Gold Market Cheat Sheet (November 14, 2011)

Sunday, November 13th, 2011

Gold Market Cheat Sheet (November 14, 2011)

For the week, spot gold closed at $1,788.68, up $34.03 per ounce, or 1.94 percent.  Gold stocks, as measured by the NYSE Arca Golds BUGS Index, rose 1.57 percent. The U.S. Trade-Weighted Dollar Index was essentially flat, with a slide of just 0.02 percent for the week.

Strengths

• The strength in both gold and the gold stocks continued again this week, although all the gains came on Monday and were followed by a strong rebound on Friday.  Strength among the senior gold companies dominated this trading pattern with investors holding off on putting a lot of money into the junior miners.
• We believe the volatility was one significant factor that caused the large capitalization companies to lead.  Both Goldcorp and Newcrest Mining gained 4 percent.
• In the junior space there still were some winners with Continental Gold Ltd. and Kirkland Lake Gold Inc. climbing 6 and 8 percent, respectively, for the week.  Kirkland Lake made the final payment on its smelter royalty and this will improve the company’s margins.  Continental Gold announced it achieved 97 and 96 percent recoveries on gold and silver, respectively, in its metallurgical test work for the Buritica Project.

Weaknesses

• It was a tough week for a number of companies with regard to reporting quarterly results. Silver Standard Resources cut reserves after it missed guidance and consequently the stock was down 17 percent.  Pan American Silver Corp. disappointed investors with a miss on earnings due to operational issues.
• Ivanhoe Mines fell 8 percent, likely on copper prices falling 2.8 percent this week.
• Osisko Mining reported ore grades for its Hammond Reef have declined by an average of 23 percent, limiting the miner’s production levels despite moving twice the tonnage of rock. Investors didn’t see the news positively and the stock was down 6 percent for the week.

Opportunities

• Aaron Regent of Barrick Gold was interviewed by Bloomberg and noted Barrick may consider buying smaller assets near existing mines as part of its strategy to boost output.  Regent noted that lower-grade gold deposits are only economic at higher gold prices.  These deposits require multi-billion dollar investments in processing facilities that need to be sized up enough to get the economies of scale to be meaningfully profitable.  The key risk is that these lower grade deposits have a lower probability of delivering a dollar of net income to the bottom line than a high grade ore body.  Our focus at U.S. Global has been to structure our gold investments in those companies that own mineral deposits that are higher grade and more robust in the long term.
• Recent quarterly results illustrate how significant the grade of the ore is to the profitability of the company.  Osisko Mining is processing gold ore at 0.85 grams per ton and just reported a $9.3 million in profit, delivering a net margin of just 8 percent, on a total earth moving operation of 11.8 million tons.  In other words, Osisko made $0.79 for each ton moved.  In contrast, SEMAFO’s recent quarterly results show they processed ore at an average gold grade of 2.15 grams per ton, delivered a $31.2 million profit and net margins of 31 percent on 4.9 million tons moved.  SEMAFO delivered $6.55 of income for every ton moved in the most recent quarter.  Just as investors are beginning to take a more value based approach, what Barrick and others recognize is the old adage “grade is king” in the mining industry and not tonnage.
• While the S&P 500 Index was up nearly 11 percent in the past month, let’s not forget that Chinese gold purchases have not slowed a bit.  For just the quarter ending September, China imported more gold than the total amount imported for 2010.  A recent CLSA presentation outlined that China’s intention is to transform the renminbi into a dominant currency within Asia and likely aspires world reserve currency status.  James Steele of HSBC expects gold to average $2,025 per ounce in 2012 with a trading range of $1,700 to $2,300.  Mr. Steele notes that gold is a tried and true protector of wealth over many decades.

Threats

• Although gold finished the week up, there was speculation more than once that the Chicago Mercantile Exchange (CME) would again target the gold futures markets by hiking customer margin requirements.  In recent months, the CME did just such when investors were flocking to gold as a means of safety.  Should gold prices accelerate back towards $1,900, as they did in August, investors should be cognizant of this risk.
• Australia’s parliament passed laws this week that impose a tax on carbon emissions.  This will force the top 500 polluting companies, many of which are in the mining industry, to pay a price for carbon emissions.  Some of the proceeds will be used to compensate households for the higher costs this will impose.
• The next climate change debate is set to take place in South Africa at the end of the year as the country publishes revised proposals on its carbon tax scheme.  South Africa gets 94 percent of its electricity from coal and the government owned power utility, Eskom, is the largest polluter.

