EDITOR: | November 25th, 2015 | 5 Comments

Commodities hope: some analysts see light at end of tunnel

| November 25, 2015 | 5 Comments

Are we reading the wrong signals when it comes to the outlooks for metals? Apart from the bounce on Tuesday at the London Metal Exchange, it has been a pretty terrible time for traded metals and energy. Gold has been bashed around, Goldman Sachs is now forecasting $20/barrel oil (the world is apparently running out of storage capacity as the Saudis and other producers keep pumping the black liquid) and iron ore is still on its knees.

So, not too bright an outlook, it seems. But that may be the case only if you look at copper and iron ore, for example, which are both in oversupply. Nickel, too, with mines keeping on churning out that metal. No wonder prices fell. With the big iron ore miners expanding output while Chinese demand for imports is contracting, no wonder that the Baltic Dry Index (which measures bulk cargoes on 23 shipping routes) is at an all-time low.

But hold the phone: the past few days have seen a succession of reports suggesting that the worst might be over. Well, that has yet to be proven, and many a forecast over the years has turned out wrong.

That said, some highly regarded commentators are suggesting that we look at factors other than supply/demand for various commodities.

And it is not all about China. At the moment, the market is dominated by the fall in Chinese demand, with the Baltic Dry Index being presented as Exhibit No.1.


One point being made is that, while we are not running out of them, it is getting harder to find metals, and more costly to mine them. As Morgan Stanley points out in a new report on the yellow metal, global gold grades have progressively declined over the past 20 years and, when gold’s price was soaring, miners threw big investment into developing low grade deposits, a move they are now possibly regretting. McKinsey & Co, in a paper called Is there hidden treasure in the mining industry?, points out that its commodity-by commodity modeling suggests that, for many commodities, declining ore quality and limited accessibility of new deposits will squeeze supply in coming years, potentially driving a commodity-price rebound as global demand continues to rise.

And here’s another point, made not by an expert but this writer: who in their right mind would get involved in a greenfield rare earth project in the present climate? Given the fact that the many long years during which most of the various current advanced projects have been under way, and the fact that these projects need to go through the development phase, would surely deter any investment in something that would mean beginning from scratch. That means those existing projects, once they get up and running, would not face any newcomers coming up behind. Perhaps a factor helping Lynas at the moment is that presently there are not too many non-China supply options.

(Incidentally, McKinsey cites two fields where it believes there is scope for companies to enter. One is fertilizer where prices move more differently from those of other mining products, driven by food consumption rather than by infrastructure investment. The other is precious metals where prices exhibit limited correlation with those of other commodities during times of economic crisis.)

Here’s another view: that China’s slowdown has now largely run its course. This is the analysis of Julian Jessop, head of commodities research at Capital Economics in London. If so, he goes on, the price of copper in particular should recover.

Or not. Some commentators are arguing that the global economy will bounce but with little impact on commodities. A columnist in The Daily Telegraph of London calls it “a harmless commodity crash” because, while it affects miners, the world is getting on with other business, and there is about to be a huge surge of money into high-end real estate in certain cities. Barclays Bank is urging its clients to dive into stocks, arguing that previous interest rate moves by the Federal Reserve have given Wall Street a boost.

It’s all too early to tell, of course. The comments above examine various arguments that are now going on, but they are well worth keeping in mind as events unfold over the next few weeks and months.

Others are not so optimistic. In his weekly client letter out today, Perth-based Peter Strachan of StockAnalysis begins: “The resource sector is in atrocious state”. But even Strachan sees the commodity cycle bottoming out over 2016 and that will be a time to begin investing in stocks again.

We’ll keep you posted.



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  • Dr. Mike Hirschberger

    We all may be guilty at times of China Speak-whether one is at its ankles or neck. But, one hard, leading indicator has been the emergence of China Steel: the python swallowing the pig for better than a decade of Super Cycle hype. So, despite raw steel’s flatness in revenues since 2013, capacity continued to expand to nearly 1 billion mt-an amazing # if you think about it. Now, Utilization Rates have fallen materially below 70%-not good even in a State controlled economy.

