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June 10 2016

Commentary by Eoin Treacy

A Guide to Helicopter Money

Thanks to a subscriber for this report from National Australia Bank. Here is a section:  

Unlike ‘QE’, Helicopter Money has an explicit fiscal element. Moreover, in a Helicopter Money operation the central bank commits to making any asset purchases permanent and to not paying interest on the resulting bank reserves. It differs from a normal fiscal stimulus as it is not financed by interest paying debt (a bond issued to the public) but by money creation by the central bank. 
Introducing Helicopter Money will potentially affect existing monetary policy goals and tools. For example, it might require a change to the inflation target and changes to the system of interest on reserves. It could also complicate how monetary policy will operate in circumstances when the central bank seeks to tighten monetary policy. 

The key channels through which it is expected to work are increased demand for goods & services (either by government or households) and by raising inflation expectations, thereby lowering real interest rates. Proponents also argue it gets around possible problems with normal fiscal stimulus – crowding out (though higher interest rates) and households increasing savings as they perceive a future higher tax burden. 

In theory Helicopter Money should result in some combination of inflation and real economic growth. Exactly what the mix will be is harder to determine, and it is even possible for inflation to be rising while real activity goes the other way. How individuals and business react to Helicopter Money, and how it changes their expectations of the future, will be an important determinant of its effectiveness. 

While a central bank money financing government spending is not new, there are good reasons why it is considered a ‘taboo’. There are many cases where too much money printing has led to hyperinflation, with disastrous consequences. 

What this points to is the need for credible institutions and the need for any Helicopter Money program to be consistent with the inflation goals of the central bank. An open question is whether credible arrangements could be put in place given political realities. 

Legal and political obstacles to Helicopter Money vary by country. Of the major advanced economy central banks, the European Central Bank is the one facing the greatest possible constraints, given legal prohibition of (direct) money financing of governments by the ECB, the lack of a central fiscal agency and the difficulty of getting agreement amongst member states. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

With an increasing quantity of the global bond market now yielding less than zero, the ECB accepting just about anything counterparties wish to lodge as collateral and negative deposit rates at a handful of central banks, speculation is understandably turning to what central banks might next try to achieve their inflation goals. Negative rates represent something of a Rubicon for bond investors so helicopter money, which was once inconceivable, is now openly being discussed as a possibility. 



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June 09 2016

Commentary by Eoin Treacy

Brazil Frost Risk Highest in South Parana Cane Area, MDA Says

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here it is in full: 

Southeastern fringes of Parana cane and coffee areas face coldest threat on morning of June 12, Kyle Tapley, meteorologist at MDA Information Services in Gaithersburg, Md., says in telephone interview

Temperatures also to fall below freezing in Santa Caterina, Rio Grande so Sul

“The whole weekend will be pretty cold” with temperatures gradually rising by middle of next wk

NOTE: Parana suffered sugar-cane losses from frost in 2013

Most of threat this weekend remains south of Center-South w/temperatures forecast to drop below avg into 30s degree Fahrenheit, not low enough to hurt coffee, cane or oranges

Citrus trees can be damaged if temps. drop below 28 degrees F (minus 2 Celsius) for several hours w/ coffee at greatest risk below 32 F, and “I certainly don’t see that happening”

NOTE: In recent decades, coffee farms in Parana were moved norrthward, away from high frost-risk prone areas.

 

Eoin Treacy's view -

The risk of frost to crops that depend on warm temperatures is a non- trivial consideration and helps to explain the recent run up in prices for sugar, coffee, orange juice and soybeans. Perhaps the more important point is to highlight how dependent the global soft commodity sector has become on bumper crops. The after effects of the El Nino and the potential for a La Nina to develop could continue to exacerbate volatility in these markets.



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June 08 2016

Commentary by Eoin Treacy

ECB "Monetary Amphetamine" Propels Gold to Best Start Since '79

This article by Luzi-Ann Javier for Bloomberg may be of interest to subscribers. Here is a section:

In the U.S., traders are pricing a zero percent chance of an interest-rate increase in the Federal Open Market Committee’s meeting next week, and the odds of such a move stay below 50 percent until December, according to Fed-fund futures. The Bloomberg Dollar Spot Index dropped as much as 0.6 percent to the lowest since May 5.

Gold probably has bottomed and will be supported by risks surrounding a U.K. vote on whether to leave the European Union, U.S. monetary policy and elections in the U.S. and Spain, according to Clive Burstow, who helps manage $35 billion at Baring Asset Management Ltd. in London. 

 

Eoin Treacy's view -

At the last count $7.8 trillion in sovereign bonds was yielding less than zero and with the German 10-year at around 4 basis points it might not be too long before an even larger swathe of the global debt market is in the same condition. The ECB begins its corporate bond buying program today which is likely to depress yields further. 

Against that background it is hard for the Fed to raise rates because the resulting upward pressure on the Dollar would be counterproductive. Equity markets have been quite steady over the last month, taking their cue from the bond markets, and the near-term conclusion is that interest rate hikes will be modest at best and we might have to wait for them. That suggests the liquidity on which the market has been dependent will remain in place and that is positive both for financial assets and the price of items that cannot simply be loaned into existence. 



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June 08 2016

Commentary by Eoin Treacy

Unconventional future: man vs. machine

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

Mining costs: labour, electricity drive continuing inflation at conventional mines
You may have opened this expecting a sci-fi/marvel-esque drama, instead, it is about cost history of PGM producers we cover. Cost inflation has run at around 9% p.a over the past five or so years. We estimate conventional mines unit costs are 20-25% above mechanised, & may continue to increase at around 10% p.a. without stringent cost control. Around 70% of their costs are labour & electricity. Mechanised mines have a balanced cost composition & could limit increases at mid-to-high single digit percentages. We adjust our cost inflation expectations & valuations for longer-term cost inflation rates. With a shift to lower costs, AMS is our top pick: Buy. Lonmin is our least preferred: Sell.

Unit costs and inflation by mining method: conventional disadvantage to widen 
Each mine faces different circumstances and each company has different cost disclosure. However, we are able to draw some broad industry conclusions. Conventional mines have c.25% higher unit costs relative to mechanised operations. Conventional mines’ inflation rates have been c.10% p.a. or higher over the last 5 to 6 years, driven by electricity and wages (making up c.70% of costs) and we think this cost-pressure is likely to continue. Mechanised mines’ costs have a greater proportion of contractors and stores/materials than conventional mines and are relatively light on labour costs. While mechanised mines have also faced strong cost inflation, some operations have managed to keep inflation to mid single digit CAGR percentages.
Composition of costs by mining method and cost inflation of categories

Labour costs (c.60% of conventional costs) as a category have increased c.9 to 12%p.a. over the past 5-6 years. Utilities, c.8-10% of conventional on-mine cash costs, have increased at between 11 to 20%p.a. Stores/materials have increased at c.5.5% to 6.5% p.a. and are approximately 25 to 30% of costs. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subcsriber's Area.

Platinum’s scarcity, the high cost of extraction and an increasingly uncertain situation in South Africa are long running considerations the market is familiar with. The growth of the electric vehicle market is a new development that needs to be considered because with no catalytic converters they don’t need platinum. That is one of the primary reasons platinum producers are so keen to promote fuel cell technology because they use the metal and electric car batteries don’t. That represents a hurdle for platinum entering a sustained bull market but it is rallying in sympathy with the other precious metals at present. 



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June 03 2016

Commentary by Eoin Treacy

June 03 2016

Commentary by Eoin Treacy

Email of the day on corn

Regarding the price chart for corn: I have been watching this with interest for a few months after seeing that for at least the past 4 years there have been relatively large price movements in June/July. Not knowing much about corn, presumably this is related to crop information? With the price ranging in quite a tight pattern for 2 years now I wonder if you have any thoughts as to what this could indicate for the coming month or two. Thanks

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. The majority of US corn is planted in April and May so by June and July farmers have a reasonable idea of how the crop is coming along but it is heavily dependent on just the right amount of rain around this time of year to support rather than damage the crop. There are also a number of major USDA reports that come out in June/July that give some insight into stockpiles, exports and crop health which tend to have an effect on price.



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June 02 2016

Commentary by Eoin Treacy

The Deepening Deficit That Makes Zinc One of 2016�s Top Bets

This article from Bloomberg News may be of interest to subscribers. Here is a section:

The Chinese smelters that churn out more than 40 percent of the world’s zinc may cut production for the first time in four years because they can’t get enough raw material, further lifting prices of one of this year’s strongest-performing commodities.

Zinc, used for rustproofing steel in everything from auto bodies to suspension bridges, has surged as much as 25 percent in 2016 to the highest since July as miners supply less of the ore concentrate that’s refined to produce the metal, just as to Macquarie Group Ltd. see further gains, while Glencore Plc, the biggest miner of the metal, says structural deficits are back.

 

Eoin Treacy's view -

$1800 represented the lower side of a five-year range in zinc prices, so when it broke below that level in August sentiment understandably turned bearish. However the rally that has been underway since the beginning of the year has not only taken the price back up into the overhead range, but zinc has rallied enough so that the drop below $1800 can be considered a failed downside break. A sustained move below $1800 would now be required to question potential for additional upside.



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May 26 2016

Commentary by Eoin Treacy

Miner Sees Silver Price Surging Ninefold as Global Gadgets Boom

This article by Natalie Obiko Pearson for Bloomberg may be of interest to subscribers. Here is a section:

While long coveted for use in jewelry, coins and utensils, silver is increasingly in demand for its industrial applications. Last year, about half of global silver consumption came from such use, including mobile phones, flat-panel TVs, solar panels and alloys and solders, according to data compiled by GFMS for the Washington-based Silver Institute.

“Silver is not a precious metal, it’s a strategic metal,” Neumeyer said in an interview in Vancouver, where the company is based. “Silver is the most electrically conductive material on the planet other than gold, and gold is too expensive to use in circuit boards, solar panels, electric cars. As we electrify the planet, we require more and more silver. There’s no substitute for it.”

Industrial demand is set to increase, driven by rising incomes and growing penetration of technology in populous, developing nations, as well as thanks to new uses being found for silver’s anti-bacterial and reflective properties in everything from hospital paints to Band-Aids to windows.
“Over the next 10 or 20 years, more and more people are going to be using these devices, and silver is a very limited commodity,” Neumeyer said. “There’s just not a lot of it around.”

Use of silver, including investment demand, coin sales and what goes into inventories to settle trades, has outstripped annual supply of the metal in every year since 2000, according to data from GFMS, a research unit of Thomson Reuters Corp.

Still, not everyone agrees that the world is headed for a shortage of the metal.

“I would tend to disagree that silver is rarer than thought,” David Lennox, a resource analyst at Fat Prophets in Sydney. “Silver cannot be easily substituted but there’s been no need as it’s in abundance. I’d expect the search for silver would intensify and the search for substitutions would happen long before silver got to” $140 an ounce.

 

Eoin Treacy's view -

The uses for silver in the high technology sector are likely to increase over time but the quantity of silver used in each item is likely to decrease. Production efficiencies and the evolving nanotechnology sector where silver will have a great deal of utility help to explain that view. Therefore to postulate prices are going to $140 any time soon would appear wildly ambitious. 



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May 18 2016

Commentary by Eoin Treacy

Death of the Gold Market

Thanks to a subscriber for this report by Paul Mylchreest for ADM Investors Services International Limited covering the most bullish scenario for gold. Here is a section:  

Using data from the LBMA and Bank of England on gold stored in London vaults and net UK gold export data from HM Revenue & Customs, we estimate that the “float” of physical gold in London (excluding gold owned by ETFs and central banks) has recently declined to +/- zero.

If we are correct, the London Bullion Market is running into a problem and is facing the biggest challenge since it collapsed from an insufficient supply of physical gold in March 1968.

Besides the growth in physical gold demand from existing sources (see below), there is more than US$200 Billion of trading every day in unallocated (paper) gold. If buyers lose confidence in the market’s structure and ability to deliver actual bullion, the market could become disorderly (via an old fashioned “run” on the vaults) as it seeks to find the true price of physical gold.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

The argument often cited by gold bugs is that the derivatives market for gold dwarfs the size of the physical market. That is also the case in the equity, bonds and other futures and options markets because most people wish to benefit from volatility in prices rather than holding the physical asset. This only becomes a problem when someone attempts to corner the market, by buying up available futures contracts then taking delivery and refusing to have their holdings lent against. 



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May 17 2016

Commentary by Eoin Treacy

El Nino-Hit Brazil Doubles Cocoa Imports as Harvest Tumbles

This article by Isis Almeida and Gerson Freitas Jr. for Bloomberg may be of interest to subscribers. Here is a section: 

"The drought we suffered starting at the end of last year and the first month of this year, it has really, really hurt not only the main crop, which came in much smaller than was expected, but mainly it will hurt the mid crop that’s starting right now," Hartmann said.

Brazil is being forced to import cocoa to keep processing factories running. Processors need to work with 240,000 tons of cocoa to ensure capacity is utilized and to prevent costs rising, he said. Beans come mainly from Ghana, the second- largest producer, as shipments from top grower Ivory Coast are banned along with those of Indonesia, which ranks third.

"The only permitted cocoa to come to Brazil is from Ghana, which is the most expensive stuff," Hartmann said.

 

Eoin Treacy's view -

Cocoa prices have been subject to some quite abrupt volatility over the last couple of months with the result that the sharp peak to trough swings, evident within the two-year range, remain in place. With prices falling back towards the lower boundary a clear upward dynamic will be required to signal a return to demand dominance which would pressure shorts. 



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May 16 2016

Commentary by Eoin Treacy

California is poised to become the center of cannabis culture

This article by Robin Abcarian for the Los Angeles Times may be of interest to subscribers. Here is a section: 

Personally, I am not a weedinista. I hate feeling stoned. I don't think pot will save the world, and dependence, especially with younger users, can be a problem. But I do think, in some settings, it can work miracles.

A year ago, probably after hearing me knock pot smokers one too many times, David Downs, a San Francisco cannabis journalist, who is married to my niece, sat me down and explained something I hadn't known. There are two important components in marijuana. The primary psychoactive ingredient in pot is THC, which also has medicinal properties such as pain relief and nausea reduction. And there's CBD, a non-psychoactive ingredient that has been shown to be helpful for many ailments, including epilepsy, cancer pain and anxiety.

Increasingly, researchers are investigating the health benefits of CBD. Growers, in turn, are meeting consumer demand for pot strains that are high in CBD and low in THC.

You can achieve a tremendous benefit from high-CBD marijuana and never feel stoned.
This was a revelation.

 

Eoin Treacy's view -

I have to smile at signs proclaiming UCLA is a smoke free campus when driving through Westwood Los Angeles since the smell of marijuana smoke is such a common occurrence. Cannabis is available to anyone who wants it today and not just in California. Considering it is now legal in a handful of states and the FDA is coming under increasing pressure to reclassify it, the movement to build a greater awareness and market for the drug is increasingly successful. 



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May 13 2016

Commentary by Eoin Treacy

Email of the day on intermarket correlations

The January 2016 to April 2016 correlation between the CCI Index (especially oil component), and world equity markets, and the $US (inverse) has been widely noted. From late April the equities/dollar relationship has been maintained (both have mildly reversed) but unusually, the stronger dollar seems not to have had the same impact on commodity prices.

That a stronger dollar has not hit oil or gold is a little surprising.  This is especially the case for oil, which also faces the prospect of increasing supply, but how can gold be expected to continue its advance?  