Tags: American Silver Corp, Barrick Gold, Capitalization Companies, Copper Prices, Dollar Index, Gold Companies, Gold Ltd, Gold Market, gold stocks, Goldcorp, Hammond Reef, Ivanhoe Mines, Kirkland Lake Gold, Kirkland Lake Gold Inc, Nyse Arca, Ore Grades, Pan American Silver, Pan American Silver Corp, Silver Standard Resources, Spot Gold
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Energy and Natural Resources Market Cheat Sheet (November 14, 2011)

Sunday, November 13th, 2011

Energy and Natural Resources Market Cheat Sheet (November 14, 2011)

Strengths

• The International Energy Agency monthly report indicated that Organisation for Economic Co-operation and Development (OECD) oil inventory data fell by 800,000 barrels per day in September and October which is more than twice the normal rate and implies a fundamentally tight oil market.
• Monthly data released by the Chinese government showed copper imports rose to the highest level in 17 months in October.
• West Texas Intermediate (WTI) crude oil has been among the best-performing commodities over the past week and month, up 4 percent and 19 percent respectively. Analysts at Deutsche Bank observed that unlike industrial metals, the energy sector, and specifically crude oil, WTI has been resilient to heightened levels of equity market volatility and disruption risk and instead focused on physical fundamentals which have been tightening.  This has seen U.S. inventories decline in Petroleum Administration for Defense Districts (PADD) 2, which has encouraged the forward curve to move into backwardation and contributed to a narrowing in the WTI-Brent spread.  Brent is likely being constrained somewhat by a better-than-expected recovery in Libyan oil production.
• The Global Resources Fund has had good relative performance versus its peer group median over the trailing month.

Weaknesses

• The Global Resources Fund underperformed its benchmark this week mostly attributable to stock selection within the energy sector.
• In spite of some supportive supply side news and positive Chinese import data, copper prices have continued to slide since the end of October and fell 3 percent this week to $3.46 per pound on the COMEX.
• A leading indicator for Chinese steel demand, October data for residential floor space under construction fell 6.1 percent year-over-year and sales fell 9.9 percent year-over-year, while starts also slowed sharply.

Opportunities

• In its World Agriculture Supply and Demand Estimates report, the U.S. Department of Agriculture cut its forecast for U.S. corn and soybean yield, with the decline in corn production larger than anticipated by the market.  Low inventories and lower production should support higher corn prices and, by extension, higher fertilizer prices.
• According to IEA, Libya’s crude oil production is expected to rise to 700,000 barrels per day by the end of 2011.
• China’s Ministry of Industry and Information Technology (MIIT) has announced its expectation that China’s annual crude steel consumption will be on the order of 750 million tons per year by 2015, as part of the five-year plan for the sector.

Threats

• Downside volatility could refocus if an agreement is not reached regarding Congress’ efforts to pass the budget next week, and later concerning the U.S. super-committee deadline on November 23.

Tags: Agriculture, Backwardation, Chinese Import, Copper Prices, Crude Oil Wti, Day In September, Development Oecd, Forward Curve, Industrial Metals, International Energy Agency, Leading Indicator, Market Volatility, Petroleum Administration, Physical Fundamentals, Residential Floor, Resources Fund, Steel Demand, Stock Selection, West Texas Intermediate, Wti Brent, Wti Crude Oil
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Energy and Natural Resources Market Cheat Sheet (October 17, 2011)

Saturday, October 15th, 2011

Tagebau Garzweiler Open Pit Mine, North-Rhine Westphalia, Germany

Energy and Natural Resources Market Cheat Sheet (October 17, 2011)

Strengths

• Copper prices continued to rally this week, gaining 4 percent to nearly $3.40 per pound, as sentiment towards commodities improved and the potential of mine worker strikes threatens supply.
• China’s coal imports steamed ahead in September to reach an annualized rate of 244 million tons, which marked a 43 percent year-over-year rise.  Exports fell by 35 percent on the same comparison to only 14.7 million tons annualized.
• Brent Crude oil gained over 7 percent this week to $114 per barrel, the highest level in 4 weeks, as supply concerns in the North Sea and Middle East support prospects of a tightening market.
• China, the world’s biggest iron-ore buyer, boosted imports to an eight-month high in September following gains in steel prices. The nation imported 60.57 million metric tons of the steelmaking material last month, China’s General Customs said this week, which is the highest since January and 15 percent more than a year ago.
• Copper imports by China climbed to the highest level in 16 months in September as lower prices lured traders to place orders after domestic stockpiles were reduced earlier this year. Inbound shipments of the refined metal, copper alloy and products rose 12 percent to 380,526 metric tons from 340,398 tons in August, according to General Administration of Customs.  Imports gained for a fourth month to the highest level since May 2010, and were 3.3 percent higher than the 368,410 tons of a year earlier.

Weaknesses

• The World Steel Association lowered its growth forecast for India’s steel use to 4.3 percent for 2011 from 13.3 percent predicted in its April 18 report. The forecast for next year was cut to 7.9 percent from 14.3 percent as slower economic growth is expected to weigh on demand.
• In its third quarter 2011 earnings release, Alcoa highlighted weakness in European demand in an otherwise positive picture, while maintaining its view for global demand growth of 12 percent in 2011 with an upward revision to Chinese demand growth to 17 percent offsetting weakness elsewhere.

