Investment Themes - Precious Metals / Commodities

Search all article by their themes/tags in the search area
below for example “Energy” or “Technology”.

Search Results

Found 819 results in Precious Metals / Commodities
September 14 2015

Commentary by Eoin Treacy

Brazil Downgrade Leaves Firms With $270 Billion Debt Hangover

This article by Cristiane Lucchesi and Filipe Pacheco for Bloomberg may be of interest to subscribers. Here is a section: 

Brazilian companies that piled on $270 billion in international debt during the boom years are seeing their funding costs rise after the nation’s credit rating was cut to junk.
     
The spread for five-year credit-default swaps to protect against a government default, one benchmark for setting what Brazilian companies must pay for external funding, has jumped 7.5 percent to 400 basis points since the downgrade, the highest since 2009. Adding to the pain, the dollar surged to a 13-year high, making principal and interest on international borrowing more costly for local firms.

“Even very small, unknown companies issued international bonds when Brazil was considered one of the most promising economies after the 2008 financial crisis,” Salvatore Milanese, a partner at debt-restructuring adviser firm Pantalica Partners, said in an interview in Sao Paulo. “Now many of them are facing the consequences.”

Standard & Poor’s last week lowered Brazil’s sovereign credit rating one level to BB+ and said it might cut it further in response to the administration’s inability to shore up fiscal accounts as the economy falters. President Dilma Rousseff has failed to win support for her initiatives amid an investigation into corruption at the state-controlled oil company, some of which allegedly occurred while she was its chairwoman, sending her popularity to a record low and generating calls for her impeachment.

Eoin Treacy's view -

Dilma Rousseff rode to power on the coattails of President Lula’s endorsement but she was never the best candidate from a governance perspective and the currency has collapsed under her watch. An ability to ignore contradiction is characteristic of every crowd. It is not until the cohesion of the crowd deteriorates that these contradictions regain their importance for participants. 



This section continues in the Subscriber's Area. Back to top
September 10 2015

Commentary by Eoin Treacy

Interesting charts September 10th 2015

Eoin Treacy's view -

Onshore/Offshore Renminbi – Today’s announcement that the Chinese government is going to permit foreign central banks greater access to the Yuan market, so they can hold the Chinese currency as part of their reserves had a marked effect on the offshore renminbi. The ratio between the onshore and offshore versions of the currency compressed sharply and helps put a lid on fears that capital flight was fuelling the arbitrage. 



This section continues in the Subscriber's Area. Back to top
September 10 2015

Commentary by Eoin Treacy

Welcome to Rustenburg, Mr. Froneman

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

Speaking at the announcement of the deal yesterday, Froneman said, “we were very disciplined and structured. We had to make sure our first entry into platinum was significant, but we haven’t rushed into it.” Froneman demonstrated that discipline when he walked away from a deal with Amplats in October last year with those immortal words, “Well if they [the assets up for sale] are so good, they should keep them.”

In response to a question from an analyst on how the two parties came to agree on the price the second time around, Froneman revealed why he has a reputation as a skilled dealmaker. “Initially we had very different ideas of value [for the assets]. But when we took a different view in terms of sharing the risk, it allowed us to come together on getting the deal done.”

That last part of his statement around “sharing the risk” is the nub. By convincing Amplats to share the risk, he turned the haggle over price into a more cordial engagement involving mutual benefit. And by doing so, Froneman could then – with a little more maneuvering – take a potentially large and risk-fraught transaction for Sibanye, and make it congruent with the company’s strategy of delivering returns to shareholders via dividends.

Eoin Treacy's view -

Sibanye announced more than a year ago they were seeking to enter the platinum business and this is the realisation of that goal. In doing so they hope to achieve the efficiency gains with the Rustenburg assets they achieved with the legacy assets at the Beatrix gold mines. They have a solid record but the big question is going to be how they handle relations with the unions they are inheriting. 



This section continues in the Subscriber's Area. Back to top
September 04 2015

Commentary by Eoin Treacy

Norilsk raises nickel deficit forecast for 2016 as price slumps

This article by Yuliya Fedorinova appeared in Mineweb and may be of interest. Here is a section: 

China’s nickel pig iron output, a cheaper substitute for refined nickel, should fall as ore supplies from the Philippines are depleted, the Russian company said on Monday. Outside China, “we see an increasing pressure on high cost producers to cut production,” Norilsk said.