 

Eoin Treacy's view -

Thank you for raising a question which I suspect many investors are puzzling over. I certainly have and I’m not sure there is a conclusive answer. In fact considering the lack of commonality I think the answer lies in treating each market on their individual merits. 



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May 11 2016

Commentary by Eoin Treacy

Email of the day on Chinese commodity trading

Do you have any insights to share regarding reported chaotic futures trading in China. You said markets were likely be volatile going forward but I never imagined this wild ride. As for my personal investments I have consciously sold into recent market rally's while significantly increasing my weighting to cash. I need to maintain a disciplined response to markets otherwise I get stressed.

Eoin Treacy's view -

Thank you for a topical question. There is a lot of hot money chasing short-term profits in China. It’s a symptom of a wider problem where there are limited options to invest for yield, a wide spread between the lending and deposit rates and lax to non-existent regulation. The result is that manias tend to occur with uncomfortable regularity. The stock market last year and the commodity markets this year are two examples. 



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May 11 2016

Commentary by Eoin Treacy

Crop Prices Rally as Report Points to Easing of Glut

This article by Jesse Newman for the Wall Street Journal may be of interest to subscribers. Here is a section: 

The Agriculture Department report offered the first official forecast for the new season’s production and consumption around the world.

It said poor weather in South America would contribute to a surge in soybean exports from the U.S. as production in places like Argentina falls off.

“The demand that USDA set forward is incredible,” said Mr. Reilly of the forecast for soybean exports.

The USDA expects U.S. soybean reserves to dwindle to 305 million bushels by August 2017 from an estimated 400 million a year earlier as exports pick up.

Even at their current level, however, soybean prices are about 40% lower than their peak in 2012, and the level of stocks still are comfortable.

Corn futures jumped even though the USDA forecast farmers would harvest a record 14.43 billion bushels this year. The agency’s supply estimates, however, fell short of analysts’ expectations. The USDA projected stockpiles will climb to 2.153 billion bushels by August 2017 from 1.803 billion a year earlier, the largest since the mid-1980s.

The USDA said global corn reserves at the end of the 2016-17 season would total 207 million tons, down from an estimated 207.9 million tons for the current season.

 

Eoin Treacy's view -

A link to the full article is posted in the Subscriber's Area.

The full effects of the El Nino weather phenomenon are now becoming evident in soft commodity pricing despite the fact it has already peaked. Soybeans  completed a six-month base in March and continues to extend the breakout. An increasingly overbought condition is developing but a clear downward dynamic would be required to check momentum. 



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May 09 2016

Commentary by Eoin Treacy

Lithium 101

Thanks to a subscriber for this comprehensive heavyweight 170-page report on lithium. If you have questions on the lithium sector the chances are they will be answered by this report. Here is a section: 

Global lithium S&D analysis highlights opportunity for high-quality assets
The emergence of the Electric Vehicle and Energy Storage markets is being driven by a global desire to reduce carbon emissions and break away from traditional infrastructure networks. This shift in energy use is supported by the improving economics of lithium-ion batteries. Global battery consumption is set to increase 5x over the next 10 years, placing pressure on the battery supply chain & lithium market. We expect global lithium demand will increase from 181kt Lithium Carbonate Equivalent (LCE) in 2015 to 535kt LCE by 2025. In this Lithium 101 report, we analyse key demand drivers and identify the lithium players best-positioned to capitalise on the emerging battery thematic. 

Global lithium demand to triple over the next 10 years
The dramatic fall in lithium-ion costs over the last five years from US$900/kWh to US$225/kWh has improved the economics of Electric Vehicles and Energy Storage products as well as opening up new demand markets. Global battery consumption has increased 80% in two years to 70GWh in 2015, of which EV accounted for 35%. We expect global battery demand will reach 210GWh in 2018 across Electric Vehicles, Energy Storage & traditional markets. By 2025, global battery consumption should exceed 535GWh. This has major impacts on lithium. Global demand increased to 184kt LCE in 2015 (+18%), leading to a market deficit and rapid price increases. We expect lithium demand will reach 280kt LCE by 2018 (+18% 3-year CAGR) and 535kt LCE by 2025 (+11% CAGR). 

Supply late to respond but wave of projects coming; prices are coming down 
Global lithium production was 171kt LCE in 2015, with 83% of supply from four producers: Albemarle, SQM, FMC and Sichuan Tianqi. Supply has not responded fast enough to demand, and recent price hikes have incentivized new assets to enter the market. Orocobre (17.5ktpa), Mt. Marion (27ktpa), Mt. Cattlin (13ktpa), La Negra (20ktpa), Chinese restarts (17ktpa) and production creep should take supply to 280kt LCE by 2018, in line with demand. While the market will be in deficit in 2016, it should rebalance by mid-2017, which should see pricing normalize. Our lithium price forecasts are on page 9.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The cost of lithium ion batteries falling rapidly and the fact this is occurring at the same time solar cells costs have been trending lower is a major incentive for installations of both technologies; increasingly in parallel. With costs coming down and technology improving growth in demand is a major consideration as factories achieve scale and miners invest in additional supply. 



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May 09 2016

Commentary by Eoin Treacy

Dollar Extends Best Streak Since March on Fed Speculation, China

This article by Andrea Wong and Taylor Hall for Bloomberg may be of interest to subscribers. Here is a section: 

"We’re expecting a bit of dollar rebound," said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London. "The baseline for the Fed is still for two hikes. We’ve had some negative prints off the China data, that’s weighing on the commodity currencies."

The greenback has pared its 2016 decline on signs the move had become overdone and as policy makers including New York Fed President William Dudley restate plans to raise rates. The dollar has rallied during the month of May for nine of the past 10 years.

The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, gained 0.6 percent as of 2:42 p.m. in New York, after climbing 1.5 percent last week, the most since Nov. 6. The U.S. currency rose 1.3 percent to 108.48 yen, touching the highest since April 27.

The rebound hasn’t stopped hedge funds from extending their bearish bets on the dollar. Speculators extended so-called net- short positions on the U.S. currency versus eight major currencies to the most since April 2014, according to the most recent figures from the Commodity Futures Trading Commission.

Hedge funds’ bearish dollar bets against the yen held near their April peak, which was the highest in data going back to 1992. Speculators have turned "extremely bearish on the dollar,"

 

Eoin Treacy's view -

The Dollar extended its rally today against a broader swathe of international currencies not least the Yen and Rand. That is supportive of the view that it had already priced in more than short-term worries about the pace of growth and was assuming there was no chance of a hike this year. Right now there is some repricing a potential Fed rate hikes. 



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May 05 2016

Commentary by Eoin Treacy

The Value of Gold

Thanks to a subscriber for this bearish, or at least cautious report, on gold by John LaForge for Wells Fargo. Here is a section:

In February, we published a cautionary gold not titled “Not the Time to Buy More Gold” The title pretty much said it all. To be clear, we do not detest gold. Rather our long-standing guidance has been that gold should be a regular position in a diversified portfolio. Our beef is not with owning gold, but how much gold to own. 

Many signs point to underweighting gold in portfolios today. In February’s gold publication, we highlighted two vital negative trends 1) persistently poor price action, and 2) repeated performance losses to other major assets (stocks, bonds, housing). Both trends by the way are characteristics of commodity bear super-cycles.    

Poor price and performance trends, while important, only tell part of the underweight story. The value of gold is a major concern of ours too. Said simply – gold does not look particularly cheap. This may sound odd with prices down $640 per ounce since 2011, but history argues for even cheaper relative prices in order for gold to begin a new bull market. As we will explain next, gold does not appear to a great bargain vs. stocks, bonds or housing. And gold is downright expensive compared to the average commodity, and especially other precious metals.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

To balance this view of gold being expensive. Here is an interview with Jim Rickards who expects gold to move to new all-time highs. Gold is a market that tends to elicit extreme predictions so let’s stick to what I believe are the two most important factors concerning the market. It is a monetary metal and often seen as a safe haven during times of stress



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April 29 2016

Commentary by Eoin Treacy

Commodities Overtake Stocks, Bonds With Best Rally Since 2010

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section: 

The gains come after five straight years of annual losses when slowing Chinese demand and rising output produced a global supply overhang for most commodities. The rout hurt producers including Exxon Mobil Corp., Freeport-McMoRan Inc., Glencore Plc and Anglo American Plc, who boosted production following a decade-long so-called super cycle of rising consumption and higher prices.

“I believe with what we’ve witnessed early in 2016 will be the trough for the commodity markets,” Albanese said on a conference call after Vedanta reported quarterly earnings.

Oil prices in New York are up about 19 percent this month in New York, the largest increase since April 2015. U.S. crude output declined for a seventh week, according to data Wednesday from the Energy Information Administration. Futures traded at $45.60 at 11:45 a.m. on the New York Mercantile Exchange.

 

Eoin Treacy's view -

Crude Oil is by far the largest, most liquid commodity market and represents a significant cost in the production and transportation of other commodities. The falling cost of energy was a major enabler for marginal producers remaining in business so the subsequent rally has been a catalyst for increased interest right across the commodity spectrum. 



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April 27 2016

Commentary by Eoin Treacy

Email of the day on inflation expectations and rates

You've drawn attention to the 12 month T-bill rate a couple of times over the past week. Additionally, it is also very instructive to monitor inflation expectations to gauge what is discounted in terms of the future direction of interest rates. The five-year “breakeven” rate, a market measure of inflation expectations derived from comparing the yield of Treasury Inflation protected bonds (Tips) and conventional Treasuries, has climbed from a low of 0.95% in early February, to 1.56% now. It peaked at 2.4% in October 2012 after reaching an unprecedented minus 0.9% in 2008. 

Movements in Tips have tended to reflect investor expectations about future consumer price inflation, and these have been stoked by the recent rise in oil prices and a weaker dollar, which means higher import prices. In fact, the breakeven rate has been rising in tandem with oil prices since February. Interestingly, the “core” US inflation rate, which strips out the impact of volatile components such as energy and food, has also been rising. The current buying of Tips reflects a view that the cycle of dollar strength and commodity weakness has come to an end. 

Like you and David, I also think that commodities have bottomed. However, there are no signs of strong underlying demand and inflationary pressures from the real economy at the moment. Furthermore, Janet Yellen, the Fed chair, has cast doubts on the durability of the recent pick-up in core inflation and inflation expectations, arguing that the case for moving cautiously on interest rates was still strong. It is not surprising that she would say that given that the Fed has reduced the likely number of rate rises this year. 

My view is that the US breakeven rate will rise with commodity prices which will push conventional yields up and stock markets down but I don't believe that oil prices, for example, will get anywhere near the previous peak for the reasons discussed by this Service. Thus bond yields too will peak at a much lower level. The collapse in commodity prices in the last few years has distorted valuations in various markets and there will be a ripple effect across the other asset classes.

 

 

Eoin Treacy's view -

Thank you for this thoughtful email and for highlighting breakeven rates which I have not looked at in a while. I watch the 12-month yield because if gives us a good indication of how the bond market is pricing the risk of the Fed raising rates. 



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April 21 2016

Commentary by Eoin Treacy

As prices surge, Vale joins iron ore production guidance cuts

This article by Frik Els for Mining.com may be of interest to subscribers. Here Is a section: 

Top iron ore producer Vale followed rivals Rio Tinto and BHP Billiton on Wednesday by announcing that it expects full-year iron ore production to come in at the lower end of guidance.

Vale  said it produced 77.5 million tonnes of iron ore in the first quarter, marking a record for output during the first three months of the year for the Rio de Janeiro-based company.

Its Carajás operations also achieved a production record for a first quarter of 32.4 million tonnes, representing an increase of nearly 18%, offsetting the halt in production at its Samarco 50-50 joint venture with BHP and the decrease in output at its Mariana mining hub. Operations at Samarco remains suspended following the failure of a tailings dam in November.

The company total output was down 12% from the December quarter however.

"Production in the first quarter and the plan for the rest of the year suggests an annual production towards the lower end of our original guidance of 340-350 million tonnes," Vale said in a statement. The company produced 345.9 million tonnes in 2015.

Eoin Treacy's view -

On the supply side, the reductions in production announced by the iron-ore oligarchy of BHP Billiton, Rio Tinto and Vale may be transient in nature. In the first two cases they are the result of infrastructure upgrades and for Vale it is a case of the Samarco dam break accident leading to the mine being closed. The demand side of the equation on the other hand may be more important. 



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April 20 2016

Commentary by Eoin Treacy

Mining the balance sheets

Thanks to a subscriber for this report from Goldman Sachs dated February 29th. Here is a section:

Our commodities analysts believe that China’s demand for commodities will normalise to a level consistent with its GDP/capita, as the economy transitions from investment-led (i.e. where the government pays) to consumption-led (i.e. where the consumer pays). In short, fewer roads, buildings, bridges and airports, and more cars, air conditions, fridges and the like. This part of an economy’s development is less commodity-intensive, and we expect China’s commodity demand evolution to follow a more conventional path. This suggests a significantly lower level of demand than that seen through 2003-2014.

The implication for the supply-demand balances of the major metals is that without a significant change on the supply-side of the equation, oversupply will widen and prices will fall further

Which brings the argument back to liquidity. We would argue that mines don’t close through choice, but because they have to. Typically, this point comes when a company runs out of funds to meet its obligations (liquidity). We have seen African Minerals and London Mining join and leave the London stock market and their mines close - the capital markets were not prepared to continue to fund losses.

Ultimately, if demand does not return, then the industry’s current position could prove to be something of a holding pattern. Keep producing, drive more productivity and cost reduction and wait for the capital markets to pass judgement when the more weakly positioned companies need to refinance.

Eoin Treacy's view -

The role of energy prices in the total cost of production for mining operations is a topic that does not appear to be covered by this report. Yet, it is a major consideration for miners and declining oil prices were a key factor in the ability of very marginal operations remaining viable. That is one of the primary reasons why the rebound in oil prices has been a positive catalyst for commodities. 



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April 19 2016

Commentary by Eoin Treacy

Australia's Stevens Posits Whether Policy Has Reached Its Limits

This article by Michael Heath for Bloomberg offers a window on the thinking of a major central banker approaching the end of his tenure so with little to lose. Here is a section: 

Australian central bank Governor Glenn Stevens speculated that monetary policy may have reached its limits in spurring economic growth and suggested this could explain why markets are being easily rattled.

“Monetary policy alone hasn’t been, and isn’t, able to generate sustained growth to the extent people desire,” Stevens said in a speech in New York on Tuesday. “Maybe we need to be clearer about what we can’t do. Monetary solutions are for monetary problems. If there are other problems in the underlying working of the economy, central banks won’t be able to solve those.”

The irony here is that Stevens, who has resisted the global movement to further easing and kept his benchmark rate at 2 percent for almost a year, is facing a currency that has reversed course in the past three months and threatened his push to broaden Australia’s growth drivers. He warned in minutes of this month’s policy meeting Tuesday that the Aussie’s appreciation could complicate efforts to rebalance the economy away from mining.

Stevens, who is in the final months of his 10-year stint at the helm of the Reserve Bank of Australia, also questioned in the notes of his speech whether central banks and their unorthodox policies are solely responsible for the decline in long-term interest rates. 

“Monetary policy is not supposed to be able to affect real variables -- like real interest rates -- on a sustained basis,” he said. “Presumably, changes in risk appetite, subdued growth and expectations that growth will continue to be subdued have also played a role in lowering real rates.”

 

Eoin Treacy's view -

The need for Australia to develop additional sources of economic growth outside the resources sector was a major focus of attention while the price of commodities was falling. With the rebound in energy, industrial resources and soft commodities now underway the urgency of that drive is less pressing. In fact it is likely to act as headwind because the RBA will be less inclined to ease monetary policy when commodities are doing well. 



