Archive for the ‘resources’ Category

These are buoyant times for (some) commodity investors, and (some) commodity producers, what does it mean in terms of a global recovery?

A common feature among people drawing conclusions about the economy from commodity markets tends to be a sole focus on price, and even then only prices in exchange traded commodities. If buyers out number sellers prices rise, so rising prices mean a return of global demand which in turn means global recovery — right? Well not quite, despite the enthusiasm displayed in many articles pushing that line. The flaw in this line of thought is that the buyers who are out numbering sellers in commodity markets need not be end users of the commodity. There can be speculative demand from speculative buyers just as there can be economic demand from industrial buyers. From the point of view of the markets, or the commodity producer, it doesn’t matter who the buyer is: more buyers than sellers means rising prices. The problem arises when you use market price — at face value — to draw conclusions about the economy. Since most of the people who connect price to economic recovery without digging deeper tend to be economists, I’m assuming economic theories don’t allow for speculators.

Let me focus on metals and minerals (e.g. iron ore, coal). People don’t eat these (unlike food commodities), they are used as inputs for industrial production. As global demand picks up we would expect to see increasing consumption of metals and minerals. When buyers out number sellers prices rise. This is clearly what is occurring at the moment, you only need to look at price charts–which I haven’t reproduced here because we’re all familiar with them. But what if the majority of buyers are not end users of the commodity and do not take delivery, i.e. speculative buyers? If the buyer doesn’t take delivery then you would expect stockpiles to rise. In other words if speculators are out numbering industrialists you would expect to see quantities of the commodity that are available, i.e. stockpiled, to increase. In the first chart we have the base metal stockpiles on the London Metals Exchange.

LME stockpiles


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A recent article from Reuters titled “Economic optimism lifts US copper to 13-month peak” provides an example of the leap of faith many are taking when they observe rising copper prices and conclude that global economic prospects are brighter. The article included a lot of bullet points, but most related to matters unrelated and unconnected to economic activity.

Some of the discussion related to charting. Terms such as “double bottom neckline” and “resistance level” may have meaning among charting traders, but those terms should be confined to discussions relating to where people betting/gambling/speculating on the copper price see the price heading. In other words speculators who are long copper because of a chart pattern shouldn’t lead a journalist or sub editor to frame the article around economic matters. The predictions being made based on “double bottom neckline” are unrelated to whether or not economic optimism exists and are unrelated to economic data. For clarity I am not saying a trader can’t profit from these things, but merely that they are what they are, and what they are is independent of economic fundamentals.

Another bullet point related to housing sales. The assumption is presumably that, as a so-called bellwether metal, a rise in housing sales means a rise in construction, which means a rise in copper consumption, which means an expectation of a rise in demand. Below is a chart of US copper consumption this decade. For reasons unclear to me consumption has been falling all decade. The International Copper Study Group (ICSG) has forecast consumption in the USA, Europe and Japan to be down approximately 17% this year.


US copper consumption


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We hear a lot about the BRIC countries. The plot below — world crude steel production this decade as of end of August — pretty much sums up why it is all about China, the “C” in BRIC, when it comes to iron ore and metallurgical coal demand. The plot shows the enormous growth in Chinese steel production this decade, compared to the low growth in the other three BRIC group and the rest of the world.

world crude steel production

world crude steel production

Iron ore producers took a hit in pricing negotiations this year–admittedly from high price levels in 2008. The pick up in Chinese steel production this year is good news for iron and coal producers for 2010 pricing if this recovery in Chinese steel production is sustainable.

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From Reuters:

  • Chinese copper and semi-fabricated imports fell 20 percent in August from July at just over 325,000 tonnes, and off 30 percent from a record 476,000 tonnes in June.
  • The Baltic Dry Index hit a fresh four-month low on Tuesday with a slowdown in Chinese demand hurting sentiment. There has been an apparent slowdown in China’s iron ore import demand and a bit less coal imports. … China’s commodity imports slowed rapidly in August

… meanwhile elsewhere (The Australian):

  • Unexpectedly strong demand from China in the third quarter has forced Australia’s government forecaster to boost production expectations for most mineral commodities.

… perhaps individual.com can clear this up:

  • China’s iron ore imports in August rose 33% from a year earlier to 49.68 million metric tons, according to preliminary data provided Friday by the General Administration of Customs. Imports fell 14% from a month earlier.

… ditto mineweb.com:

  • Chinese August iron ore imports retreat 14.5 % from July record, while steel exports rise from July figure but down 73% year on year.

So imports are down and up. If you’re glass half empty you cite month on month numbers. If you’re glass half full you cite year on year numbers.

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Rare earths have been in the news recently, primarily because China produces an estimated 93% and whenever China has a stranglehold on something it makes news these days — although you don’t hear much about tungsten anymore.

Had an admittedly quick look at the recent Lynas presentation (ASX ticker: LYC) and two things caught my eye:

Slide 18: Weighted price average $9.52 per kg of ore—based on the analytical composition of the ore.

Slide 30: Expected cash cost $5.65 per kg of ore processed.

This looks good: $4 margin per kg. Slide 19 shows a total resource of 2.78 Mt, but most of this resource is inferred. In any case what you’ll notice in slide 18 is that the weighted average price is heavily dependent on the trace components Dysprosium Oxide, Europium Oxide, and Terbium Oxide. With an estimated 4% total rare earths in the ore, these three components make up only 0.00048%, 0.0176% and 0.0028% of the ore respectively, or 4.8 g/t, 176 g/t and 28 g/t. The grams per tonne numbers would be pretty good for gold or platinum group elements in terms of the stuff being economically recoverable, but what does it mean for rare earths? Exclude those trace components and the weighted average comes down to ~ $6.80 per kg, assuming 100% recovery. So it seems to me that leaving aside the uncertainty in the size of the resource, the issue is how well you can economically extract rare earths that exist in ores in the gram per tonne range, and what sort of recovery rates you would expect. I’d like to know more about rare earth (i.e. lanthanides) chemistry, and extraction and recovery before being a buyer.

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Today I thought I’d plot the Baltic Dry Index (BDI) versus spot base metal prices over the last 5 years, as of the end of August 2009. Similar plots can be made for most/many commodities.

We can see the point earlier this year–the rise in the BDI–when China began stockpiling copper (and some other minerals/metals). Copper stockpiles also declined at about this time. Chinese stockpiling presumably ended a few months ago because we’ve seen a rise in LME copper stockpiles indicating a drop in demand. The BDI began dropping at about the same time. Nevertheless despite the signs of decreasing demand copper, and other base metals, spot prices keep marching upward. So we have the BDI declining-which can be interpreted as decreasing demand-we have LME stockpiles rising-which can be interpreted as decreasing demand-yet we have LME prices rising. Punters are clearly betting on a global recovery. Either a correction is on the way, likely to occur when speculators conclude increasing demand is still some time off, or real demand, from an eventual global recovery, is going to have to pick up.

Baltic Dry Index vs spot aluminium prices

Baltic Dry Index vs spot aluminium prices


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