The global nickel deficit will be at 60,000 metric tons in 2016 and the market will likely be balanced in 2015, according to Norilsk. In its previous market update in March, the producer saw a deficit of 20,000 tons this year that would widen to 55,000 tons in 2016.

Nickel prices are near a six-year low after China’s economic growth slowed and London Metal Exchange inventories reached an all-time high of 470,000 tons in early June. They have since declined to about 455,000 tons. The chance of nickel prices continuing to fall is small because more than 60 percent of producers are already losing money, according to the company.

“A sizable reduction of LME inventory is widely recognized as a major signal of improved nickel market fundamentals,” Norilsk said.

Eoin Treacy's view -

Sentiment towards the industrial metals market has become increasingly bearish as prices have fallen and commodity led economies have come under pressure. The question then is to what extent this bad news is already in the price. 



This section continues in the Subscriber's Area. Back to top
September 02 2015

Commentary by Eoin Treacy

Brazil's Epic Era of Splurging Is Over

This article by Matthew Malinowski Dominic Carey for Bloomberg may be of interest to subscribers. Here is a section:

1. No work
Brazil’s economy bled almost 900,000 jobs over the last year. That's unheard of, even in the aftermath of the 2008 Lehman Brother’s crisis.

2. Less money
For those who still have a job, real wages contracted as much as 5 percent in May from a year ago, before easing to a 2.4 percent annual drop in July. Annual real wages, as well as moving averages for retail sales and formal job creation have all contracted this year, according to government statistics. The declines are all worse than in 2009 when the economy also shrank, as the charts illustrate.

3. No more retail therapy
As the labor market deteriorates, Brazilians have cut back the most on shopping since the start of the century. Retail sales in June dropped for the fifth straight month, the longest declining streak since 2001, data from the national statistics agency show.

Eoin Treacy's view -

During the boom in the balance of payments associated with surging commodity exports, Brazil went from being a serial defaulter to a creditor to the World Bank. However, the economic effect of the collapse in commodity prices has been exacerbated by the failure of successive administrations to improve governance. As a result the boom from massive surpluses has been wasted on corruption, vanity sports projects and inefficiency. 



This section continues in the Subscriber's Area. Back to top
September 02 2015

Commentary by Eoin Treacy

September 01 2015

Commentary by Eoin Treacy

Australia as China's Canary Means World Watching RBA's Heartbeat

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

“Of most interest will be any comments regarding recent financial market turbulence in relation to China and emerging-market driven worries and in particular whether this suggests a strengthened easing bias,” said Shane Oliver, head of investment strategy at Sydney-based AMP Capital Investors Ltd. “My view remains that the probabilities are skewed towards the RBA having to cut rates again at some point.”

The stock market rout in China threatens not only Australian exports but also a fresh slump in confidence among consumers and businesses Down Under.

Company profits fell in the second quarter for the fifth time in a row, the longest stretch of declines for at least two decades, according to data released Monday by the Australian Bureau of Statistics. Firms are forecasting a 23 percent drop in investment in the fiscal year that began July 1, little changed from the 25 percent reduction they estimated three months ago, a government report last Thursday showed.

Eoin Treacy's view -

The Australian Dollar is perhaps the greatest arbiter of the effect the decline in commodity prices has had on the economy. The inability of Chinese demand to meet exaggerated expectations has been a headwind for the mining sector as new supply has reached market. So far the major producers have sacrificed profits for market share and there is no sign just yet that this has ended. 



This section continues in the Subscriber's Area. Back to top
August 28 2015

Commentary by Eoin Treacy

A Currency Drop is Inflationary, Right?

This article by Jeff Black and Jennifer Ryan for Bloomberg may be of interest to subscribers. Here is a section:

The central banker's task of keeping inflation just right has become a permanent tussle with the global currency markets. Too weak a currency equals too rapid price gains. Too strong, and disinflation looms.