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April 15 2016

Commentary by Eoin Treacy

Brazil Is Throwing a Big Impeachment Party

This article by Anna Edgerton for Bloomberg may be of interest to subscribers. Here is a section:

Cunha is the showmaster, a Brazilian Democratic Movement Party member who came out against Rousseff last year, around the time that prosecutors revealed he was under investigation for allegedly hiding money related to corruption in a Swiss bank account.

The speaker is just one of many caught up in a long-running anti-corruption blitz that has put top executives and politicians behind bars. And more than half the members of the congressional panel that recommended the impeachment vote take place are under investigation for everything from alleged campaign financing irregularities to environmental offenses.

As for Rousseff, the current impeachment accusation against her is that she used accounting tricks to hide a budget deficit, which she says isn’t a crime that warrants impeachment. The president has denied any wrongdoing. Still, in the view of many Brazilians, she’s guilty of far worse, presiding over an economy that has sunk into a crippling recession.

 

Eoin Treacy's view -

Unfortunately being bad at your job and taking office just ahead of a major commodity price decline are not impeachable offenses. Rousseff’s close ties with those being investigated for wholesale corruption within Petrobras and a host of other state owned companies is a different matter. 



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April 15 2016

Commentary by Eoin Treacy

Has Dr Copper gone on sabbatical?

Thanks to a subscriber for this report from NAB which may be of interest. Here is a section:

2016 is shaping up to be a crucial year for copper producers and copper markets. Its biggest consumer, China, is going through a period of slower economic growth, with structural transitions under way and a depreciating currency. The end of China’s unprecedented growth rates of infrastructure investment, which pushed up metals demand and prices when it started, is now putting downward pressure on commodity prices, including copper. Copper price is now down over 50% since its peak in 2011, while the Chinese economy has been pushing ahead with slower, yet still impressive growth rates. The price falls have certainly been driven by the demand slowdown, but maybe more so by the supply glut and market sentiment in our view. 

One complicating factor is the scale and direction of some large carry trades which use metals (including copper) as collateral to take advantage of China’s domestic to foreign interest rate differential (see Page 3). There is a significant amount of copper tied up in these financing deals, with some estimates putting it at as much as ten per cent of total global copper demand. With the narrowing of the interest differential and a depreciating yuan, these trades are now starting to reverse, potentially releasing significant supply into the market, putting downward pressure on copper prices. 

On the supply side, producers responded to the previous high levels of demand and prices with increased exploration efforts and new mine constructions. The International Copper Study Group estimates global mined supply increased by 2.6% p.a. between 2009 and 2015, compared to 1.7% between 2001 and 2008. Last year’s large price declines have prompted some negative supply responses, although the cuts have not been enough to fully offset the new capacity. Existing producers have also managed to cut costs to remain in operation and maintain market share. Looking ahead, more than 4.5 million tonnes of copper mine capacity is scheduled to be added by 2020, the timing of which could be important for copper prices. 

Overall, our view on China and its metals demand are not as downbeat with a lot of the downside already priced in. The risks could be more from the supply side and overall market sentiment. As a result, we forecast a largely balanced market for 2016 and 2017 and still depressed price levels, with downside risks remaining around new mine supply growth outstripping demand while the China outlook will remain closely watched. 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

A point we regularly make is that supply represents the strongest influence on how prices evolve. Therefore how China’s commodity collateral agreements are resolved and just how much mine supply is taken out of the market will be important if copper prices are to continue to rally. 



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April 15 2016

Commentary by Eoin Treacy

Sugar Surges Most in 7 Weeks as Bulls Return on Deficit Outlook

This note by Marvin G. Perez for Bloomberg may be of interest. Here is a section:

This wk, price posted a gain of 2.2%, first since March 18

NOTE: Trader Czarnikow says world may be heading for the biggest shortage of sugar in seven yrs
 
“The bulls may also have been encouraged by reports of some physical off take appearing at these levels,” James Liddiard, partner at Agrilion Commodity Advisers in New York, says in an e-mailed note

While Brazilian farmers are set to collect a bigger harvest, crop problems in other major producers such as China, Central America, the EU, India, Thailand and Southern Africa, are supporting prices, he says

Eoin Treacy's view -

Sugar prices been the subject of quite a lot of volatility but found support this week in the region of the 200-day MA to reassert medium-term demand dominance. A sustained move below the MA would be required to begin to question potential for additional upside. 



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April 14 2016

Commentary by Eoin Treacy

Deutsche Bank Confirms Silver Market Manipulation In Legal Settlement, Agrees To Expose Other Banks

Thanks to a subscriber for this article from ZeroHedge detailing continued attempts to prove manipulation in the silver market. Here is a section: 

According to Reuters, Deutsche Bank has signed a binding settlement term sheet, and is negotiating a formal settlement agreement to be submitted for approval by U.S. District Judge Valerie Caproni, who oversees the litigation. A Deutsche Bank spokeswoman declined to comment. Lawyers for the investors did not immediately respond to requests for comment.

As noted above, investors had accused Deutsche Bank, HSBC and ScotiaBank of abusing their power as three of the world's largest silver bullion banks to dictate the price of silver through a secret, once-a-day meeting known as the Silver Fix.

None of this will come as a big surprise to readers, most of whom have been aware that this took place for years.

But wait there's more.

In a curious twist, the settlement letter reveals a stunning development, namely that the former members of the manipulation cartel have turned on each other. To wit:

“In addition to valuable monetary consideration, Deutsche Bank has also agreed to provide cooperation to plaintiffs, including the production of instant messages, and other electronic communications, as part of the settlement. In Plaintiff’s estimation, the cooperation to be provided by Deutsche Bank will substantially assist Plaintiffs in the prosecution of their claims against the non-settling defendants.”

 

Eoin Treacy's view -

The method used to set the daily benchmark rate for sliver changed to an electronic system in January. This change to a decades old method was in recognition of the fact that the honour based system that had prevailed previously was woefully inadequate. The admission by Deutsche Bank of culpability and its willingness to share correspondence pertaining to what amounts to conspiracy is likely to continue to make headlines and may draw more attention to the silver market. 



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April 12 2016

Commentary by Eoin Treacy

Email of the day on precious metals ratios

I just wonder if there is a chart of the Gold Silver ratio, as well as the HUI to gold and silver stocks to silver ratios available

Eoin Treacy's view -

Thank you for this question and I was just looking at these ratios following what has been an impressive breakout in gold and silver miners. You can recreate these ratios using the Charting function in the Chart Library. Here is a video showing how this can be achieved. 



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April 12 2016

Commentary by Eoin Treacy

Email of the day on ETFs that track the gold miners' index

I always enjoy reading your articles on PMs. On April 11th you showed HUI Gold shares chart How does one invest in this index from here in the UK? Is there an ETF one can buy? Thank you 

Eoin Treacy's view -

Thank you for your kind words. Gold miners are among the best performing stocks so far this year so interest in the sector is definitely picking up. There are a wide number of instruments that track the Index of gold miners. 



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April 12 2016

Commentary by Eoin Treacy

Soybeans Extend Rally to 8-Month High as Demand Seen Recovering

This article by Aya Takada for Bloomberg may be of interest to subscribers. Here is a section:

Futures up 0.2% at $9.30 1/2/bu at 11:25am in Tokyo, rising a 3rd day, longest streak since Mar. 11

“A weakening dollar is boosting optimism demand for U.S.  supplies from overseas buyers will keep expanding,” says Takaki Shigemoto, analyst at JSC, researcher in Tokyo

NOTE: U.S. soybeans inspected for export jump +70.5% w/w to 386,768mt: USDA

 

Eoin Treacy's view -

Spring planting started last week and with favourable ground conditions the potential for a large crop, barring incident, is high. Against that background demand dominance for soybeans is likely to be a short to medium-term affair rather than a major bull market.



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April 11 2016

Commentary by Eoin Treacy

April 08 2016

Commentary by Eoin Treacy

April 07 2016

Commentary by Eoin Treacy

Jamie Dimon's Rate-Spike Nightmare

This article by Lisa Abramowicz and Rani Molla for Bloomberg may be of interest to subscribers. Here is a section: 

3) Investors are piling into medium and longer-term U.S. bonds with increasing conviction that borrowing costs will stay low forever. The biggest exchange-traded funds that focus on such notes have experienced a surge of new money this year, with the volume of short interest on the ETFs' shares falling. This has helped fuel a 4.9 percent surge in Treasuries maturing in seven to 10 years so far this year, according to Bank of America Merrill Lynch index data.
 
4) The demand hasn't only come from ETFs and mutual funds. Big institutions and hedge funds have also bought more U.S. government bonds, particularly those maturing in the next decade, as they seek safe spots to park cash in the face of global economic uncertainty. 

Eoin Treacy's view -

How the Fed measures inflation does not appear to bear a great deal of resemblance to what we experience in our day to day lives. The cost of services such as insurance, education and healthcare have all trended higher and housing prices have recovered in many major cities but inflation measures have not responded. When I look at what I spend on a monthly basis that doesn’t make sense but the other side of the balance sheet also needs to be addressed.

Wages have been static for a long time and that means people have had to pay more for services but have cut back elsewhere to make ends meet. That is probably closer to how the Fed views inflation than any other explanation but it means wages are vital in how they decide to act. 



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April 05 2016

Commentary by Eoin Treacy

April 04 2016

Commentary by Eoin Treacy

Amcu to launch strike at Sibanye Gold on Wednesday

This article by Zundi Shabalala for Mineweb may be of interest to subscribers. Here is a section:

South Africa’s Association of Mineworkers and Construction Union (Amcu) said on Monday it plans to launch an indefinite strike on Wednesday at Sibanye Gold to demand higher wages.
Amcu members had voted in October to strike in the gold sector, including at Sibanye, but had agreed not to down tools immediately.

Amcu spokesman Manzini Zungu said on Monday the union had given a 48-hour strike notice to Sibanye.

“We will go on strike for as long as our members are saying ‘stay on a strike’,” he said.
“Sibanye is on a shopping spree, acquiring other assets but their workers are paid very low wages.”

Sibanye, which in 2015 bought Anglo American Platinum‘s labour-intensive Rustenburg mine and Aquarius Platinum, signed an agreement with three smaller unions and extended the wage deal to Amcu members.

Sibanye spokesman James Wellsted said the company had received the strike notice.
“They have a right to strike but we have the right to limit the potential damage to our business,” he said. “We have robust strike plans and will be implementing,” he said, without elaborating how Sibanye would cope with the work stoppage.

 

Eoin Treacy's view -

South African mines have been subject to headline grabbing labour disputes for much of the last five years and this is an issue that has the potential to become problematic for shareholders unless handled extremely delicately. 



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April 04 2016

Commentary by Eoin Treacy

We interrupt this rally to bring you...fundamentals

Thanks to a subscriber for this report from Deutsche Bank focusing on the mining sector which may be of interest to subscribers. Here is a section: 

The rally year to date reflects a rotation into sectors benefiting from a weaker US dollar, Chinese stimulus and the oil price rebound more than it reflects the slowly improving fundamentals - and we think each of these positives is now priced in. The sector has re-rated to a P/NPV of 0.86x, in line with the average trough multiple since 2003. It's the same for earnings multiples, where we now forecast a sector 2017e PE of 30x, well above the average trough PE of 9x, and the 17x of the most recent low in May 2015. We prefer Rio at 0.76x P/NPV compared with BHP at 0.92x. We have downgraded Glencore to Hold (0.8x NPV), but prefer it to Anglo (0.6x) given deleveraging progress.

FCF now healthy across the sector and gearing coming down
The 1Q16 commodity price recovery, with the oil price and producer currency weakness early in the quarter, plus continued ‘self-help’, has boosted free cash flow across the sector. 17 of the 19 companies under our coverage are now producing free cash flow after dividends in 2017. FCF yields average 10% for the big four diversified miners and 8.4% for the whole sector next year. Gearing is also reducing: we forecast a drop from 26% in 2015, to 22% in 2016 and 16% in 2017.

Lots for sale, lots of window shopping, no real buying…yet
A few companies are starting to use their balance sheets in selective M&A, but for rich multiples which are too high for most to justify when downwards pressure on long-term commodity prices prevails: today we have cut our LT copper price by 7% to USc300/lb and our LT iron ore price by 14% to US$57/t. There is a lot of window shopping going on, but valuations have run hard very quickly and we think both buyers and quality “for sale” assets remain scarce. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The commodities sector was about as unloved as is possible late last year and an impressive short covering rally has taken place over the first quarter. A similar move in oil prices has been the catalyst for renewed interest in miners because somewhat higher energy prices will have helped to push marginal supply out of the market. 



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April 01 2016

Commentary by Eoin Treacy

Lithium Story is (Quietly) Taking Off

Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

Key takeaways 
1) Q1 is firmly on track led by good growth in Lithium and solid growth in Surface Treatment, including in China, where auto/industrial demand is above expectations. The weakest region is Latin America where hydroprocessing catalyst demand is down as refiners in Brazil and Venezuela have sharply curtailed purchases. 2) Spot lithium carbonate prices in China of $21,000/m.t. are “fiction” with no relation to prices Albemarle receives or its large battery customers pay. Albemarle sells no spot lithium in China. The vast majority of Albemarle's lithium is sold under annual contracts. We estimate Albemarle’s battery grade lithium carbonate prices will be up ~15% in '16 to ~$6,.900 (vs $6,000 in '15). 3) All options for Bromine have been explored. A spin does not work as it would increase Albemarle's leverage at a time when it is trying to reduce leverage. A sale does not work as there are no strategic buyers and private equity would likely only pay 7x. A JV does not work due to required divestitures. As such, Albemarle is focused on running Bromine for cash for the next 3-5 years and using the cash to fund organic growth in lithium. 4) A sale of Surface Treatment would be much easier (and valuable) as evidenced by last week’s acquisition of Valspar for 15x EBITDA. However, with an onerous tax clawback until 2H'17 (stemming from the tax free separation of the business in '12), a sale before then is unlikely. 5) Assuming the recently announced MOU with Chile is formalized, Albemarle’s next lithium capacity will be a 20k m.t. plant in Chile. If it is built in La Negra, where Albemarle’s new 20k m.t. lithium carbonate plant is ramping (commercial sales ’17), the cost would be <$200MM versus $220MM spent on the new plant. This next increment of capacity should be on-stream in ‘20 and will increase Albemarle’s Chilean lithium carbonate capacity to 64k m.t. (70k m.t. with debottlenecking) plus 6k m.t. of US capacity. After Chile, Albemarle intends to bring on a 25k m.t. lithium hydroxide (from spodumene) plant in ’22-‘23 at a cost or ~$300M.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

With Tesla reportedly taking 180,000 pre-orders for its anticipated $35,000 Model C yesterday it is perhaps a good time to think about where the batteries to power these vehicles are going to come from. Tesla’s gigafactory is expected to begin production next year and factories in China, Japan and South Korea are ramping up production for their own EV solutions. This all requires lithium. 



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March 16 2016

Commentary by Eoin Treacy

Lumber Jumps as Trudeau-Obama Meeting Fuels Hopes for Trade Pact

This article by Jen Skerritt for Bloomberg may be of interest to subscribers. Here it is in full:

Lumber prices touched an eight-month high after a state visit to the U.S. by Canadian Prime Minister Justin Trudeau raised expectations that the latest chapter in a long-simmering trade dispute is closer to being resolved.

