Good news for commodities — Citi says the worst is over
More good news. In fact, possibly great dollops of it for the range of technology metals, potash/phosphate, and uranium followers. But let’s start the wrong way around, arguing the case from the particular to the general (which university philosophy students learn from the start is not a good thing to do). But what the hell: Australian emerging tin producer Stellar Resources (ASX:SRZ) announced Friday (Sydney time) it had raised A$2.6 million after selling 50 million shares to Capetown SA, a private family company based in Luxembourg. Capetown SA has a long association with the tin and owns 40-year-old metal recycling company, Metallum.
Tin is one of our key critical metals (stockpiles in London Metal Exchange warehouses fell to just 9,580 tonnes this week) and an important technology metal, vital for solder in electronics. The investment out of Luxembourg is another sign that wallets are being opened again, especially for metals that look like being in short supply (which sure applies to tin and — incidentally — the commodities team at French bank BNP Paribas this week picked tin as one metal to back this year).
Now, something slightly less particular. Spot uranium ticked up a little this week to $35/lb. That is still woeful — it would need to double before a company would consider starting a new mine — but encouraging nevertheless.
And then, on the graphite scene, the fourth quarter of 2013 represented a slight improvement in sales; prices steadied and high grade flake prices reversed the downtrend of earlier months. Again, like uranium, not time yet to pop a cork, but it seems as if a floor might have gone under the graphite price. We might be excused for feeling a touch of bullishness, which leads me to the most encouraging news of the week.
Now to the general, the big guns, as it were. Ten days ago I posted an item here on Investor Intel headlined “Relax REE, graphite, potash and uranium followers: JP Morgan says the super-cycle has a way to run”
Now read this headline: “Turning Bullish — The First Time in Three Years”. It was on a report out this week from Citi Research, a division of Citigroup Global Markets. It covers, of course, the base metals, the bulk mineral commodities and steel. However, as with the JP Morgan report, I can think it is reasonable to extrapolate some of the points to critical and technology metals, along with fertiliser minerals and uranium. Each of those has particular market fundamentals, but any up-tick in global activity must work its way through to all levels of the resources sector. If the electronics sector gains, then that must have some impact on rare earth oxide demand, for example.
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The Citi analysts argue that the mining sector has moved through the five stages of grief: denial, anger, bargaining, depression and acceptance. This how they see those stages playing out:
2010 — mid-2011: The Denial period. Investors and companies would not believe the sunset of the super-cycle, instead clinging to the “stronger for longer” rock.
Mid-2011 — mid-2012: Anger. Shareholders reacted badly to write-downs. The mining companies said they would continue to spend on large projects no matter what.
Mid-2012 — End 2012: Bargaining. Management changes, slashing of capital spending budgets, and focus on costs. This buoyed hopes that the mining sector had experienced a sea change and the sector could re-emerge with greater focus on shareholder return.
2013: Depression. The mining sector underperformed the FTSE 100 in London by around 24%, this being coupled with redemption and liquidation from commodity exchange-traded funds and questioning whether metals had a future as an asset class.
2014: Acceptance? Target prices have been cut by around 44% over the past three years, commodity price forecasts have also been cut to be more in line with spot commodities. Generalist interest has hit rock bottom.
Okay, some of our sectors have behaved differently. Rare earth prices were soaring in the “anger” period, and it was a tsunami and earthquake that did for uranium prices, not market changes.
That said, don’t you agree that Citi’s analysis of 2013 and into 2014 has some plausibility? Do you find many people these days trying to talk up the rare earth sector, or uranium, or even to some extent graphite. No, outside the followers of InvestorIntel, optimists are hard to find.
Yes, generalist interest in our product group has dissipated. Share prices show that. Perhaps there’s another word for that often used in market cycles: capitulation. And we all know what follows capitulation: the cycle starts all over again.
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