Opportunities

• China’s cabinet announced on Monday it will tax all resource products starting on November first. Crude oil and natural gas nationwide will be taxed at a rate between 5 and 10 percent of their sales value. The regulations impose a sales tax ranging from 8 yuan (1.25 U.S. dollars) to 20 yuan per metric ton on coking coal, and from 0.40 to 60 yuan per metric ton on rare earth ore. Taxes on other types of coal stood unchanged at 0.30 to 5 yuan per metric ton. The tax rate for other non-ferrous metals is set between 0.4 to 30 yuan per metric ton. Ferrous metals will be taxed at two to 30 yuan per metric ton. China’s current resource tax is levied based on production volume instead of sales value.
• According to a report from Business Line, the Indonesian government has circulated a new draft decree seeking comments on imposing a ban on the export of coal below 5,100 gross kilo calories per kilogram (Kcal/kg) from 2014. The ban, if implemented, could reduce the exports by 120-130 million tons; the country exported 270 million tons in 2010. India will be impacted the worst as it imports coal grades from 5,000 Kcal/kg to as low as 3,500 Kcal/kg from Indonesia.
• Colombian Mines and Energy Minister Mauricio Cardenas said the country seeks to ensure that gold, coal and other mining projects move ahead at full speed to boost production and government revenue.  Colombia wants growth in its mining industry to match rising investment in oil production by helping projects that meet environmental and social standards and avoid delays, Cardenas said. Milton Rodriguez, a member of a Senate commission overseeing natural resources, and other lawmakers had pushed for tax increases on mining companies. Colombia should work on implementing recent changes in how mining revenue is distributed by the government, rather than on changing tax rates, Cardenas said.  The Global Resources Fund holds several investments in Colombian energy and mining assets.

Threats

• The International Energy Agency (IEA) cut forecasts for global oil demand in 2012 for a second month as the economic recovery loses momentum. The Paris-based adviser reduced estimates for world demand for next year by 210,000 barrels a day, to 90.5 million barrels a day in its monthly oil market report. That means consumption will increase by 1.3 million barrels a day, or 1.4 percent, from this year. Oil inventories in industrialized nations fell below their five-year average for the first time in more than three years, according to the IEA.
• Copper supply will begin outpacing demand in 2013 as new mines enter production, according to consultancy Brook Hunt. The surplus will start to accelerate toward 2015, according to Richard Wilson of Brook Hunt. The researcher estimates the market will be in deficit by 200,000 metric tons this year and balanced in 2012.

Tags: Brent Crude Oil, Commodities, Copper Alloy, Copper Prices, Crude Oil, Earnings Release, General Administration, Gold, Inbound Shipments, India, Iron Ore, Metal Copper, Million Metric Tons, North Rhine Westphalia, Open Pit, Refined Metal, Steel Association, Steel Prices, Steelmaking, Stockpiles, Supply China, Supply Concerns, Westphalia Germany, World Steel
Posted in Commodities, Gold, India, Markets, Oil and Gas | Comments Off

Energy and Natural Resources Market Cheat Sheet (October 11, 2011)

Monday, October 10th, 2011

Energy and Natural Resources Market Cheat Sheet (October 11, 2011)

Strengths

• This week, the Global Resources Fund outperformed its peers and benchmarks due to its defensive positioning of the portfolio. Exposure to seniors and larger market cap stocks helped limit the downside risk to the Fund. Junior exploration stocks also rebounded from 52-week lows.
• Deutsche Bank highlighted that global stainless steel production rose 3.8 percent to a record 16.4 million tons in the first half of 2011.
• Copper prices gained 4 percent this week on reports that LME cancelled warrants jumped to 60,000 tons, the highest level in over two years.
• According to the International Monetary Fund, Thailand, Bolivia, and Tajikstan added a combined 18.2 tons of gold last month.
• Crude oil gained 5 percent this week after the U.S. Department of Energy reported a surprise drop in crude stockpiles and on signs the U.S. may take further steps to sustain an economic recovery.
• Deutsche Bank reported strength among agriculture markets. Corn was supported by the U.S. Grains Council prediction that China will need to import five times more corn than the 2 million tons the USDA is currently estimating in 2011-12.  Wheat futures rose by increased tenders from the MENA region.  Many nations there stocked up after last year’s Arab Spring, but now are in a position where they need to import again. Additionally, Thailand, the world’s largest exporter of rice, cut its main harvest production forecast by almost 10 percent after floods damaged crops.

Weaknesses

• Bloomberg reported that Nigeria, Africa’s top oil producer, plans to end fuel subsidies, saving the government $7.5 billion in 2012. Nigeria is facing declining revenue as the price of oil, the source of more than 95 percent of export income and 80 percent of government earnings, fell 28 percent in the past six months.
• Macquarie Research drew attention to precious metals’ year-to-date performance, which has remained low. Palladium prices have been hit by large ETF redemptions, with palladium ETF holdings now close to levels seen in mid-2010.
• The latest steel market sentiment survey results were highlighted by Macquarie Research.  Fifty-seven percent of companies globally now expect prices to be lower in a three-month timescale, with only 13 percent seeing upside. Eleven percent of global respondents expect global demand to rise this coming quarter, with 46 percent expecting it to fall.