Futures for May settlement rose 3.6 percent to their daily limit of $291.60 per 1,000 board feet at 12:45 p.m. in Chicago, the highest intraday price for a most-active contract since July 14.
The two nations have long sparred over softwood lumber, with the dispute gathering steam in the early 1980s when U.S. lumber companies complained Canada gave producers access to cheap timber on government land. The 2006 Softwood Lumber Agreement expired last fall and both countries have until October to iron out a new trade accord, after which U.S. companies can file new trade cases against Canadian imports.

Trudeau brought up the dispute at a meeting with President Barack Obama in Washington on Thursday and said he’s confident the two countries can find a solution in the coming weeks and months. Comments from both sides point to the conclusion of a new, compromise deal before the deadline, Bloomberg Intelligence analyst Caitlin Webber said Friday in a note.

A new accord would probably boost prices as imported Canadian lumber will be subject to a tax at the border, Paul Quinn, an analyst at RBC Capital Markets in Vancouver, said in an interview.
"We would expect benchmark lumber prices to rise following the reintroduction of a trade deal," Charles Gross, an analyst at Morningstar Inc. in Chicago, said via e-mail.

 

Eoin Treacy's view -

The relative weakness of the Canadian dollar has acted as a headwind for lumber prices because it makes supplies north of the border more attractive. This weighed on the commodity until recently and the potential that the USA and Canada can come to an agreement on tariffs is a positive catalyst. 



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March 14 2016

Commentary by Eoin Treacy

World Sugar Market Seen in Deficit for Few Years, Archer Says

This note by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here it is:

“World production and consumption for the next 2-3 years show a reasonable chance that we will continue having deficits” as prices remain below production costs for many producers, Archer Consulting says in March 12 report.

Consumption around the world is rising faster than production, says Arnaldo Correa, partner at the Sao Paulo- based firm

As Brazil’s average sugar-yield (known as ATR) dwindles fourth year in row, “it’s no wonder that we will have constant deficits (though small) over the next years”

Thailand’s costs of production is 15.10c/lb, India’s 24.47c/lb, while Australia’s is 11.90c/lb and Brazil’s 11.25c/lb, Archer estimates

Near term, recent price rally needs validation from physical market, where demand came to a standstill since early March

NOTE: Raw sugar for May delivery rose 2% last wk to 15.13c/lb on ICE Futures U.S. in N.Y.

Rebounding Brazilian real helping sugar rally as it deters producer selling of commodities priced in greenback: Archer

 

Eoin Treacy's view -

“The cure for high prices is high prices” is one of the oldest adages in the commodity markets but it also works in reverse and particularly for agricultural commodities where farmers can choose what to plant. As prices for one commodity fall they have an incentive to plant a more lucrative cash crop. 



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March 14 2016

Commentary by Eoin Treacy

Copper A Pause for breath

Thanks to a subscriber for this report from Standard Chartered which may be of interest. Here is a section

One critical question facing copper-market participants at the conference was why China’s copper imports have been so strong since September. The latest trade data (for February) showed that preliminary copper imports rose 50% y/y to 420 thousand tonnes (kt), just 5% down from January and 10% lower than the average in Q4-2015. Conversations with market participants offered four key drivers supporting the level of imports. First, H2-2015 was dominated by fears of sharp CNY devaluations versus the USD, which would make imports of copper more expensive. As a result, China’s fabricators bought more cathode than usual, seeking to limit the potential cost impact. It was generally observed that the People’s Bank of China’s (PBoC’s) CNY management since the LNY holiday had settled these concerns to some extent. We expect a relatively benign environment for the CNY in 2016, and therefore that this currency-related restocking will moderate.

Second, another import driver was the relative weakness in Yangshan copper premia versus last year’s long-term contracted premium (USD 130/tonne, ‘t’) and 2016 terms (USD 98/t). Alongside the lower price environment and fears of CNY devaluation, this supported fabricators’ and traders’ appetite for cathode purchases. Contracted tonnage volumes for 2016 potentially fell 20-30%, leaving China’s traders and fabricators with a larger discretionary volume to be purchased from the spot market early in 2016. While Yanghsan premiums dropped from close to USD 100/t in January to USD 70/t currently, until the domestic copper discount narrows or Yangshan premiums falls further, spot demand was seen limited. In this respect, further builds in bonded stocks were expected through March

Third, another key support for imports early in 2016 was the State Reserve Bureau’s (SRB’s) copper purchases in January. The SRB clearly signalled that it was tendering for 150kt of cathode from domestic smelters early in the year, and purchases were completed within the month. This tightened the domestic market temporarily and boosted refined imports. There was also discussion of potential commercial stockpiling being undertaken in China. Although not officially confirmed, media reports in December noted that the China Development Bank (CDB) had allocated a three-year interest-free loan to producers of various metals to use for commercial stockpiling. The tenor of the loans suggested the goal was to remove the metal from domestic markets for a substantial period of time. It was reported that at the time, a CNY 9bn loan had been offered to copper producers, which would equate to just under 250kt of copper cathode at current Shanghai Futures Exchange (SHFE) prices. This commercial stockpiling has been undertaken in China’s aluminium sector, but it remains unclear whether this has been the case in copper.

 

Eoin Treacy's view -

Copper prices are currently about half of their peak 2011 value and this chart of the futures curve highlights how small the spread is between the various contracts. At only a 2¢ over three years the curve suggests the market is in relative balance. 



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March 10 2016

Commentary by Eoin Treacy

March 08 2016

Commentary by Eoin Treacy

Caffeine Addicts, Beware the Shrinking Coffee Supplies

This note by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section: 

Slumping coffee stockpiles are signaling that caffeine fiends may start paying more for their morning buzz. Inventories of arabica beans at warehouses monitored by ICE Futures U.S. have tumbled 12 percent this year to the lowest since May 2012. Prices traded in New York reached a two-year low in January, and the shrinking glut shows that cup of Joe may not stay cheap for long as global demand gains, said Fain Shaffer, the president of Infinity Trading Corp. in Indianapolis.

Eoin Treacy's view -

Coffee is addictive so demand growth is reasonably unaffected by moderate moves in the price of the commodity. It’s also a high margin business for companies like Starbucks where the majority of costs are in rent and labour rather than raw materials. 

Supply is a different story because of the life cycle of the coffee tree. It can take anything up to five years to produce a fruit bearing tree. This means coffee prices are prone to multi-year moves where uptrends eventually lead to increases in supply and downtrends eventually mean trees are ripped out to make way for more profitable cash crops or diseased plants are not replaced. 

 



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March 04 2016

Commentary by Eoin Treacy

Brazilian Real, Stocks Rally as Traders Root for Impeachment

This article from Bloomberg may be of interest to subscribers. Here is a section: 

"Brazilian stocks have already risen a lot these past days as investors reverted bets on the worsening of the economy," said Alvaro Bandeira, economist at Banco Modal. 

"The market clearly wants a better government, one that’s credible and stable, and able to change economic policies that have led the country into this recession."
Some market watchers warned the rally could be short-lived as the process to impeach the president drags on, potentially plunging Brazil deeper into chaos.

“The market is reacting like Brazil woke up today as a whole new country, but a corruption investigation is hard, long and full of surprises," said Adeodato Volpi Netto, head of capital markets at Eleven Financial Research. "There’s room for profit taking on stocks as short-term investors play to make money, not to discuss politics."

Eoin Treacy's view -

I had hoped Dilma Rousseff would lose the 2014 election but that was not to be the case and her success resulted in a loss of investor confidence that Brazil could deal effectively with its challenges. The collapse of oil prices highlighted how much of a piggy bank Petrobras had become for the ruling elite and pictures today of former, and well-loved, president  Lula da Silva being arrested highlight just how high up the payments may have gone. As the above segment suggests impeachment is not a simple process so we can expect this saga to persist a while longer unless of course she resigns which appears unlikely given the protections from prosecution afforded the president. 



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March 03 2016

Commentary by Eoin Treacy

Iron-Ore and Steel

Eoin Treacy's view -

A firmer tone in oil prices inhibits the ability of marginal miners to continue to remain in operation which should remove supply from the market. This has predictably acted as a catalyst for bullish interest in other commodities. 

Following a five-year downtrend and 80% price decline, Iron-ore rallied this week to break back above the 200-day MA for the first time since late 2013. 

 



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March 02 2016

Commentary by Eoin Treacy

The Silver Institute

Thanks to a subscriber for this edition of Silver News, which highlights innovations in industrial uses for silver. Here is a section on supply: 

Global mine supply production is projected to fall in 2016 by as much as 5 percent year-on-year. This would represent the first reduction to global silver mine production since 2002. The lower price environment provided little incentive for producers to invest in expanding capacity at existing operations. Looking further ahead, many analysts expect global silver mine production to fall through 2019 as primary silver production from more mature operations begins to drop.

Scrap supply, which has been on the decline for several years, should further weaken in 2016. This outlook is based on additional losses in photographic scrap, a depleted pool of near-market silverware, jewelry and coins, and slowed scrap flows from industrial sources. Industrial scrap such as electronics cost more to recycle and the current price environment has weighed on the profitability of recovering silver from these end-of-life items.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The loss of the photographic film market was a major blow to the silver market from the 1990s. However the metal also has other industrial uses not least in healthcare and the fight against antibiotic immunity. 



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March 01 2016

Commentary by Eoin Treacy

Copper Bargains Scant With Best Assets Hoarded, Antofagasta Says

This article by Danielle Bochove and Millie Munshi for Bloomberg may be of interest to subscribers. Here is a section:

When asked about the possibility of future asset purchases, Hernandez said the company would prefer to remain in the Americas. Copper prices, down more than 50 percent from an early-2011 peak, are unlikely to recover significantly for the next two to three years, he said. As that happens, more miners may be forced to put up assets for sale.

“Mining companies don’t want to dispose of their copper assets,” Hernandez said. “We haven’t seen too many opportunities on the market. On the other hand, many companies are very stressed financially, and we don’t know what will happen.”

 

Eoin Treacy's view -

Copper has been trending consistently lower since 2011 so we know a lot of bad news is already in the price. It has stabilised near $2 over the last couple of months in what has so far been a relatively gradual process of mean reversion. It is going to have to sustain a move back above the 200-day MA to confirm more than temporary support has been found. 



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February 29 2016

Commentary by Eoin Treacy

Electric car war sends lithium prices sky high

This article by James Stafford for Mineweb may be of interest to subscribers. Here is a section:

That’s why Goldman Sachs calls lithium the “new gasoline”. It’s also why The Economist calls it “the world’s hottest commodity”, and talks about a “global scramble to secure supplies of lithium by the world’s largest battery producers, and by end-users such as carmakers.”

In fact, as the Economist notes, the price of 99%-pure lithium carbonate imported to China more than doubled in the two months to the end of December—putting it at a whopping $13,000 per ton.

But what you might not know is that this playing field is fast becoming a battlefield that has huge names such as Apple, Google and start-up Faraday Future throwing down for electric car market share and even reportedly gaming to see who can steal the best engineers.

Apple has now come out of the closet with plans for its own electric car by 2019, putting it on a direct collision course with Tesla. And Google, too, is pushing fast into this arena with its self-driving car project through its Alphabet holding company.

Then we have the Faraday Future start-up—backed by Chinese billionaire Jia Yueting–which has charged onto this scene with plans for a new $1-billion factory in Las Vegas, and is hoping to produce its first car next year already.

Ensuring the best engineers for all these rival projects opens up a second front line in the war. They’ve all been at each other’s recruitment throats for months, stealing each other’s prized staff.

And when the wave of megafactories starts pumping out batteries—with the first slated to come online as soon as next year–we could need up to 100,000 tons of new lithium carbonate by 2021. It’s an amount of lithium we just don’t have right now.

 

Eoin Treacy's view -

Describing lithium as the “new gasoline” is an interesting take on the projected demand for electric cars. Last week’s Bloomberg article proclaiming batteries would cause the next oil crisis would appear to be in the same vein. These estimates are based on the fact that large battery factories are going to come on line in the next 18 months and not just Tesla’s giga-factory in Nevada. With additional supply, prices can be expected to decline and demand should rise. Home batteries and home charging stations are likely to become much more visible and utilities are already installing industrial scale batteries to tackle intermittency of renewables and to become more efficient with fossil fuel use. 



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February 29 2016

Commentary by Eoin Treacy

It's expensive, but you need some insurance

Thanks to a subscriber for this report from Deutsche Bank focusing on the outlook for gold not least as a hedge against fear in other asset classes. Here is a section:

As a hedge against a weakening currency, we think Chinese gold demand will continue to increase, and whilst we do not forecast a repeat of 2013, physical demand could grow in the order of 10% or 100 tonnes. Chinese demand has increased by 14% CAGR since 2005. In the recent bout of RMB weakness we have seen increased trading volumes on the Shanghai Gold exchange, suggesting a higher propensity to buy gold as a hedge against a depreciating currency. Chinese buying remains tactical with the most activity occurring on the dips. We note that since the strong rally in gold, we have seen activity drop off on the SGE.

Gold holds its own in a US recession
Although we are not as bearish on the US to suggest that the entire economy will lapse into a recession, there are certain manufacturing sectors that are in a recession. Assuming the worst case scenario where the US slips into a recession, dragging the global economy with it, the USD normally performs very well as investors search for safe havens and US investors repatriate funds onshore. Gold is normally inversely correlated to the USD, but under these conditions i.e. extreme risk aversion, gold also performs relatively well. We outline the performance of the USD in the past two global recessions.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

Gold rallied as negative yields made it attractive based on what is now a positive carry. That alerted people once more to its characteristics as an uncorrelated asset class which was ignored while prices trended lower. 



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February 26 2016

Commentary by Eoin Treacy

A step change for Sibanye

This article by Warren Dick for Mineweb may be of interest to subscribers. Here is a section: 

The yawning margins South Africa’s gold producers are now enjoying courtesy of the current rand-dollar exchange rate and gold price are bringing a whole lot of positive problems that revolve around what to do with the cash.

“A situation like this only comes around once or twice in a lifetime,” is the way Sibanye CEO Neal Froneman put it in our interview. To add numbers for context: Sibanye has guided the market that it will produce 50 000 kilograms of gold in 2016 (the company’s financial year runs to the end of December). The current rand gold price means that Sibanye will earn R612 000/kg, whereas forecast All-in Sustaining Cost (AISC) is expected to be R425 000/kg. Should these assumptions hold, it would indicate the margin of R187 000/kg would generate earnings before interest and tax of R9.35 billion, with cash flow from operations in that region. This massive increase in potential free cash flow explains why Sibanye’s share price has risen 182% in the last three months.

So what will it do with the cash?

This year it will have to pay for the acquisition of Aquarius Platinum and the Rustenburg Operations from Amplats which amounts to about R6 billion. Using existing cash resources and debt facilities means the company would only marginally breach its self-imposed comfort level of debt to operating profit without factoring in the windfall from the margins it would enjoy during the course of the year.

 

Eoin Treacy's view -

David has long said that happiness in the currency markets is about having both the trend and the central bank on your side. Gold is a monetary metal and its supply does not depend on a central bank. However since no currency can be valued in isolation the influence of whatever central bank is issuing the currency you want to denominate gold in is important. The Dollar has been strong over the last year which has held back gold’s advance against the greenback. On the other hand, the Rand has been among the weakest currencies, so gold has been hitting new all-time highs against it. 



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February 24 2016

Commentary by Eoin Treacy

Trends & Inflection Points

Thanks to a subscriber for this note by Mark Steele for BMO which may be of interest to subscribers. Here is a section: 

Gold does well when the banking system is at risk.

The banking system is at risk.

