "a very natural correction" that didn't change the long-term outlook. "Does it mean that people are not going to invest in commodities? Maybe people don't want to invest financially in commodities, but as a producer, as a trader, I can assure you that commodities will remain very, very strong; very important."

The low prices in some key commodities were also fuelling savings that would reap long-term benefits.

"It is not bad for the economy at the end of the day, and it is not bad for China, your main customer," he said.

Mr Lambert envisages a "stabilisation" of oil prices that will enable investments in new supply projects, even if they are deferred for six months or so to "see where the market is going".

Mr Lambert said the scene had been set for a period of volatility in crude oil markets after relatively stable prices for three or four years, when traders' margins were being increasingly squeezed.

At the same time, economic uncertainty prevailed alongside rising geopolitical tensions around the world.

"My guess was that volatility would be back," he said. "And volatility is back. Had I expected the [oil] price would drop as it has? No, but that in itself you can see the strategic play of Saudi Arabia in this respect."US shale boom on track

Mr Lambert said the latest price slump after the OPEC decision to maintain quotas had done little to derail the US's shale boom.

"You might have some marginal fields that are being hurt now, that are coming under pressure, but overall no, it doesn't put the whole shale strategy off track at this stage," he said.

Mr Lambert remains bullish about demand for iron ore, despite projections of lower prices next year, pointing to the urbanisation still to come in China and the need for infrastructure across the world, even in the US.

He said the strategy of majors such as BHP Billiton and Rio Tinto to ramp up output was justified by the demand outlook and their low-cost position.

"China is halfway in its urbanisation process," Mr Lambert said. "No matter what bubbles and things we are hearing about here and there, the long-term trend is there."

He said despite the current weak prices, the majors that had made large investments in new production had the means to sustain them. "The price is much lower than it was one year ago, but the profitability of the big players remains extremely high. What could they do, mothball these investments?"Agribusiness urged to step up

Mr Lambert said the closure of high-cost capacity such as mines in Sierra Leone, and of lower-quality production in China, was playing into the hands of the big players.

"Yes, they are taking market share, and yes, some producers will be hurt. This is efficient; they have better logistics, and it's cleaner."

Mr Lambert also urged Australian agricultural companies to capitalise on the competitive advantage they enjoy against rivals overseas as China positions itself to become a major player in the sourcing of soft commodities.

"If I were Australian companies producing, I would pay attention to that and I would try to build a relationship and establish the links with these people, because no matter what, these future Chinese trading houses or Chinese buying houses, supply chain managers, are going to be big," he said.

"In Australia, you have a major customer for everything, and this is China. Rather than be scared about that it, I think it's a fantastic opportunity.

"China is the key engine of growth in the world, of the trade flows; it is already and is going to remain for a long time your key customer, so embrace it."


Fairfax Media Management Pty Limited

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