Opportunities

• Goldman Sachs Group reported that commodity prices may rise 20 percent over the next year as growth in emerging markets offsets the impact of the sovereign-debt crisis in Europe and a slowdown in developed economies. “With recent GDP revisions by our economists falling hardest on Europe but emerging market growth expectations still relatively solid, we continue to believe that demand growth in 2012 will be sufficient to tighten major commodity markets,” an analyst for the bank said.
• Fed Chairman Ben Bernanke said the central bank can take further steps to sustain a recovery that’s close to faltering and cautioned lawmakers against making changes in fiscal policy that may harm growth. He went on to say that the Fed can give more information about its pledge to keep interest rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits or buy more securities.
• Codelco said buyers in China should take advantage of a 14-month low in copper prices to boost imports of the metal. Customer orders from Asia look quite strong for next year, CEO Diego Hernandez said, adding that Codelco has started talks with buyers for 2012 sales and expects them to match this year’s number. Clients in Europe are cautious on requirements and the company has had some cancellations, Hernandez said. Other customers have sought to bring forward deliveries, he said.

Threats

• An International Monetary Fund official warned that the eurozone could see a “meltdown”’ in two to three weeks, unless policy actions take place, says JPMorgan.  This in turn would trigger a domino effect, producing a meltdown across the European banking system.
• Claudio Scliar, the Ministry’s Secretary for geology and mineral royalties, announced that Brazil had plans to boost taxes on iron ore and that the government is considering a plan to double the royalty on iron ore to 4 percent of gross revenue from 2 percent of net sales, Nomura Research highlighted.  She further went on to say that the ministry aims to send Congress three bills this month to alter minerals royalties, change the way mining concessions are granted and create a new regulating body.
• An energy economist and publisher of Petroleum Economics Monthly recently said, “Natural gas as an energy source is now roughly the equivalent of $24-per-barrel oil.”  Furthermore, the publisher believes that projections of crude-oil demand in 2025 are typically 20 percent to 30 percent too high, and that crude-oil prices are likely to drop sharply as those forecasts go awry.
• Macquarie reported that Grasberg, Freeport McMoRan Copper and Gold’s mine in Indonesia will see union workers extend their strike for a second month. Freeport has experienced on-going labor disputes at a number of their mines.

Tags: 52 Week Lows, Agriculture Markets, Brazil, Cap Stocks, Commodities, Copper Prices, Crude Oil, Downside Risk, Exploration Stocks, Export Income, Gold, Grains Council, International Monetary Fund, Junior Exploration, Largest Exporter, Lme, Mena Region, Nigeria Africa, Oil Producer, precious metals, Resources Fund, Stainless Steel Production, Tajikstan, Wheat Futures
Posted in Brazil, Commodities, ETFs, Gold, Markets, Oil and Gas | Comments Off

Energy and Natural Resources Market Cheat Sheet (October 3, 2011)

Sunday, October 2nd, 2011

Energy and Natural Resources Market Cheat Sheet (October 3, 2011)

Strengths

• The Global Resources Fund performed well this week due to its defensive positioning in the portfolio.
• On a relative basis, asset allocation and stock selection among food and grain processors helped to limit downside risk to the fund. Additionally, weighting in senior precious metals also played a role in limiting a decline.
• Despite a sell-off in copper prices and poor sentiment towards mining stocks this week, M&A remains active. Minmetals Resources agreed to buy Anvil Mining for $1.3 billion cash, gaining three copper mines in the Democratic Republic of Congo, which may produce 60,000 metric tons of copper cathode annually from next year.

Weaknesses

• Copper fell almost 5 percent to a 13-month low on Wednesday, plummeting from ongoing European fears. Copper’s drop came despite a 21 percent jump in Chinese imports in August. Gold had dropped almost 2 percent and wheat 5 percent.
• Freeport McMoRan Copper and Gold continues to experience ongoing strikes at two of their properties. Mining Weekly reported that up to 1500 workers in Indonesia’s Freeport remote Papua province protested outside a government office on Thursday, while workers went on strike that same day at the Peruvian Cerro Verde mine. This is third stoppage at Freeport this month. The company still maintains that the labor concerns have had no effect on output. Freeport’s shares were at a 15-month low as it weathers these two strikes.
• Crude oil is headed for its largest quarterly drop in 15 months over concerns of global economic slowdown.
• HSBC highlighted that September data signaled continued stagnation of China’s manufacturing sector. After adjusting for seasonal variation, the HSBC Purchasing Managers Index held steady at 49.9 in September. Moreover, the index averaged its lowest quarterly reading since the first quarter of 2009. Despite manufacturing production in China continuing to rise during September, panelists attributed the subdued increase in production to fewer intakes of new business and decreased demand conditions.

Opportunities

• The Don Coxe Strategy Journal recommended an investment strategy of maintaining heavy weighting in agricultural stocks. Despite having high volatility, the endogenous risk in their earnings is well below those of most cyclical stocks – commodities and otherwise. He also recommended retaining strong exposure to U.S. oil producers operating on land. The spread between West Texas Intermediate and Brent oil, and U.S. and European natural gas prices, remains. Coxe says that at the moment, energy is the most conspicuous competitive advantage the U.S. possesses.
• The CEO of Anglo American gave an upbeat statement this week regarding current and forward-looking demand conditions. The company stated that demand from China continues to be robust and that it doesn’t expect any of its clients to cancel orders for the next 18 months to two years in their nickel and iron ore businesses.