Yesterday, we highlighted the CDS curve on Deutsche Bank, which went inverted (Markit pricing) when WTI hit $26. We updated that chart as of 5:30am, only this time with gold overlaid on the DB curve – Figure 3.

 

Eoin Treacy's view -

A link to the full note is posted in the Subscriber's Area. 

The correlation between the underperformance of the financial sector and the surge in gold prices is not a coincidence. Gold has been in need of a bullish catalyst and it has attracted interest as government bonds yields moved into negative territory. 



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February 19 2016

Commentary by Eoin Treacy

The multi-asset essay: Why commodities will recover

Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

Our call for a final leg down in metals prices is based on weaker-than-expected oil prices and the potential depreciation of the Chinese renminbi. Metals currently are factoring in oil at $40 a barrel – not today’s prices of low $30s. Furthermore, a weaker Chinese currency is likely to drag down commodity currencies even further. But that is likely to be the end of this deflationary cycle.
Management teams may be able to take out more costs, but we are at the point where these cuts would be unsustainable, ultimately leading to lower output in the future.

Why is that? Because current spot prices are 40 to 50 per cent below so-called incentive prices, which are the prices required to earn a 12-15 per cent rate of return on a project. As a result, capital spending on new capacity has simply dried up, with industry capex down over 60 per cent versus the peak in 2012. Ore bodies are depleting assets and current capex levels are not sufficient to sustain current output for more than two to three years. In copper, for example, the world needs two new large-scale mines every year just to offset the reserve depletion.

While oil prices are low, current spot prices for metals are well below the marginal cost of most producers. As an extreme example, nearly two-thirds of the nickel industry is under water. That has placed mining company balance sheets under intense pressure. We estimate the net debt of the largest companies will approach an uncomfortable 3.5 times ebitda by the end of the year. This could force an industry tipping point and, indeed, supply curtailments have already started to gather momentum. In aggregate, around five per cent of the industry’s capacity is in the process of closing. We need at least ten per cent of the capacity to be shuttered to reach critical mass. Given the stresses in the industry, we think this will occur during 2016 and will stabilise prices. It may take a little longer for capital constraints to become apparent, but as they do, metal price deflation will quickly turn to inflation. 

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

I was talking to a Scotland based nickel buyer in Heathrow a couple of weeks ago who testified to how difficult the business of buying scrap has been over the last few years. Prices have been falling in a jerky fashion, which complicated their hedging strategy making it largely ineffectual. They are now surviving on thin margins and really hope for a turn in the price environment soon to ensure survival. 



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February 15 2016

Commentary by Eoin Treacy

Downside risk remains

Thanks to a subscriber for this report from Deutsche Bank focusing on the shipping sector. Here is a section:

Supply discipline is the only resort, but looks difficult to achieve 
Another 518k TEU of mega vessels will hit the water in 2016 (with 800k more in both 2017 and 2018), which will force Asia-Europe capacity to grow c.10% in 2016 (vs. est.2% demand growth). Liners’ supply discipline has also become increasingly difficult to achieve, given the widening cost gap. While the latest mergers (Coscon+CSCL; CMA CGM+NOL) should further consolidate market share, pricing competition typically intensifies post mergers, based on prior experiences. This is due to liners seeking to preserve market share while cargo owners seek to diversify their risks. Moreover, the existing alliances are set to break up post mergers, creating short-term instability for the industry. 

How deep and long will this downturn last? 
The sector has traded down to 1.0x P/B, vs. 2016E ROE of -19%, which still looks expensive. During the GFC, the sector troughed at 0.5x P/B vs. ROE of -20%. More importantly, investor interest has waned over the past several years as the sector’s oversupply was widely expected to persist. This explains why the sector’s P/B range has not only moved down but also contracted. We expect a prolonged downcycle; hence, value will only emerge when P/B is closer to the GFC trough of 0.5x.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

Bull markets begin when new sources of demand emerge amid an environment where supply is constrained. Likewise they peak when supply has caught up and overwhelms demand. We occasionally get periods of time when demand falls but then prices retreat enough to encourage consumers to participate again. As a result supply is a more important factor than demand when thinking about how a market is likely to evolve. Bearing that in mind it has often puzzled me why people tend to think about the Baltic Dry Index as being an indicator of demand rather than supply; since that kind of interpretation is contrary to how we tend to look at just about every other commodity related market. 



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February 15 2016

Commentary by Eoin Treacy

Early Morning Reid

Thanks to a subscriber for this report by Jim Reid for Deutsche Bank which may be of interest. Here is a section:

Talking of Oil and Gold, last week we showed a long-term graph of Oil in real adjusted terms, showing that the average real price since 1861 was $47. Following on from that, one ratio we occasionally look at is the ratio of various assets to the price of Gold. So today in the off we update the Oil/Gold ratio back to 1865 and find that the Gold price has just hit an all-time high at around 44 times the price of Oil. The previous high of 41 in 1892 has just been exceeded. For perspective, the ratio was at 6.6 in June 2008 and only 12 in May 2014. The long-term average is 15.5. While this says nothing about where the ratio is going in the short-term surely this looks a good trade to exploit over the longer-term for those who care about such things.

A big reason behind the rally in Gold this year has been a flight to quality and the fading expectations of further Fed tightening in the next twelve months. Yesterday Yellen stuck largely to the script in acknowledging market concerns emanating from tightening financial conditions, while at the same time refusing to fully close any doors still open to the Fed later this year. That said the overall tone was certainly of a dovish leaning. Much was made of the passage suggesting that ‘financial conditions in the US have recently become less supportive of growth, with declines in broad based measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar’. Yellen said that should these developments prove to be persistent then they ‘could weigh on the outlook for economic activity and the labour market’.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

When gold was used to buy oil the ratio between the two would have been a powerful indicator of sentiment towards the economy and relative value of savings over investment. That may no longer be the case in an era of fiat currencies but when the ratio hits new highs it tends to turn heads. 



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February 15 2016

Commentary by Eoin Treacy

February 12 2016

Commentary by Eoin Treacy

Crude Oil Futures Surge After Closing at Lowest in 12 Years

This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section: 

"It makes a lot of sense to cover shorts after plunging to new 12-year lows," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "We had one of the more reliable people in OPEC say that it was willing to cooperate in making cuts. I don’t believe anything will come of it but you have to pay attention."

And

“Prices are not appropriate, I won’t say for the majority only, but for all producers,” U.A.E.’s Al Mazrouei said in the Sky News Arabia interview in Arabic on Wednesday. “The people who have spent money and have this investment, it’s natural that they won’t make cuts alone unless there is complete cooperation from everybody in that area.”

Eoin Treacy's view -

Oil is cheap right now and many producers are uneconomic at these levels. The question then is only about when this supply will be taken out of the market not if that happens. The lower prices go, the greater the potential is for that to happen. Russia signalled in January that it was willing to discuss cutting supply and now several OPEC members are discussing it which is a confirmation they are not immune to the decline in prices. These prognostications are helping oil prices to steady but substantive action is probably needed to act as a catalyst for a more impressive rebound. A lot will depend on what Saudi Arabia is willing to do. 



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February 09 2016

Commentary by Eoin Treacy

Breaking Through the Zero Lower Bound

Thanks to a subscriber for this report by Ruchir Agarwal and Miles Kimball for the IMF which may be of interest to subscribers. Here is a section:

We show here how the combination of (a) using electronic money as the unit of account and (b) a time-varying paper currency deposit fee can be used to eliminate the option to circumvent the negative rates by withdrawing, storing and, later, redepositing paper currency. The key idea is that a negative interest rate can be accompanied by a time-varying deposit fee that ensures the value of paper money and the value of funds in electronic accounts will move in tandem. Such a deposit fee only needs to be imposed at the central bank’s cash window—the facility through which the central bank and commercial banks interact to bring cash in to and out of circulation—and not on households, firms, or banks. Levying the paper currency deposit fee on net deposits of paper currency allows the central bank to create an exchange rate at the cash window between electronic currency and paper currency, so that in a negative interest environment, the value of paper currency can be caused to depreciate over time relative to electronic money. The objective is a policy at minimum distance from the current monetary system consistent with eliminating the zero lower bound. In particular, such a policy requires no extra regulations or quantity constraints. Instead, its impact on the economy works entirely through the price system.

Eoin Treacy's view -

This is about the best, though unintentional, argument for owning gold and stocks with reliable dividend growth I’ve seen. One of the primary arguments used by fundamental analysts to disparage gold is that it does not pay a dividend and as a result cannot be valued. That’s does not seem to trouble them when it comes to suggesting that fiat currency should be intentionally debased and eroded by negative interest rates. With $7 Trillion in bonds currently in a negative yield environment, gold has a positive carry just by virtue of not paying anything. 



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February 08 2016

Commentary by Eoin Treacy

January 29 2016

Commentary by Eoin Treacy

ETF Holdings of Gold

Eoin Treacy's view -

The gold market has been the subject of considerable conjecture over the last month as prices have stabilised mostly above $1050 and closed an overextension relative to the trend mean in the process. ETF holdings of gold do not represent the same influence on gold prices as they did in 2011, not least because so much selling has taken place. However, it is noteworthy that the total holdings of gold index has also been engaged in a process of mean reversion.



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January 28 2016

Commentary by Eoin Treacy

The Bigger Picture A Global & Australian Economic Perspective

Thanks to a subscriber for this report from National Australia Bank which may be of interest. Here is a section: 

There are signs that the strength in household goods expenditure is losing steam, possibly reflecting the recent cooling of the housing market spearheaded by Sydney. That said, the more recent data on retail spending continues to be relatively resilient, underpinned by improving trading conditions, while a lower AUD has encouraged tourism spending. ABS retail turnover growth for November (0.4%) was slightly below October (0.6%) to be 4.1% y/y, around the trend seen since late 2014. Meanwhile, NAB’s Online Retail Sales Index for November showed a 0.7% m/m rise in online spending. Despite soft wages growth, we expect a modest pick-up in consumer spending growth through to 2016, driven by a gradual reduction in households’ saving ratio and strong employment growth.

The Sydney housing market has clearly cooled, having recorded two consecutive months of price declines, while momentum in the Melbourne market has also slowed -but not as much as Sydney. Other capital cities experienced mixed outcomes in December. Recent property market outcomes are consistent with our view that prices growth will increasingly come under pressure as credit restrictions on investor lending bite, in combination with subdued incomes and slowing population growth/rising supply. We have maintained our previous forecast for much slower house price growth in 2016 (2%), although risks to the downside have escalated even more, especially in the apartment market.

Signs of stronger non-mining investment remain hard to find in the official data (especially the expectations data), while inevitable declines in mining capex continue – and could well become more pronounced given further falls in commodity prices. Despite significant signs of improvement in the business landscape, the NAB Business Survey reports that firms are still apparently gun-shy on investment. A fall in capacity utilisation in the December Monthly business survey has probably not helped, nor would recent financial market uncertainties. That said, we remain hopeful that AUD depreciation will eventually assist investment in trade exposed industries. Dwelling investment has been a little softer than expected in recent quarters, yet record high numbers of dwellings in the construction pipeline suggest the positive contribution to growth is likely to continue – although the cooling housing market will likely stem the flow of new projects.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

A firmer tone on energy markets represents a tailwind for Australia as LNG shipping capacity comes on line. In fact with the rationalisation of China’s steel industry Australia needs energy to play a significant role in exports to make up for the loss of revenue from coal and iron-ore. If we take that a step further it is reasonable to expect the Australian Dollar to be more heavily influenced by moves in the oil price than was previously the case. 



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January 25 2016

Commentary by Eoin Treacy

Plumbing the depths...

Thanks to a subscriber for this report from ICBC Standard Bank which may be of interest. Here is a section:

We would be biased long gold into Chinese New Year but only up to around $1,140 We expect the current rally to fade after that the metal to post a new low for the current down-cycle in Q3, followed by a sluggish recovery into year end.

Silver remains a derivative of gold. Trading opportunities are tactical and technical, not fundamental. We recommend buying silver volatility when one-month implied dips below 23%. We would rather own puts than calls.

In the short-term we expect platinum to trade below $800 and potentially test the global financial crisis low of $744. The medium-term outlook is improving, however, and we think platinum’s long period of underperformance relative to both gold and palladium will begin to reverse during H2.

Relative to spot prices we are most bearish palladium. That’s counter to consensus and recent history. But the demand outlook has deteriorated, supply is inelastic, inventories are large, and investor conviction is shaky. Palladium is more likely to trade in the $300s than $600s this year

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

This report is representative of a large number that have crossed our desks recently with the abiding message being that there are short-term risks but medium-term upside potential. In any other circumstances investors would pre-empt a medium-term bullish view by buying now and using further weakness as an opportunity to increase positions. One has to ask why this is not more evident within the commodity complex right now?

 



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January 20 2016

Commentary by Eoin Treacy

Gold and Safe Haven Status

Eoin Treacy's view -

Gold prices are down about 43% in US Dollar terms since the 2011 peak but have been notably quiet over the last few months as volatility has picked up in just about every other asset class. Sometimes just doing nothing is enough to attract attention when the emotionality of the market spikes higher and this has certainly been the case for gold. 



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January 19 2016

Commentary by Eoin Treacy

Email of the day on lithium and miners

Following up on your 12th Dec piece on the lithium production from Elementis' hectorite mining in the US the consensus amongst those who know appears to be that we have adequate globally and in the West. The person to speak to (as Elementis doesn't answer emails!) is R Keith Evans who is globally the world expert. A Google search will show up previous articles from this gentleman on the same theme. There's probably a reason why Elementis aren't making a song and dance about it! 

Eoin Treacy's view -

Thank you for this informative email and for the link to R.Keith Evans’ article which it should be noted is dated 2008. Lithium prices have been static for approximately four years suggesting that supply and demand are in relative equilibrium, that the market is dominated by long-term contracts and is not very liquid. 



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January 19 2016

Commentary by Eoin Treacy

Top Forecaster Sees Aussie Demons Capping Gains as Bottom Near

This article by Candice Zachariahs for Bloomberg may be of interest to subscribers. Here is a section: 

Bialas estimates that a “big chunk” of Aussie underperformance came from the unraveling of carry trades that involved, in particular, borrowing euros at near zero percent to buy a currency linked to a higher benchmark rate. The Reserve Bank of Australia cash rate currently stands at 2 percent and policy makers have signaled a reluctance to take it any lower.

Australia last month capped its strongest year for job growth since 2006, with the country’s services sector propelling gains as the mining industry cooled.

“I expect the Aussie-U.S. dollar to bottom sometime in the second quarter,” Bialas said, “as improved competitiveness of sectors unrelated to mining, a strong labor market and a recovery in inflation will give rise to speculation about the return of the RBA to raise interest rates later this year.”

 

Eoin Treacy's view -

Few developed markets are as exposed to China as Australia so the relative weakness of the Australian Dollar has been a reflection of stress in its largest export market. With Chinese government yields testing the lows seen in 2008 the potential for measures to support economic growth to be announced is growing and that may act to stem the Aussie’s decline.  



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January 13 2016

Commentary by Eoin Treacy

Gundlach to Summers Side With Bond Market Against Fed Rate Path

This article by Susanne Walker Barton for Bloomberg may be of interest to subscribers. Here is a section: 

Traders are pricing in about a 39 percent chance the Fed will raise interest rates at or before its March meeting, down from 51 percent at the end of last year. The probability is based on the assumption that the effective Fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase.
     
“We could be looking at a really ugly situation during the first quarter of 2016,” Gundlach said during a market outlook webcast Tuesday. “It’s particularly more likely to happen if the Fed keeps banging this drum of raising interest rates against falling inflation.”

