Fear not the Fed hike: technology metals should survive
Attention investors in and miners of technology metals, gold, graphite, potash, uranium: there are rays of hope.
There are two (possibly) main reasons for this. One is that the tightening this month by the Federal Reserve – if it happens, which is still very unsure – should not have too much of an impact on commodities. The other is that the persistence of depressed commodity prices is going to lead to mine closures. If your mine is not one of those forced to close, then the others who cannot carry on losing money will, by exiting the market, tighten supply, and so benefit the survivors.
Julian Jessop, chief global economist at Capital Economics in London, believes the Fed lifting interest rates will have little negative effect on commodity prices.
He cites the “taper tantrum” of 2013, when the Federal Reserve first raised the prospect of scaling back its asset purchases under quantitative easing. This “tantrum” took place when the move was just a prospect: but prices started recovering in 2014 once tapering had actually begun. Add, to that, the fact that the recent weakness both in commodities and emerging markets (much of that due to China worries) has already dwarfed the falls during the 2013 “taper tantrum”. Concludes Jessop: “From these (present) levels we see plenty of upside”.
On top of that, Jessop notes that monetary policy is likely to remain loose in much of the rest of the world, or even be eased further, notably in China, the Eurozone and in Japan. (Just today the Bank of Japan said that country’s exports and industrial output fell in August. The Nikkei news service notes that “the central bank’s less optimistic view of the economy will likely fuel expectations that the BOJ may take further action, possibly next month”.)
Jessop says the Bank of England might be one of the first to follow the Fed’s lead, but is still likely to wait until 2016 and move much slowly thereafter.
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The other factor that might give miners some hope is that of mine closures (by other companies, of course). The international commodity giant Glencore has already decided to close two copper mines, in the Democratic Republic of Congo and in Zambia. Copper output next year is expected to be 6% lower.
But potentially the most dramatic event could be large-scale closures in South Africa’s gold industry where a third of mines are operating at a loss (due to the depths at which they are operating and increasing labour costs). The removal of a substantial part of the country’s gold output would put a real squeeze on gold supplies. Incidentally, the U.S. gold industry is under pressure, too: it is stuck with the gold price in U.S. dollars ($1,109/oz as I write) while falls in other currencies have insulated miners in those countries. Australian miners are receiving A$1500/oz and New Zealand mines NZ$1,750/oz – so their received price has gone up substantially but their costs remained the same as they are in local currencies.
This currency factor will therefore favour producers of various metals and minerals that have their costs in other than the U.S. dollar. One Australian company, Rum Jungle Resources, reported last week its phosphate project was 10% more robust because of the fall of the Aussie dollar and expected retreats in some of its costs, including gas prices. Rare earth, tungsten, antimony and other projects located in countries whose currencies have fallen in value against the greenback (in which commodity prices are expressed) will also be sharpening their pencils and revising (upwards) the potential profitability of their projects.
No one is quite sure what the outcome of possible closures of rare earth mines in China will be for other players, but those non-China developers who have survived so far will be feeling a little more hopeful.
The worry is not over, and the commodity cycle is unlikely to show much bounce in the near future, but those who can hang in there should find that, when the bounce does come, they are still in good enough shape to take advantage of it.
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