Threats

• Should we continue to see excessive volatility in the markets, we could potentially experience a global sell-off. Worldwide negative sentiment remains present, as ongoing concerns surrounding the global sovereign debt issues, leading investors to lose confidence in global policymakers.
• After recently swearing in Michael Sata as Zambia’s new president, the new Mines Minister Wilbur Simusa reportedly said that the tax the country is receiving from Africa’s top copper producers is not enough and may need to be reconsidered. Reuters highlighted that copper mining is Zambia’s economic mainstay and any plans to increase the tax could hurt the industry target of doubling annual copper output to 1.5 million tons by 2015.

Tags: Anvil Mining, August Gold, Cerro Verde, Commodities, Copper Cathode, Copper Mines, Copper Prices, Crude Oil, Democratic Republic Of Congo, Downside Risk, European Fears, Freeport Mcmoran, Freeport Mcmoran Copper, Freeport Mcmoran Copper And Gold, Global Economic Slowdown, Gold, Grain Processors, Labor Concerns, Papua Province, Purchasing Managers Index, Relative Basis, Seasonal Variation, Two Strikes
Posted in Commodities, Gold, Markets, Oil and Gas | Comments Off

Energy and Natural Resources Market Cheat Sheet (September 19, 2011)

Sunday, September 18th, 2011

Energy and Natural Resources Market Cheat Sheet (September 19, 2011)

Strengths

• The Global Resources Fund gained this week and outperformed its benchmark as energy- and industrial metal-related stocks rallied with major stock indices.
• The latest Steel Benchmarker price assessment by World Steel Dynamics showed further stability in global steel prices, with the majority flat over the past two weeks. The exception was U.S. hot rolled coil, which rose 5.1 percent sequentially to $768 per ton, arresting three months of consecutive falls.
• The Baltic Dry Index of freight costs increased 7 percent this week as shipments of iron ore remain robust. This is the fifth consecutive weekly gain for the Baltic Dry Index.

Weaknesses

• Seaborne iron ore prices ended the week lower for the first time in 5 weeks on weakening steel prices. After hitting 3-month highs of $181 per ton last week, the TSI reference price has fallen nearly 2 percent to trade below $178 per ton. Per analysts at Citigroup, sentiment in the Chinese steel market is still deteriorating and buyers remain inactive owing to the lack of any clear direction.
• Corn prices fell 4 percent this week on a government report that corn crop conditions have improved recently.
• Despite news of additional supply constraints, copper prices slipped 1 percent this week on concerns of slowing demand in Europe and Asia.
• Southern Copper cut its production forecast by 8 percent for the year. Output will fall to 600,000 tons, from an earlier estimate of 650,000 tons, CEO Oscar Gonzalez Rocha said.
• The International Energy Agency released its Oil Market Report this week, revising its global oil demand growth forecast lower for 2011 by 160 thousand barrels per day to 1.04 million barrels per day, and for 2012 by 200 thousand barrels per day to 1.41 million barrels per day. The IEA attributes lower non-OECD readings and reduced economic growth expectations as the prime reason for its downward revision.

Opportunities

• Reuters reported that power rationing in China will likely persist in the first half of 2012, and the deficit should be between 10 gigawatts and 15 gigawatts in the first half of 2012. Other than low water levels impacting hydropower supply, power output has been hampered by insufficient coal production, low coal quality and a mismatch between coal and power prices. The grid has asked the local government to subsidize additional power generation.
• According to Alberta’s Energy Minister Ron Liepert, Canada’s oil sands producers need to build at least two more pipelines the size of the controversial Keystone XL project if they are to meet their ambitious plans for growth. “As we move forward, there will be a need for other pipelines … By 2020, we may need three Keystones,” he said.
• Peru’s Finance Minister Miguel Castilla commented that the country’s overhaul of its mining tax system will maximize government revenue while ensuring companies proceed with more than $40 billion of investment in new mines. Castilla also stated that companies won’t pay more than 50 percent of their operating profits under the new tax regime. Under Peru’s existing system, royalties are based on sales. He said that the new system will be fairer because it levies taxes on operating profits instead of revenue, and companies with contracts that protect them from higher taxes will be subject to a separate levy on profits.
• Australia’s Bureau of Meteorology sees La Niña conditions developing in Q4 this year. Historically this would mean cold winters in the U.S. northeast and stronger demand for heating fuels.

Threats

• Workers at Freeport MacMoRan’s Cerro Verde mine in Peru launched an indefinite strike today after discussions with the government failed to reach an agreement on wages and working conditions. The mine represents roughly 2 percent of the world’s mined copper production.