And

Policy makers this week have offered conflicting views about the central bank’s rate path amid tumbling oil prices and global market volatility. Boston Fed President Eric Rosengren said Wednesday that estimates for U.S. economic growth are falling, putting the central bank’s projected path for rate increases at risk.

By contrast, Richmond Fed President Jeffery Lacker said Tuesday that the U.S. and China’s economies are linked "less than you would think" and the Fed is likely to need at least four rate rises this year. 

Dallas Fed President Robert Kaplan said he "would have a bias to want to move toward normalization” in an interview with Bloomberg TV on Wednesday. "It comes with some risk,” he said.

“Every time we increase the federal funds rate, we’re going to have to watch and see what the impact is.”

Eoin Treacy's view -

In very simple terms the Fed altered the status quo by choosing to raise interest rates and market participants are still pricing in the effect rising interest rates will have on leverage, buybacks, position sizing and the relative performance of various asset classes. 

2-year yields are rapidly unwinding the short-term oversold condition but a sustained move below the trend mean, currently near 75 basis points would be required to question medium-term supply dominance. 

 



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January 13 2016

Commentary by Eoin Treacy

Email of the day on sugar companies

What are the implications for Tate and Lyle of a secular bull market in sugar?

Eoin Treacy's view -

I agree there is a secular demand growth story for sugar but that does not mean there is a secular uptrend in sugar prices considering the ability of farmers to increase supply over the medium term. Nevertheless, the current outlook is for additional strength is sugar prices following the break of the five-year downtrend. 



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January 07 2016

Commentary by Eoin Treacy

China Sugar Demand Spurs Sweet Surge in Futures Premium

This note by Marvin G. Perez and Melissa Mittelman for Bloomberg may be of interest to subscribers. 

China’s increasing appetite for sugar imports has jolted the spread between futures prices for the raw and processed products.

“There has been poor weather, but there’s also been an exodus out of sugar production” in China, Michael McDougall, a broker at Societe Generale in New York, said in a telephone interview. “They’ve steadily reduced the cane price for the farmer, so he’s basically planting something else.”

China will import a record 5.5 million metric tons in 2015-16, up 8.7% from a year earlier, as domestic production tumbles, the U.S. Department of Agriculture estimates. That will drive demand for supplies from Thailand and India, McDougall said.

 

Eoin Treacy's view -

Sugar is addictive so demand growth tends to remain on a steady upward trajectory. Supply is the major variable and that is true of all commodities not just sugar. Prices trended lower for five years and that means farmers were getting less money every year for the same work. Little wonder then that they decided to plant something with better prospects for a profit. 



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January 06 2016

Commentary by Eoin Treacy

Gold Standard Ventures Is Uncovering Bonanza Grade in Nevada's Carlin Trend

Thanks to a subscriber for this interview from The Gold Report which may be of interest. Here is a section:

TGR: You have released test results on Dark Star that Bob Moriarty called "obscene" in a good way. What's your strategy for moving that discovery forward?

JA: The Dark Star project is something that we're very excited about. To hit 150-plus meters of 1.5 grams per ton oxide in the Carlin Trend has historically meant you were in a large, robust system. This is our second blind discovery on the project. This just goes to show that our exploration team is very good. This was a systematic, methodical model-driven exploration process. Our strategy is to hit this whole corridor, which from north to south is about 10 miles long. On the southern end is Dark Star, and on the northern end is Newmont Mining Corp.'s (NEM:NYSE) producing Emigrant mine. We think there is a lot of exploration potential along the structural corridor. A lot of that has been made possible because of the consolidation work that Gold Standard has been able to do.

TGR: As you mentioned, you have some majors as operating neighbors. Are there some models in Nevada that investors are using to compare your possible future prospects?

JA: For Pinion, I think the closest model is Emigrant, a producing mine that belongs to Newmont. It was built in 2012. It's a run-of-mine, heap-leach operation. It has similar grade and characteristics. I think the market wants to see what the metallurgy will look like at Pinion because that is key to the economic model for a heap-leach project. We're doing a lot of that work in that area right now and should have a much better picture in January/February of 2016.

 

Eoin Treacy's view -

Gold shares are trading at their lowest level relative to the gold price in at least 25 years. 

In absolute terms the NYSE Arca Gold Miners Index is not quite as low as it was in 2000 but it has definitely already fallen a long way. 



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January 06 2016

Commentary by Eoin Treacy

January 05 2016

Commentary by Eoin Treacy

How are traditional Safe Haven assets performing?

Eoin Treacy's view -

Following yesterday’s disappointing start to the year and against a background of heightened geopolitical tension, weakening performance in emerging markets and fears about a paucity of earnings growth I thought it would be an interesting time to look at the performance of what have traditionally been viewed as safe haven assets. 



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January 04 2016

Commentary by Eoin Treacy

8 Tech Breakthroughs of 2015 That Could Help Power the World

Thanks to a subscriber for this article by Wendy Koch for National Geographic which may be of interest. Here is a section: 

7. Better Batteries
Solar and wind power have seemingly limitless potential, but since they're intermittent sources of energy, they need to be stored. That’s why there’s a race to build a better battery. The lithium-ion standard bearer, introduced by Sony two-plus decades ago for personal electronics, can be pricey—especially for large uses—and flammable. So every few weeks comes an announcement of a new idea.

Harvard researchers unveiled a flow battery made with cheap, non-toxic, high-performance materials that they say won’t catch fire. “It is a huge step forward. It opens this up for anyone to use,” says Michael Aziz, Harvard University engineering professor and co-author of a study in the journal Science. (Find out how this flow battery works.) Also this year, MIT and DOE announced promising advances that could make batteries better and cheaper.

The battery push has gone beyond the lab. In May, Tesla’s Musk unveiled battery products that he plans to mass-produce in his $5 billion Gigafactory in Nevada. The products include the sleek, mountable Powerwall unit that SolarCity, a company he chairs, is putting in homes. This month, in the first such offering from a U.S. utility, Vermont’s Green Mountain Power began selling or leasing the Powerwall to customers. (Here are five reasons this battery is a big deal.)

Other companies are challenging Musk. Pittsburgh-based Aquion Energy, a spinoff from Carnegie Mellon University, began selling its saltwater battery stacks last year. German storage developer Sonnen said this month that it’s ramping up production of its lithium-ion battery at its facility in San Jose, California, for use in U.S. homes.

 

Eoin Treacy's view -

Symbiosis is popular in nature but it is becoming increasingly clear that it also has a role to play in sustaining the pace of technological innovation. Renewable energy technologies such as wind and solar are progressing rapidly but they will always suffer from intermittency without corresponding innovation in storage for both consumer and industrial uses. This has been painfully slow to follow because it takes time for capital invested in research to deliver results and yet the signs are promising that the next really big enabler with occur among chemical companies. 



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December 31 2015

Commentary by Eoin Treacy

Forget El Nini: La Nina Poised to Storm the Markets

This article by Lucy Cramer for the Wall Street Journal on the 23rd may be of interest to subscribers. Here is a section: 

“The likelihood that the current El Niño peaks soon and turns into a potentially strong La Niña by late 2016 or early 2017 is something that participants in agricultural markets should track closely,” Mr. Norland said.  

And

“El Niño gets all the buzz, but La Niña does not get enough credit,” said David Ubilava, a lecturer at the University of Sydney’s School of Economics, who has written on the correlation between climate anomalies and commodity prices. For example, Canada and the U.S. are more likely to get more droughts in La Niña years than during an El Niño year, which can tighten food supplies and push up prices, Mr. Ubilava said.  

 

Eoin Treacy's view -

With floods across much of the Mid West USA and Europe snowless talk of climate change and its effects on weather is widespread. Crops don’t care if the extremity of the current El Nino is influenced by climate change but we do know that volatile weather makes for volatile pricing. 



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December 24 2015

Commentary by Eoin Treacy

Thin markets

Eoin Treacy's view -

Over the period between Christmas Eve and New Year a lot of people take some time off with the result there are fewer traders around to execute orders. Market liquidity tends to dry up. We occasionally see enterprising traders take this as an opportunity to pressure stops in an attempt to reverse short-term overbought or oversold conditions. 



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December 23 2015

Commentary by Eoin Treacy

Who's on Board?

Thanks to a subscriber for this interesting report from Deutsche Bank focusing on insider sales and purchases at the largest US listed mining companies. Here is a section: 

As an end of year wrap, we have collated data for the miners under our coverage to track when directors and management bought and sold their companies’ shares voluntarily throughout 2015. We have not included transactions involving (i) vesting of shares or options, (ii) sales to cover tax obligations linked to share/option vesting, (iii) purchases under monthly share schemes, (iv) shares issued in lieu of director fees.

Kaz Minerals most frequent buyer, Randgold most frequent seller
Kaz Minerals tops the leader board for the highest number of discretionary purchases, net of sales, with nine throughout 2015. The top three buyers were Kaz (9), South32 (8) and Anglo American (7). The top three sellers were Randgold (-2), Ferrexpo (-1) and Rio Tinto (-1). Of the big four miners, Anglo’s directors made the most net purchases (7), followed by Glencore (5), BHP (1) and Rio was a net seller (-1). There were no insider transactions at Acacia Mining, Antofagasta, Fresnillo, Lonmin and Nyrstar

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

2015 has been a trying period for mining executives as they have dealt with shuttering expansion plans, reducing headcount amid low prices for their products and shares prices that have, in many cases, accelerated lower. Against that background it is perhaps understandable that some might wish to diversify their holdings. Yet it is interesting that the selling is not universal and that some companies’ board members increased their stakes on a buy-low-sell-high basis. 



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December 23 2015

Commentary by Eoin Treacy

U.S. Calls for 256% Tariff on Imports of Steel From China

This article by Sonja Elmquist for Bloomberg may be of interest to subscribers. Here is a section:

Corrosion-resistant steel imports from China were sold at unfairly low prices and will be taxed at 256 percent, according to a preliminary finding of the U.S. Department of Commerce.

Imports from India, South Korea and Italy will be taxed at lower rates, the agency said Tuesday in a statement. Imports from Taiwan and Italy’s Marcegaglia SpA will not face anti-dumping tariffs. The government found dumping margins of 3.25 percent for most South Korean steel imports, with Hyundai Steel Co.’s shipments subject to duties of 3.5 percent. Imports from Italian companies excluding Marcegaglia will be taxed at 3.1 percent. Indian imports are subject to duties from 6.6 percent to 6.9 percent.

“We’re concerned that the dumping that’s occurring is at higher levels than these determinations reflect,” Tim Brightbill, a partner at Wiley Rein LLP, a law firm representing U.S. steelmaker Nucor Corp., said Tuesday in an interview. “We have serious concerns that these preliminary duties are not enough at a time when unfairly priced imports continue to surge into the U.S. market at unprecedented rates.”

 

Eoin Treacy's view -

With enormous overcapacity in basic resources China has little choice but to sell its production on the global market at a significant discount. This has represented a significant headwind for the global steel sector and today’s news may prove a catalyst to stem short-term selling pressure. 



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December 21 2015

Commentary by Eoin Treacy

Incrementum AG Investors Letter

Thanks to a subscriber for this letter by Ronald Peter Stoferle and Mark Valek which may be of interest. Here is a section:

That the Fed is walking on eggshells has become obvious from the complications related to hike rates for the first time in 10 years. This impressively demonstrates that the market is highly dependent on low interest rates. It seems as if the market participants would be conditioned on ever increasing money stimuli like Pavlovian dogs.

Regarding commodities, the fear of the first rate hike could turn out to be a huge “buy the rumor, sell the fact”. Contrary to the common assessment, commodities are the best performers after historical rate hikes of the Fed when comparing different asset classes.

On the other hand, the US dollar tends significantly lower after the first 100 days after the first rate hike. 

Even though confidence in the equity markets continues to be exceptionally high, the actual performance is anything but formidable. While European stock indices were outperforming American titles, this primarily results from a significantly weaker euro. The term “devaluation boom” hits the bull’s-eye in this context.

With regard to the broad stock market, we think the party is pretty nearly over.

Eoin Treacy's view -

A link to the full letter is posted in the Subscriber's Area. 

A point made earlier by Allen Brooks’ is that the US Dollar does not tend to do well in the first three months following the first hike after an easing cycle. This is an important consideration because the majority of investors now seem to adhere to the medium-term Dollar bull story. We were early in identifying the relative strength of the Dollar and continue to believe that its secular decline is over not least because of widening interest rate differentials. However it is also worth considering the US administration does not want to have a currency which is appreciating against its international competitors in a linear fashion. 



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December 18 2015

Commentary by Eoin Treacy

Wheat Set for Third Weekly Gain on Signs of Higher World Demand

This note by Megan Durisin for Bloomberg may be of interest to subscribers. Here it is in full: 

Prices head for third straight weekly gain, longest rally since Oct. 2

NOTE: Argentina Devalues Peso With Grain Exporters’ Backing “Argentina is not going to be a heavy exporter of wheat in the short term, like they are for corn and beans,” Terry Reilly, senior commodity analyst at Futures International in Chicago, says in telephone interview.

NOTE: Morocco Issues Tender for 360,000 Tons of U.S. Soft Wheat: ONICL

NOTE: Jordan Buys 50k MT of Wheat at $229/MT From Ukraine

Jordan tender bolsters global market and “Morocco coming in for U.S. wheat is supportive,” Reilly says

Some traders are re-entering market following U.S. interest-rate increase and Argentina devaluation, Reilly says

Corn futures for March delivery climb 1.1% to $3.78 1/2 a bushel

 

Eoin Treacy's view -

This is an El Nino year so we can expect volatility in agricultural commodity prices and this is particularly true considering how powerful this event is and how volatile recent weather patterns have been. 



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December 16 2015

Commentary by Eoin Treacy

Email of the day on the impact of currency market volatility on returns

In your piece today [Ed. Yesterday] on bonds the foreign exchange rate aspect was not mentioned. Several years ago many international investors were tempted by the relatively high yields on Australian bonds. Non-Australian investors have lost out on the fall in the value of the Australian dollar.

Eoin Treacy's view -

Thank you for highlighting this issue which has been a topic covered in the Friday audio commentaries for at least the last 18 months. While the Dollar was trending lower, investors in emerging markets and commodity producers had the luxury of capital and currency market appreciation as well as being able to pick up a competitive yield. 

With a resurgent Dollar the status quo has been shaken up and that is creating both risks and opportunities across a number of assets. Since foreign issuers of US Dollar debt represent significant weightings in bond indices, the strength of the Dollar is a potential headache for investors in bond ETFs. 

 



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December 16 2015

Commentary by Eoin Treacy

Global Metals Playbook: 1Q 2016

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section: 

Back to fundamentals: We continue to see only a modest abatement in China-led commodity demand growth, not the capitulation that year-to-date price performances imply. The fact that economic activity everywhere remains buoyant, commodity trade flows are intact, and that producers are rapidly rebalancing their trades in reply to shock-low prices – tells us that downside price risk is limited. Historical benchmarks confirm this view. So after the investor exodus and speculative selling is done, robust fundamentals of Commodity World will again matter to its prices.

Likely catalysts for price recovery: Q1’s typically reliable seasonal restock alone has the capacity to terminate ongoing short-selling strategies. Other potential price supports include a demand-led recovery in the oil price (inflationary); resolution over the scale/duration of the US rate hike cycle (generally supportive within 12 months of the cycle’s start); and government backing for industrial activity in China (project approvals, funding, macro).