    Further, the dead canary happened last week with the announced closure of Tang Steel-the historic, large capacity, export mill for long steel. This speaks volumes about the extent of the collapse of China raw steel. No longer is the consolidation limited to Mao-styled backyard smelters or provincial mini-mills..
    Tang Steel is a cow bell for the temperature of China Steel. There is still a towering “V-for Victory” stenciled to the wall of its main high speed mill. It is the leading capital mill within Hebei Iron and Steel-the largest steel provence in the world-capacity formerly exceeding 130 million mt (larger than all of Japan). Losses for HBIS are swelling at an accelerating rate-without a forward forecast.

    Hard landing? no kidding. Until the dead cat bounces several times. the whole value chain of steel supply (whither BHP etc?) remains anyone’s guess and with zero confidence in 2016 or 17.

    Yes, you can look for other signs outside of China–and good luck with that. For me, all those forecast are chained at the ankle to the fate of China Steel.

    Mike Hirschberger
    Strategic Min-Metals. AG

    November 25, 2015 - 10:53 AM

  • Raj Shah

    Great article! I believe in Robin. I am optimistic that the commodity prices will revive.

    November 25, 2015 - 12:07 PM

  • Robin Bromby


    Personally, I share your overall view — but, as a reporter, I try and cover as many points of view as possible.

    I can remember back a decade or so when economists like Stephen Roach were looking for “growth engines” that would keep the global economy rolling. Then we had China, and what a growth engine that was. But that, as you say, is yesterday’s story. The only potential growth engine now is the US, but I can’t see it: there are no signs that America can throw any economic lifeline to the likes of the EU, Brazil, Russia, Japan, Australia, etc.

    And this commodities downturn has been going on for four years, and I see few signs that it is about to reverse. I don’t know when it was get better: and the problem is that I suspect no one else does either.

    November 25, 2015 - 2:34 PM

  • Dr. Mike Hirschberger

    Hi Robin,

    I entirely understand your position. I was a writing analyst for decades with an institutional IB in New York. Held my nose many times if it was an IB client I was writing on.

    However, I do agree that a bottoming process may be grinding thru individual metal markets-(these collective moves either up or down usually don’t last too long–“hauling off the madam with the girls” so to speak).. But, I think the physical markets will change at a glacial speed, but the financial markets will exaggerate the inflexion point of this change and lead investors prematurely into a set of false premises-” saying this is the China Super Cycle” all over again. I do disagree strongly with this latter view. And, for your background I was a raging bull in the 2005/6 period on emerging China—ask Chris Ecclestone who, knows me well during this whole period.

    I think we have seen and lived thru the major Super Cycle in our lifetime at relates to markets like steel and its value chain. The level of gain for such large sectors as China Steel is unlikely to repeat itself due to many reason and especially the unique set of conditions that promoted a catch up period for China beginning with the Great Leap generation that emerged so strongly for an entire decade in the early 2000’s.

    I could be entirely and completely wrong–but, the Chinese demographics just do not add IMHO–household formation-energy consumption–concrete production-borrowing for first time homes and of course the debacle in China steel all point to Japan much more than a repeat. The cheap seats will likely react in the opposite direction..

    China at the upper echelons has much, much to learn in humility lessons especially as it relates to the financial markets..

    So, my bet is that this will be a long and costly set of courses for the largest top down economy in the world to learn and accept-in particular as it relates to financial markets. To me this is the real trap I see emerging–speculators are trying to be the first to call a bottom and then will tout a V shaped recovery in metal markets. Hedge funds will be chained at the ankle to follow each other over the cliff of false expectations. Does anyone shed a tear? .

    On the other hand-having an active role in investment allocations-internationally-IMHO-the US is the very last place I would ever consider putting new $$ into the ground-a separate and much longer response. To me it is more cost effective to pick thru the carcass of FCX’s assets that are being drug around the marketplace as proof of the Great Fool theory. The US has regulated itself out of business as it relates to the Junior exploration.

    Best, Mike Hirschberger

    November 26, 2015 - 10:06 AM

  • Dr. Mike Hirschberger

    Hi Robin,

    need I say more:

    US signs asteroid property law
    President Obama has signed an act recognising US citizens’ right to own and mine asteroids.

    Mike Hirschberger

    November 26, 2015 - 10:25 AM

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