Tags: Baltic Dry Index, Canadian Market, Copper Prices, Corn Crop, Corn Prices, Crop Conditions, Global Steel, Growth Expectations, Hot Rolled Coil, International Energy Agency, Iron Ore Prices, Major Stock Indices, Oil Market Report, Oscar Gonzalez Rocha, Prime Reason, Resources Fund, Southern Copper, Steel Dynamics, Steel Market, Supply Constraints, World Steel Dynamics
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Chart of the Week – Copper’s Weak Supply Growth

Friday, August 12th, 2011

A flurry of weak economic news lately is weighing heavily on copper’s price. Recently, the red metal dipped to its lowest since July 25 after a release of weak global manufacturing numbers and concern over global growth.

But demand is only part of the equation for the metal widely used in manufacturing and construction. Macquarie Research says current copper supply shortages are a main reason we could see higher copper prices in the near future.

Like gold, oil and other commodities, copper mine supply growth has made little headway recently. Since 2004, only around 1.45 million tons of new supply have been brought online.

This is the same old story for copper production. In 2001, the top 50 probable copper mine projects totaled more than 7 million tons of new production. By 2007, only 1.3 million tons—less than 20 percent—were either operational or under construction, data from Merrill Lynch and Xstrata shows.

With weather delays, poor deposit grades, worker strikes and mill problems, Macquarie forecasted at the start of 2011 that roughly 700,000 tons of copper mine production could be lost to disruptions. Only halfway through 2011, more than 75 percent of that allotment is already accounted for. Much of the supply disruption has come from Chile, the world’s largest copper producer.

Weather reports out of South America indicate that Chile is experiencing the “wettest winter in decades for Chile’s arid northern desert.” In July, a single stretch of storms dropped four year’s worth of rain on the historically dry Antofagasta region, according to the Associated Press. This especially harsh winter has forced more than 12 copper mines to slow or halt operations.

Furthermore, a prolonged strike at Chile’s Escondido mine continues to affect copper supply. Workers at the mine have been striking for nearly two weeks, seeking higher wages and an $11,000 annual bonus. The mine accounts for 7 percent of the world’s annual copper output. It’s estimated the closure has eliminated nearly 36,000 tons of copper from the global marketplace, says the Dow Jones Newswires. Reuters reported progress has been made in labor discussions, raising expectations that workers will soon head back to work.

Macquarie says 2 percent year-over-year supply growth in 2011 is “optimistic.” We believe delays and disappointments for copper production increases will continue to constrain supply. This could keep copper prices at relatively high levels despite a weaker-than-expected global economy.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

None of U.S. Global Investors Funds held any of the securities mentioned in this article as of 06/30/11.

Tags: Allotment, Commodities, Construction Data, Copper Mine, Copper Mines, Copper Prices, Copper Producer, Copper Production, Disruptions, Economic News, Global Growth, Harsh Winter, Headway, Macquarie, Merrill Lynch, Northern Desert, Supply Disruption, Supply Shortages, Weather Delays, Wettest Winter, Xstrata
Posted in Commodities, Markets | Comments Off

QE2: An Unmitigated Disaster?

Monday, March 7th, 2011

By Dian L. Chu

There was a debate recently between Rick Santelli of CNBC and James Bullard, President of the Federal Reserve Bank of St. Louis regarding the inflation effects of the QE2 initiative.

Bullard, the economist, cited the core inflation rate, and even the headline inflation rate as illustrative of a lack of serious inflation pressures in the US economy. Santelli, on the other hand, talked the trader`s perspective of inflation wanting to use the CRB Index (Fig. 1) as a true indication of inflation effects since QE2 was brought up at Bernanke’s Jackson Hole Speech in August 2010.

So let us compare two scenarios and ask ourselves would the US economy be doing better without the QE2 initiative?

Pre-QE2 Prices:

1. 2.50-2.70% 10-Year Treasury Yield
2. $2.64 US Gasoline Price (August 2010)
3. Cotton Prices at $85 (Contract Size 50,000 pounds)
4. S&P 500 Index 1100
5. Copper Prices $3.25 a pound
6. US Dollar Index at 83.00
7. Lumber Prices at $200 (Futures Contract –Contract Size 110,000 board feet)
8. Sugar Prices at $17.50 (Futures Contract-Contract Size 112,000 Sugar #11)
9. Cattle Prices at $92 (Futures Contract-Contract Size 40,000 pounds)
10. Milk Prices at $14 (Futures Contract-Contract Size 200,000 pounds Class III)

QE2 Effects So Far:

1. 3.50% 10-Year Treasury Yield
2. $3.50 US Gasoline Price
3. Cotton Prices at $215 (Futures Contract -50,000 pounds)
4. S&P 500 Index 1320
5. Copper Prices $4.50 a pound
6. US Dollar Index at 76.40
7. Lumber Prices at $303 (Futures Contract)
8. Sugar Prices at $30 (Futures Contract)
9. Cattle Prices at $114 (Futures Contract)
10. Milk Prices at $19.50 (Futures Contract)

About That Unemployment Rate…

This just gives a snapshot of some of the inflationary effects for the US consumer.  I cannot think of any argument where higher interest rates resulted from QE2 are good for the housing sector, which is the most troubled part the US economy.