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The Continuous Commodity Index, which is unweighted, remains in a consistent, albeit short-term overextended downtrend. However since this has been ongoing for nearly 4 years it tells us a good deal of the bad news has already been priced in. That does not mean the downtrend has ended but suggests the news will need to get progressively worse to expect the decline to persist.  



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December 08 2015

Commentary by Eoin Treacy

JAB Trio Creates Global Coffee Empire for Billionaire Backers

This article by David de Jong for Bloomberg may be of interest to subscribers. Here is a section:

The Luxembourg-based group, known as JAB, has spent more than $30 billion in the past four years acquiring coffee companies in the U.S. and Europe to challenge global leader Nestle SA. Run by a trio of well-connected executives with decades of experience in food and beverage, JAB has bought assets including D.E Master Blenders 1753 NV, Mondelez International Inc.’s coffee unit and high-end chain Peet’s Coffee & Tea.

“This is part of a much, much bigger strategy. JAB wants to be the Budweiser of the coffee space,” Pablo Zuanic, a Susquehanna Financial Group analyst, said, referring to Anheuser-Busch InBev NV, the world’s biggest brewer. “Just as you’ve seen Bud consolidate beer, they want to consolidate coffee.”

 

Eoin Treacy's view -

Coffee is big business and with approximately 20-25 espressos from a pound of beans it is a high margin business. Little wonder then that the bulk of spending from coffee companies goes in the form of marketing and physical locations. Coffee also represents a growth market since it is considered a bourgeois drink in China and for many exemplifies modern living.  

Another way of thinking about coffee is that consumption tends to trend higher as the pace of everyday life increases. People with busy work, family and social commitments tend to get less sleep either because of time or worry and need a pick-me-up in the morning. As the pace of economic development continues to trend towards urbanisation the pace of life inevitably picks up. That’s good news for coffee producers and helps to explain the race to dominate the market.

 



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December 04 2015

Commentary by Eoin Treacy

Australia Materials - The Big Golden Book

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

The 6th Edition of our Big Golden Book, covering a suite of 25 ASX listed gold producers and developers, with 7 stocks under MS coverage (AQG, EVN, MML, NCM, PRU, RRL, RSG) and broad detail on another 18 mid small cap gold miners, provides a sector snapshot in which to identify relative strengths and weaknesses amongst the ASX gold space. Our 6th Edition arrives at a time of relatively buoyant AUD gold price - a key beneficiary of the weakened Aussie dollar.

Australian gold miners are up ~15% YTD, as represented by the S&P ASX All Ords Gold Index, significantly outperforming US$ spot gold (down ~9% YTD), the ASX 300 Resources Index (-26% YTD), the ASX Small Resources Index (-20% YTD) and the ASX All Ordinaries (-2% YTD). Currency has been a key driver, pushing AUD Spot gold ~2% higher against the backdrop of a falling USD gold price (down ~9% YTD).

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

At The Chart Seminar in Sydney in 2010 a delegate asked what all the fuss was about in the gold market because prices had not moved for more than a year when redenominated to Australian Dollars. I was reminded of that today because prices today are no different from where they were in 2010 and are about 23% of the 2011 peak which represents significant outperformance relative to the US Dollar quoted price. 

As the above report highlights, Australian gold miners have benefitted from the relative weakness of the currency. This also speaks to the broader point that gold is a monetary metal and tends to hold its value better than fiat alternatives in a depreciating currency environment. As a result it outperformed spectacularly while the US Dollar was in a decade long downtrend and is likely to remain a relatively sound store of value for other countries when their respective currencies fall. 

 



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December 04 2015

Commentary by Eoin Treacy

December 03 2015

Commentary by Eoin Treacy

Draghi Braves QE Hype With Boost That Leaves ECB Room to Do More

This article by Jeff Black and Maria Tadeo may be of interest to subscribers. Here is a section: 

The fresh stimulus coincides with a shift in global monetary policy, with the ECB adding stimulus as the U.S. Federal Reserve prepares to start its process of normalization. Even so, financial markets reacted with skepticism, sending the euro up as much as 2.6 percent and equities and government bonds down in a sign that Draghi’s measures fell short of expectations.

“The expectations were too high, and this was the minimum he could do,” said Marco Valli, chief euro-area economist at UniCredit SpA in Milan. “I think this was a mix of Draghi being held back by the conservatives, but also him wanting to keep some powder dry in case more is needed.”

 

Eoin Treacy's view -

The ECB’s balance sheet is currently in the region of €2.7 trillion. At €60 billion a month until March 2017 they will add an additional €960 billion which will take the total to well in excess of the previous peak in largesse; reached during its previous expansionary program. With the announcement that they will continue to reinvest maturing issues the prospect of the balance sheet contracting is almost zero. Meanwhile they leave the door open to additional easing should the need arise.   



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December 03 2015

Commentary by Eoin Treacy

Brazil Assets Surge as Impeachment Move Brings Resolution Closer

This article by Denyse Godoy and Paula Sambo for Bloomberg may be of interest to subscribers. Here is a section: 

While investors in the past have been split about whether impeachment would be positive for Brazil, some now say that the decision could finally lead to a resolution of a months-long political stalemate. Rousseff’s administration has struggled to push through fiscal changes she says are needed to reverse the biggest budget deficit in more than two decades and ward off further credit-rating cuts for Latin America’s largest economy.

"This euphoric reaction of the stock market today shows how much investors are eager for some kind of solution that ends this turmoil and paves the way for the country to get back on track," Alvaro Bandeira, an economist at Banco Modal, said from Rio de Janeiro. "There’s still a lot to happen before a final settling, so we should be prepared for more volatility in the coming weeks."

The president, who started her second term in January, has been fighting for her political survival for months, leaving Congress in disarray, rattling financial markets and deepening an economic slump poised to be the worst since the Great Depression. The political crisis has made the real the worst-performing major currency in the world this year, and set stocks on pace for a third year of losses.

Eoin Treacy's view -

At first blush the surge in Brazil’s stock market today could have been related to the Dollar’s weakness against the Euro or the fact that oil prices steadied. However if one looks at the performance of a range of other Latin American commodity exporters there is no confirming evidence for this contention. 

The impeachment of Dilma Rousseff on the other hand is a decidedly Brazilian affair and has been overhanging the market since she won the election last year. Since she was a senior executive at Petrobras during a time when avarice was consuming revenues at a depressing rate and is now the President, the obvious conflict of interest represented by her administration represents a major headwind to governance improving.

 



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December 01 2015

Commentary by Eoin Treacy

Stevens Rate 'Chill Out' Rattled as Australia Easing Case Builds

This article by Michael Heath for Bloomberg may be of interest to subscribers. Here is a section: 

Yet the economy and wages are in the weakest stretch of growth since the country’s last recession in 1991. The Treasury last week bowed to reality and lowered the economy’s speed limit -- the level at which it begins to generate inflation -- to 2.75 percent from 3 percent estimated in its May budget.

Deloitte Access Economics forecast in a report Monday, ahead of the government’s mid-year budget update due next month, that fiscal deficits over the next four years will be A$38 billion worse than predicted in May.

“What the Deloitte report shows today is the stresses and the pressures on the budget,” Treasurer Scott Morrison said Monday. “They note particularly in terms of the global situation commodity prices, changes in China.”

Indeed, only a surge in the volume of resource exports is likely to cover the drag on growth from weak investment by companies last quarter. Economists are predicting ahead of data due Wednesday the economy grew 0.7 percent in the three months through September from the prior quarter and 2.3 percent from a year earlier.

 

Eoin Treacy's view -

With Sydney and Melbourne housing prices off their highs there is no prospect of the RBA raising rates and with resources’ sector capex close to an all-time low, the prospect of an interest rate cut next year is looking more likely than not. Australia successfully avoided the majority of the ill effects of the credit crisis not least because it was such a beneficiary of China’s stimulus program, through commodity exports. China’s moderating consumption rate for Australia’s exports represents a headwind and suggests the outlook for inflation will be closely tied to what happens in the commodity sector. 



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November 24 2015

Commentary by Eoin Treacy

Global Insight: Stability opens a window of opportunity

Thanks to a subscriber for this report from Morgan Stanley which may be of interest to subscribers. Here is a section: 

Lessons from history: The 'size at all costs' strategy, as gold prices lifted to unprecedented levels between 2000-2012 (real), left the Gold industry ill prepared for the sharp pullback, limiting the post-capex 'harvest' period and almost complete capital destruction for the global seniors. Understandably, gold equity values pulled back sharply – Morgan Stanley Global coverage down ~35% 2014 to-date, while the bullion price fell 10%. Our coverage now trades on 20yr low trailing P/CF and EBITDA multiples, creating a window of opportunity for select gold exposures – those finally moving to 'harvest' and those exposed to industry cost tail winds.

Capital allocation discipline emerging – who is moving to 'harvest': A shift in focus from adding ounces to financial returns has driven reductions in capital spending. Global capex is declining about 6%-10% p.a. on aggregate, allowing miners to focus on cash flow and enter the 'harvest' phase.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

A great deal of bad news has already been priced into gold equities but with capex budgets virtually eliminated from balance sheets there is potential for profit growth as some of the investment in new supply pays off. 

It is worth considering that while the NYSE Arca Gold BUGS Index underperformed the gold price by a wide margin from 2011 that has not been the case more recently. Gold hit a new reaction low a week ago but golds shares have mostly held within their ranges. This is particularly noteworthy since gold shares have already fallen so much versus the metal price and are at historic relative lows. 

 



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November 23 2015

Commentary by Eoin Treacy

Argentina Macri Said to Consider Suspending Soybean Tax

This article by Pablo Gonzalez for Bloomberg may be of interest to subscribers. Here is a section: 

The policy will be decided on Dec. 10, as only on that day will Macri know with certainty how much money the Central Bank has, the second person said. If approved, the window would close once the new soybean crop arrives in March. That crop would pay exports taxes of 30 percent.

“The plan will be successful if farmers are allowed to buy dollars after selling their crops.” Gabriel De Raedemaker, vice president of the Argentine Rural Confederation, said from the town of Oliva in Cordoba province. “A few will feel tempted to sell just to get pesos under a threat of devaluation.”

Macri has also vowed to lift currency controls as soon as he takes office Dec. 10, a move that investors see leading to a devaluation of as much as 35 percent for the peso, which would further help farmers trying to sell abroad.

Eoin Treacy's view -

The Kircheners are out and a new potentially reform minded administration is in. Macri will face a great deal of opposition in attempting to upset the status quo so it is too early to speculate on how successful he will be. Some early milestones which may offer an indication of how serious he is about reform will be whether he follows through on floating the currency, how he deals with the nation’s creditors and how successfully he can reignite the export sector not least agriculture. 



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November 17 2015

Commentary by Eoin Treacy

Copper Tumbles to Six-Year Low as Industrial Metals Extend Slump

This article by Martin Ritchie may be of interest to subscribers. Here is a section: 

“There is a sense that this move is a little bit China-related,” Ric Spooner, a chief market strategist at CMC Markets Asia Pacific Pty, said from Sydney. “There has been a trend towards destocking of inventory in recent times and that appears to be creating downward momentum, particularly in copper.”

Metals are being battered by a stronger dollar. The greenback is buoyed by expectations for the first U.S. interest-rate increase since 2006 in December and by heightened geopolitical risk after the terror attacks in Paris. The Bloomberg Dollar Spot Index rose 0.2 percent on Tuesday, making assets denominated in the currency more expensive.

Eoin Treacy's view -

We saw a lot of evidence of businesses under pressure when in China earlier this month. The low oil price is a benefit for China’s energy consumers but for its exporters the loss of Russian and Middle Eastern customers is a headache and is contributing to the economic slowdown. The domestic market continues to transition from an infrastructure investment led model to consumerism. This means the while demand is likely to continue to trend higher it will do so at a considerably slower pace. This is weighing on resources companies. 



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November 12 2015

Commentary by Eoin Treacy

Which currencies have made new lows?

Eoin Treacy's view -

The Dollar has been firm, that’s not news, but it experienced a sharp pullback against most currencies following the market low in risk assets from early September. This rebound has not influenced every currency equally and while most have held their gains, a number posted new lows.  These are the Philippine Peso, South African Rand, Norwegian Krone, Peruvian Sol and the Canadian Dollar is testing its low. 



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November 12 2015

Commentary by Eoin Treacy

BHP, Vale CEOs Committed to Restoring Brazil Iron-Ore Mine

This article by Yasmine Batista, Andrew Willis and David Stringer for Bloomberg may be of interest to subscribers. Here is a section: 

A 2013 report by the Minas Gerais University-linked Instituto Pristino, commissioned by the state environment ministry, warned about the risk of dams bursting and recommended putting in place a plan to monitor the structural integrity more closely and frequently.

“As you will appreciate, an issue like this will be relevant to any investigations that follow this tragic incident,” BHP said in an e-mailed response to questions. “In those circumstances we need to let those investigations take their course. So it’s just not appropriate to comment any further.”

Samarco said it’s too early to say what caused the accident and that the dams were deemed to be in compliance with safety standards in a July inspection.

Samarco’s insurance coverage totaled more than $1 billion as of mid-2014. A large-scale disaster such as the one it experienced last week is likely to lead to lawsuits and other actions that may take years to resolve, according to Bloomberg Intelligence analyst Kenneth Hoffman. Its structure as a stand- alone company may shield joint owners BHP and Vale from deep losses related to the dam collapse, Hoffman said.

 

Eoin Treacy's view -

The BRL250 million ($66million) initial fine announced by Dilma Rousseff today is quite a bit larger than what was expected but for companies like BHP Billiton and Vale this is not the same kind of fine that has rocked Volkswagen. The weak oil price and moribund market for iron-ore are more important influences. 



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November 11 2015

Commentary by Eoin Treacy

Hedge Funds Load Up on Sugar

This article by Christian Berthelsen and Carolyn Cui for the Wall Street Journal may be of interest to subscribers. Here is a section: 

“We have seen the longest bear market in sugar for quite some time,” said Michael McDougall, director of commodities for Société Générale in New York. “It’s like a large ship that takes a lot to turn. But it looks like it’s finally beginning to turn.”

Sugar mills in Brazil are directing more cane production to ethanol for fuel blending, thanks to government incentives that make prices more attractive compared with sugar.

After a weak domestic crop season, import demand from China has been strong, jumping 55% to 3.75 million tons in the first nine months of the year.

Singapore-based trading house Wilmar International Ltd. took physical delivery of $1 billion worth of sugar through the financial market so far this year, fanning speculation about increased Asian appetite for the sweetener.

But in a sign that gives some investors pause, sugar producers and processors are placing the largest bets in two years that prices will fall.

“Demand is just not there,” said Bruno Lima, head of sugar and ethanol at brokerage INTL FCStone in Brazil, who found raw sugar offered at a deep discount to the futures prices traded in New York during a recent tour of mills in Santos.

 

Eoin Treacy's view -

Commodities don’t go to zero but sugar prices trended consistently lower for 5 years, dropping over 60% in the process. That is ample time to create a supply response and Brazil’s decision to mandate greater ethanol production is a sign low prices are also creating a demand response. 



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October 26 2015

Commentary by Eoin Treacy

Africa: The next frontier

Thanks to a subscriber for this report from Deutsche Bank focusing on Africa’s potential as a commodity exporter and consumer. Here is a section focusing on copper:

The world will need an estimated 5mt of additional mined copper by 2025

Copper demand has grown 3.2% each year since the end of WWII. However, we estimate that this growth rate will drop over the next 15 years to be below trend at 3%. This takes into account our GDP expectations, ongoing industrialisation of the emerging market economies and further substitution.