Nevertheless, I must add that the unemployment rate is better, and we have created more jobs since QE2 but with a highly fluctuating job pool where workers give up looking and leave the labor market it is hard to gauge the real unemployment numbers.

Plus how much of the job creation is due to other factors like more business friendly policies from the Obama administration, a Republican Landslide in the Midterm Election, and the extension of the Bush Tax Cuts and a reduction in the payroll taxes for businesses?

Equity Gains Don’t Mean Much

The S&P 500 is 230 points higher which can be argued is good for the “wealth effect” but stocks usually have a year-end rally so some of these gains probably would have occurred even without QE2.

Clear Present Danger – Inflation

There are some substantial price increases in a lot of these inflationary metrics for both businesses and the US consumer, not to mention the reduced purchasing power of a much lower US dollar (Fig. 2).

More importantly, inflation data utilized by the core and headline rates are behind the curve of futures prices by anywhere from 3-6 months so the true inflation pass through effects of these higher input prices at the futures level have yet to be realized in the Fed`s measures of inflation data.

For example, gasoline prices at the pump probably lag the futures prices established by the RBOB contract by 20-30 cents. Likewise, the full effects of higher cotton prices will take much longer to work their way through the supply chain to consumers at the retail level for clothes they purchase. It may take another six months for the damage that has already occurred at the futures level to be fully experienced by consumers of cotton products, which would lead to an underestimate of the current inflationary effects in the economy.

Biflation at Work

It should be noted that parts of the economic data are deflationary in nature like housing and wages, which serve to artificially keep the inflation numbers utilized by the fed down, which is the biflation phenomenon I previously discussed.  And if you add in the 6 month lag factor for inflation effects to pass through to the data, a completely different inflation story starts to emerge.

Wanted – Lower Inflation & Interest Rate

However, this still misses the important barometer for analyzing QE2 which should be the following question: “Which scenario is better off for the US economy?” and not any argument of what the current inflation level is in the economy.

This assumes that some inflation is better than no inflation, and I would argue that being able to finance a home mortgage at 100 bps lower, and a dollar per gallon cheaper gasoline is better for businesses and consumers, and that this scenario is far better for fostering sustainable economic growth than the current scenario of QE2 and its effects.

Really Better Off with QE 2?

So the question for Bullard misses the mark if one argues with him what the current or even future inflation effects are for the economy due to QE2. The real question for Bullard is would the US economy be performing that much better without QE2? If you add up all the pros and cons of QE2, guess which scenario would 9 out of 10 independent economists pick for an environment that fosters economic growth?

It seems regardless of what the inflation data says is the overall inflation rate in the economy, QE2 gave us all the negative, anti-growth, lowered standard of living type of inflationary effects that act as a major tax and headwind for both businesses and consumers going forward, and very little of the much needed “Record GDP Growth” and “Eye-Popping Job Creation” bang for our costly buck.

Right Back Where We Started

It seems we pretty much could have gotten this same level of current GDP growth and job creation without massively devaluing the dollar in the process. Sometimes a little patience goes a long way, and if the fed would have waited until the November elections where both the business climate and economic data were improving all on their own we could have had the best of both worlds with a low inflationary price stable environment, and a slow but steadily improving employment situation.

The real fear and irony is that once the full effects of QE2 are realized in the US economy, that we start reacting to said inflationary effects both through tightening monetary policy and consumer/business behavioral changes, and the US starts giving back some of its recent economic gains, and becomes vulnerable to the very scenario that the fed was trying to avert in the first place, a double dip, deflationary downturn in the economy.

EconForecast, March 06, 2011 | Facebook Page | Post Alert | Kindle

Tags: 10 Year Treasury, Cattle Prices, Contract Size, Copper Prices, Core Inflation, Cotton Prices, Dollar Index, Federal Reserve Bank, Federal Reserve Bank Of St Louis, Futures Contract, Gasoline Price, Headline Inflation, Inflation Pressures, Inflation Rate, Inflationary Effects, James Bullard, Lumber Prices, Rick Santelli, Unmitigated Disaster
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Energy and Natural Resources Market Cheat Sheet (February 7, 2011)

Saturday, February 5th, 2011

Energy and Natural Resources Market Cheat Sheet (February 7, 2011)

Strengths

• Ukraine’s coal production rose 9.6 percent from a year earlier in January, the Coal and Energy Ministry said.
• The Journal of Commerce reported that U.S. steel imports rose by 47.2 percent on a year-over-year basis in 2010.
• Supply disruption fears due to cyclone weather activity off the coast of Australia pushed copper prices to record levels in London this week.
• Analysts at IHS Herold highlighted in a report this week that global coal mergers and acquisitions set a record in 2010 with $20 billion worth of deals.

Weaknesses

• The Indonesian Coal Mining Association said the country’s 2011 coal output may reach 320-330 million tons, below the target of 340 million tons.
• India’s domestic coal production will fall short of demand by 142 million metric tons in the year starting April 1, exceeding a previous estimate. Coal demand in the next financial year is expected to be 696 million metric tons, compared with domestic output of 554 million tons.