Despite the strong growth in copper demand in China over the past decade (2000-2010, near 15% CAGR), global copper demand was a more muted 2.4% The high price environment of 2005-2008 led to demand destruction of around 2.2mtpa, with widespread substitution.

Taking into account increased secondary supply (+3% pa), mine depletion from falling grades (see Figure 29) and supply additions already underway, we estimate the world will need an additional 5Mtpa of mined copper by 2025, or around 500kt each year. This is more than a Collahuasi-sized mine each year (445kt in 2014) or two Andina-sized mines (232kt in 2014).

Time to first production is now at least 12 years
As shown here, for a typical Greenfield copper mine, the time to first production is at least 12 years. For diamond mines, the time frame has extended to an average of 22 years. For gold mines, the average time frame for the mines currently producing in Cote d’Ivoire was 15 years to get to first production (see Figure 32).

And 

Most major known deposits are currently exploited across Chile, Australia, North American, Russia and China. As shown earlier (in Figure 1 on page 4), Africa has a wealth of mineral resources, hosting 95% of the world’s known platinum, 65% of its manganese, 50% of its diamonds and cobalt, 40% of its gold, 30% of the world’s bauxite, and approximately 10% of the world’s known copper sits in the Central African Copperbelt. Yet today, Africa supplies only 11% and 12% of the world’s copper and gold respectively, plus just 9% of its thermal coal.

 

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area. 

This report carries a very interesting graphic illustrating the number of conflicts that occurred in the 1990s compared with the last decade. Relative peace has broken out across the continent despite some high profile trouble spots grabbing attention. The question then is to what extent higher commodity prices contributed to this easing of tensions? 

In an environment characterised by a dearth of capital, the potential for armed conflict increases as access to basic resources such as food, energy and shelter is inhibited. The commodity bull market meant revenues increased and reduced the incentive for conflict. The question now is how many of the gains achieved in the last decade can be held onto and improved upon. Standards of governance are integral to this question because without improvement the potential for a number of major African countries to miss out on development over the next decade increases. 

 



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October 19 2015

Commentary by Eoin Treacy

Sugar Bulls Rewarded With Best Rally Since 2013 on Tight Supply

This article by Marvin G. Perez for Bloomberg may be of interest to subscribers. Here is a section:

“Much of this move has come on the back of a tightening market,” said Harish Sundaresh, a portfolio manager and commodities analyst in Boston for the Loomis Sayles Alpha Strategies team, which oversees $5 billion. “There seems to be weather problems in Brazil, in certain parts of the country’s Center South region, and India is also worried about the monsoon effect on crops.”

Sugar futures in New York climbed 16 percent over the past three months, the biggest such gain since 2013. Prices are rebounding after reaching a seven-year low in August, spurred by declines for Brazil’s real that encourage exporters to increase shipments that fetch dollars in return. Since then, declines for the South American currency have eased, while dry weather is posing risks to the nation’s crop.

 

Eoin Treacy's view -

White Sugar trended lower for five years which has had an effect on supply as other cash commodity prices held up better. The question for bulls is now how much remains in Brazilian and Indian reserves that were built over the course of record crops of the last few years. 



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October 16 2015

Commentary by Eoin Treacy

Rare Platinum Discount to Gold Inspires Bulls Seeing Slump End

This article by Ranjeetha Pakiam and Eddie van der Walt for Bloomberg may be of interest to subscribers. Here is a section:

“It all depends upon whether one believes that the VW scandal marks the beginning of the death of diesel or if the eventual outcome will be a lot less radical for platinum autocatalyst demand,” Philip Klapwijk, managing director of Precious Metals Insights Ltd., said by e-mail. “Arguably the bad news is already in the platinum price.”

Platinum slumped as low as $892.50 an ounce on Oct. 2, only enough to buy 0.7924 of an ounce of gold, data compiled by Bloomberg show. That day, the ratio of gold to platinum reached a record 1.26. The drop in platinum will attract interest from financial traders and spur jewelry demand, Ole Hansen, an analyst at Saxo Bank, said by phone.

Gold may stay weak into next year as economic prospects improve and the Federal Reserve increases interest rates from near zero, dulling bullion’s appeal as a safe haven, according to Singapore-based Oversea-Chinese Banking Corp. The yellow metal will average $950 an ounce in the fourth quarter of 2016 while platinum is seen at $905, said Barnabas Gan, the most accurate gold forecaster based on data compiled by Bloomberg.

The estimates are subject to revision if the Fed doesn’t raise rates this year, he said.

Platinum has been rallying the past two weeks, trading Thursday at $1,004.80. In a Bloomberg survey of analysts, platinum was forecast to reach $1,150 next year, and will extend that gain over the following three years to $1,400 in 2019.

"Platinum is at unsustainable low levels relative to gold, relative to vehicle sales in Europe and relative to the trends we’re seeing in jewelry demand in China," Mike McGlone, director of research at ETF Securities LLC, said by phone from New York.

“We’re getting all the signals you would expect to see from a market putting in a bottom.” 

Eoin Treacy's view -

The Volkswagen scandal represents a significant blow for diesel as a fuel in passenger vehicles but there is little chance of it being displaced in the haulage sector any time soon. Pulling heavy loads requires torque and diesel engines provide it cheaply. Electric vehicles have the capacity to displace diesel over the medium-term but costs will have to come down substantially first. In the meantime auto-catalyst demand in unlikely to disappear but it will decrease.   



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October 15 2015

Commentary by Eoin Treacy

Zinc turning bull?

This article by Kip Keen for Bloomberg may be of interest to subscribers. Here is a section: 

She responds, “Glencore’s cuts do matter.”

To give perspective, she puts the zinc cut in copper terms. “Another way I have been explaining the impact of these cuts is that if this were announced in the copper market, it would be equivalent to 1 million tonnes of mine supply, which would be a very big cut from a copper miner.”

So, with a sizeable cut to zinc output in mind, Fung now forecasts a market that looks set to get tight – finally some might add.

“We were forecasting a 74kt surplus next year (pre-Glencore cuts) assuming 2.8% demand growth,” she writes in an email. “If we assume zero growth, it’s about 400kt that we remove from the demand side of the equation. But Glencore’s cuts more than offset this assumption, so at worst (assuming zero-growth is worst case) we still have a tight market next year, which should be positive for prices, given how far they’ve fallen in response to demand concerns this year.”

Already near-delivery prices have jumped from the mid-70 cent range to over 80 cents.

 

Eoin Treacy's view -

There has been a lot of loose talk about the inevitability of a deflationary outcome which the falling price of oil has contributed to. However we have been at pains to point out in the audio commentaries that there is the world of difference between deflation and disinflation. After all commodity prices went up a lot and have subsequently come done a lot not least due to supply factors. 



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October 15 2015

Commentary by Eoin Treacy

Gemfields recalibrating supply for a softer market

This article by Warren Dick may be of interest to subscribers. Here is a section: 

Production at the company’s 75% owned Montepuez ruby mine rose by 29% to 8.4m carats of ruby and corundum. A maiden JORC statement for Montepuez was published in July 2015 indicating probable ore reserves of 432m carats with an NPV of $996m.

Further steps were taken post reporting period, with the company entering into two transactions to source supply of gemstones in Colombia – a country with a 500-year history of producing world renowned emeralds. “The results speak for themselves – I am extremely proud of what we have been able to do,” says Harebottle.

But it’s the work on the demand side that really sets Gemfields apart from its competitors and other mining companies. “Gemfields is the only company taking a leadership role [in this regard] – so we are price makers, not price takers. We the have potential to ramp up production, but we prefer to do so slowly and steadily, and in conjunction with the needs of our sightholders,” says Harebottle.

Faberge’ produced a “Pearl Egg,” the first such created in the Imperial Class since 1917. The egg was sold within hours of unveiling at the Doha Jewellery and Watches expo. Faberge’ also launched four new timepiece collections during the year, something that will be supported by the addition of eight more retail outlets.

 

Eoin Treacy's view -

The diamond market has become a lot more efficient with the introduction of Rapaport pricing models for both rough and polished stones. This has for the first time allowed consumers to price check on a carat for carat basis between suppliers and the jewellery sector has been rocked as a result. Prices for 1 carat stones are now back at lows not seen since 2009. 



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October 13 2015

Commentary by Eoin Treacy

Weaker USD, Commodity Rally A Mar/Apr Redux?

Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section on sugar: 

Investment Thesis 
After more than a year of low prices, a shrinking global surplus, coupled with limited reinvestment in cane plantings, should conspire to lift prices YoY in 15/16.

Supply
In Brazil, above-normal rain and limited reinvestment in cane fields have lowered the cumulative ATR, the amount of sugar produced per unit of cane crushed, to the lowest in at least 10 years.

Demand
Falling sugar prices and increased gasoline taxes have lifted Brazilian hydrous demand to record levels, pulling more of the cane crush away from sugar and toward ethanol production. The sugar mix should fall to the lowest since 2008.

Chinese import demand has exceeded expectations over the past year, as falling prices have led to sharp production declines. China’s internal debate on the future of its minimum support price policies should shape import demand in the long term.

Eoin Treacy's view -

A link to the full report is posted in the Subscriber's Area.

The removal of subsidies for European sugar production, concurrent demand growth for ethanol in gasoline production and demand for sweet treats among the global middle class created the conditions for sugar prices to rally impressively in the last decade. The ensuing boom in planting, particularly in Brazil and India resulted in supply overwhelming even the most ambitious demand forecasts and prices have trended lower for nearly 5 years. 



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October 07 2015

Commentary by Eoin Treacy

Sibanye brisk march

This article by Warren Dick for Mineweb may be of interest to subscribers. Here is a section:

“It’s similar to the removal of mine boundaries in the gold industry 10-15 years ago,” says Froneman. “There are things like concentrators, surface infrastructure, and surface tailings that are not being optimised. Group overhead can be shared. So there are numerous ways to achieve economies of scale in terms of being able to reach the R800m a year in savings.”

Stakeholders will be pleased to hear that this will not involve cutting jobs. “Where we find ourselves today [in South Africa] it is all about saving jobs. No jobs will be lost at the lower end of the organisation. So it’s important in terms of what’s right for South Africa,” says Froneman.

Nor does it deviate or affect Sibanye’s declared strategy of paying returns to investors via dividends. “This deal is synergistic, it is value accretive, and it is consistent with our dividend strategy,” says Froneman, who was very complementary of the Aquarius management team led by CEO Jean Nel. “All-in-all it’s an attractive, cash generative business, and Jean and his team have been ahead of the game.”

 

Eoin Treacy's view -

Buy low and sell high is easy in theory and difficult in practice. The siren call to pay record high prices for assets when prices are surging often leaves companies unable to make the same purchases when prices are depressed. In fact many find themselves in the opposite situation and end up selling once expensive assets at deep discounts. The Chinese were highly active in 2009 and were major contributors in the subsequent recovery but on this occasion have been largely absent as domestic factors have led to a change of emphasis. 



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September 24 2015

Commentary by Eoin Treacy

Interesting charts September 24th 2015

Eoin Treacy's view -

Gold has held a short-term progression of higher reaction lows since its July low and is now closing in on the region of the 200-day MA as some safe haven buying lifts prices. A sustained move above 1175 will be required to break the medium-term progression of lower rally highs and signal a return to demand dominance beyond some steadying. 



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September 18 2015

Commentary by Eoin Treacy

Quartermain gets it done

This article by Kip Keen for Mineweb may be of interest to subscribers. Here is a section:

In this, it may be Pretium will go back to the market in the coming year or so, if that capital cost figure proves close to reality. Or, maybe Pretium closes the gap between what it has raised and spent to what it needs in full. Either way it wouldn’t be surprising to see it go back to markets for more cash or seek additional debt resources to give it a bit more breathing room.

In production, Pretium plans Brucejack as one of the more important gold mines – certainly one of its highest grade gold mines – to come online in recent years in Canada and beyond.

Pretium targets 2017 for first production from a deposit that contains swarms of very narrow veins with extremely high-grade (and difficult to model) gold often counted in the kilogram/tonne range over sub-meter intervals. In all, Pretium estimates 13.6 million tonnes proven and probable resources at a whopping 15.7 g/t Au for just under 7 million ounces gold.

That gives the project a mine life near two decades with annual production around 500,000 ounces gold a year for most of the first decade of production. It is, if it all goes according to plan and bulk underground mining captures that gold at forecast costs and values, the kind of mine majors will want to buy. Notably, Zijin Mining, is already a key Pretium shareholder through recent private placements.

 

Eoin Treacy's view -

A veteran subscriber has been to the Pretium claim and testifies that it is the real deal. Against a background where mining ore grades have been declining for years the prospect of bringing a high grade project on stream has insulated the share price from the selling pressure that has prevailed across the majority of the gold mining sector. 



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September 17 2015

Commentary by Eoin Treacy

Iron Ore Seen at $50 in Last Quarter as Majors Gain Control

This article by Jasmine Ng for Bloomberg may be of interest to subscribers. Here is a section: 

Iron ore may average about $50 a metric ton in the final quarter of the year after low prices forced many high-cost producers to quit the market and the world’s biggest mining companies completed a round of expansions, according to UBS Group AG.

The supply surge from the largest producers has been delivered, with output stable for several months now, and there’s been a widespread exit of smaller players, Daniel Morgan, an analyst in Sydney, said in an e-mailed response to questions. Benchmark prices in Qingdao were at $57.37 a dry ton on Thursday, and averaged $54.69 so far this quarter.

Expansions by BHP Billiton Ltd. and Rio Tinto Group in Australia and Brazil’s Vale SA helped to drag prices to the lowest level in at least six years in July, prompting the closure of less efficient miners while increasing the clout of the largest producers. Brazil and Australia were gaining market share in China, the world’s biggest consumer, Vale Chief Executive Officer Murilo Ferreira told reporters this week.

“The majors have just regained control of the iron ore market and can, if they wish, curtail supply to support the price,” said Morgan. “Under $50, we look for supply factors to support the price.”

 

Eoin Treacy's view -

The iron-ore oligarchy have been flexing their muscles over the last couple of years by increasing supply into a falling market. More than a few UK and Australian listed juniors have gone to the wall and Chinese domestic supply has been heavily impacted. 

Iron-ore prices have stabilised following an accelerated decline and are currently testing the region of the 200-day MA. A sustained move above $60 would begin to suggest a return to demand dominance beyond short-term steadying. 

 



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September 17 2015

Commentary by Eoin Treacy

Pure Energy Minerals drops the next lithium bombshell As Tesla seeks supply for its Gigafactory

This article by Peter Epstein for Mineweb may be of interest to subscribers. Here is a section: 

Stepping back for a moment, on September 3rd, Tesla’s Founder Elon Musk reiterated his commitment to source materials from Nevada. However, that pledge did not necessarily mean another sourcing deal, announced so soon, or that it would be for lithium. Other materials besides lithium will be required. Cobalt and graphite, (among others), will also be needed to feed Tesla’s massive giga-factory in Nevada. I find this agreement to be highly noteworthy in the sense that Tesla’s growing need for lithium, perhaps more so than that for cobalt and graphite, represents the single most important raw material need. I imagine that other lithium agreements will be signed in coming months. Without question, Nevada wants further lithium deals to come from Nevada.

Eoin Treacy's view -

The fall in oil prices has had a knock-on effect on most energy related sectors as the relative economics of various alternatives have changed. Lithium miners have been no exception and this has been despite the fact lithium prices have not fallen. Demand for lithium-ion batteries in everything from consumer goods to cars and planes has helped fuel major investment and a large number of explorers are now listed. However securing an agreement to supply Tesla’s factory is a major coup for Pure Energy.



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