Opportunities

• China will have more difficulty feeding itself in the coming years as expanding demand, spurred by increased urbanization, strains resources, a state official said. From 2011-2015, more than half of the country’s population is expected to be living in cities or towns, creating additional demand of 4 million metric tons of grain, 800,000 tons of vegetable oil and 1 million tons of meat every year.
• The next annual coal-supply contracts between mining companies and Asian utilities, which run from April, are likely to set record prices, the Financial Times reported. This year’s estimates range from $130-$145 per metric ton, compared with $125 in 2008-09 and $98 in 2010-11.
• In an effort to fend off tough competition from Asian rivals and offset shrinking demand from domestic automakers, Japan’s Nippon Steel Corp. and Sumitomo Metal Industries plan to merge. This would create the world’s second-largest steelmaker. The deal comes as the industry grapples with surging raw materials prices, which have been exacerbated recently by floods in Australia.
• Reuters reported that Chinese oil company CNOOC will pay $1.3 billion for its second shale deal with Chesapeake Energy in the U.S. The company will buy a 33.3 percent stake in Chesapeake’s leasehold acres in northeast Colorado and southeast Wyoming for $570 million. CNOOC also agreed to fund 66.7 percent of Chesapeake’s drilling and completion costs until an additional $697 million is paid.

Threats

• Xstrata evacuated its 230,000 tons per year copper refinery—1 percent of global production—in Queensland, Australia in a precautionary move. Cyclone Yasi is expected to make landfall during the week.
• China’s oil demand growth rate in 2011 may slow to half of last year. Despite the slowdown, it would still account for 40 percent of the 1.4 million barrels per day of global demand growth forecasted by the International Energy Agency (IEA).
• U.S. gasoline at the pump may rise 13 percent by May as crude oil in New York tops $100 a barrel and a recovering economy boosts fuel demand, according to analysts surveyed by Bloomberg News. The highest price for regular gasoline this year will be $3.50 a gallon, based on the median estimate of 14 analysts. Gasoline hasn’t reached that level since Oct. 6, 2008, according to AAA.

Tags: Asian Rivals, China, Coal Demand, Coal Mining, Coal Output, Coal Production, Coal Supply Contracts, Copper Prices, Domestic Automakers, Domestic Coal, energy, Energy Ministry, Global Coal, India, Indonesian Coal, Mergers And Acquisitions, Million Metric Tons, Nippon Steel, Nippon Steel Corp, Sumitomo Metal Industries, Supply Disruption, Target, Weather Activity
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Energy and Natural Resources Market Cheat Sheet (January 31, 2011)

Saturday, January 29th, 2011

Energy and Natural Resources Market Cheat Sheet (January 31, 2011)

Strengths

• China imported 164.8 million tonnes of coal in 2010, up 31 percent compared to 2009, and exports dropped 15 percent to 19.03 million tonnes. Indonesia remains China’s largest supplier followed by Australia.
• The latest U.S. weekly crude steel output reported by the AISI is back to levels last seen in June, at 83.3mtpa, representing a capacity utilization rate of 73 percent.
• China’s stainless steel output rose 28 percent last year to 11.3 million tonnes. Imports fell by 18 percent to 1.07 million tonnes, while apparent consumption increased 14 percent, according to the Stainless Steel Council.
• India pumped 3.34 million tonnes of crude oil in December, the highest monthly output, according to the oil ministry.

Weaknesses

• U.S. natural gas futures prices fell 8.5 percent this week on a forecast for milder weather.
• The Baltic Dry Index fell to the lowest level in almost two years as Australian floods curbed coal cargoes and supply of new vessels increased.

Opportunities

• Environmental regulators in Texas have approved an air quality permit, thus paving the way for construction of a thermal power plant in Corpus Christi. The EPA had earlier requested that Texas deny the permit. This event adds to the ongoing feud between Texas and the EPA. There are still further permits needed for the plant to come to reality, and in all likelihood, this initial permit will be challenged.
• Copper prices will rise as the global economy grows and construction recovers in developed countries, according to Caterpillar, Inc. Copper will average $4.25 a pound in 2011, Caterpillar said in its fourth quarter earnings statement. That’s up 24 percent from last year’s average. Global production of copper will increase 2 percent as prices are currently very attractive for new investment, the company said.

Threats

The latest estimates by the Queensland Resources Council suggest coal production loss may cost the industry up to $9.5 billion and output may go down by up to half of forecast production of 51 million tonnes during the quarter ending March 31. The report says that 85 percent of Queensland’s mines are “impaired by excess water.”

Tags: Aisi, Apparent Consumption, Baltic Dry Index, Capacity Utilization Rate, Cargoes, Caterpillar Inc, China, Copper Prices, Crude Steel, energy, Fourth Quarter Earnings, Gas Futures Prices, Global Economy, Global Production, India, Natural Gas Futures, Natural Gas Futures Prices, Oil Ministry, Paving The Way, Queensland Resources, Resources Council, Steel Output, Thermal Power Plant
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