That's the well-worn argument under the microscope Friday at the Jackson Hole Symposium, the U.S. Federal Reserve's annual policy getaway. Gita Gopinath, a scholar at Harvard University, says that it just isn't that simple.

"The greater the fraction of a country's imports invoiced in a foreign currency, the greater its inflation sensitivity to exchange rate fluctuations at both short and long horizons,'' she says. Because the dollar is by far the dominant currency in world trade, "U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it.''

Eoin Treacy's view -

The strength of the US Dollar is a much bigger headache for emerging markets that from the USA. There is both a push and pull to this argument with a weak Dollar encouraging capital to migrate and allowing borrowers to increase leverage to lower costs. The reversal of the trend sees capital flight from emerging markets and increases the risk of default among the most leveraged debtors. 



This section continues in the Subscriber's Area. Back to top
August 20 2015

Commentary by Eoin Treacy

Gold-gold matters

Thanks to a subscriber for this note by Douglas Pollitt which may be of interest. Here is a section:

If the surface float is less than we think it is, then inground stocks, (otherwise known as reserves), are also showing signs of depletion. On the cusp of the last boom, the reserves of senior producers¡¯, as measured in years of mine life, would be ballpark twice what they are today. And moreover these stocks here have been shown to be highly inelastic ¡°tens upon tens of billions of exogenous capital poured into the sector and very, very little was found. Unlike the frackers or, say, the zinc industry, a rally in gold will not see more metal get coughed up from the primary producers; indeed, gold production will almost certainly fall for the next twenty years no matter what the gold price does.

Investors in gold equities can gnash their teeth at the shenanigans on the Comex, and that¡¯s fair enough. The current price makes no sense at all in terms of gold-gold economics. It should nonetheless be borne in mind that the last boom was largely a paper gold boom, where punters, suffuse with visions of geopolitical and monetary overreach, piled willy-nilly into long positions. The next boom, however, if the float is as thin as we think it is, may well be driven by physical scarcity, something a gold exploration geologist knows something about, be they in the jungle or on the tundra.

 

Eoin Treacy's view -

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

Gold ore grades have been deteriorating for some time which has been a contributing factor in the rising marginal cost of production for the mining sector. Rather than classify the bull market in gold prices being solely as a result of a rise in demand for paper gold over physical supply, it is more reasonable to conclude that price represents the point at which the two different portions of the market converge. 



This section continues in the Subscriber's Area. Back to top
August 19 2015

Commentary by Eoin Treacy

Gold, Silver Climb as Equity Retreat Spurs Demand for Safe Haven

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

"The selloff in equity markets reflects economic concern, which is supportive of gold," James Cordier, the founder of Optionsellers.com in Tampa, Florida, said in a telephone interview. "With so many problems globally, people think the Fed will have to wait to raise rates."

Eoin Treacy's view -

It is interesting how the motivations of the Fed can be used to rationalise just about any market move. For example, I have also heard a number of commentators suggest the PBOC devalued the Yuan in anticipation of the Fed hiking rates in September. Leaving the Fed out of the picture for the moment let's look at the precious metals sector with fresh eyes.



This section continues in the Subscriber's Area. Back to top
August 14 2015

Commentary by Eoin Treacy

Tin Prices Rise Despite Metals Rout

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

More than half of all demand for tin is accounted for by the solder which is used to assemble electronics devices such as smartphones and televisions, according to Fastmarkets, a metal research group.

China’s appetite for tin hasn’t fallen away in the way that it has for other base metals, such as iron ore, and China is tin’s biggest importer. Although this week’s devaluation of the yuan will make the metal more expensive in the Chinese market, electronics manufacturers are likely to be well-hedged and able to absorb price rises, said Ms. Bain.

Analysts see the biggest impact on prices coming from the supply side. Indonesia is the world’s largest tin exporter, with up to 35% of the global trade. New regulation this month bans all but refined products from legal mines leaving the country.

Myanmar, whose exports took off around 2011 after the fall of the ruling military junta led to the lifting of some sanctions, is a recent entrant into the tin market.

Now, though, output from Myanmar’s main tin mine is declining due to falling ore grades, and the challenges posed by the ethnic conflict raging nearby. The recent fall in tin prices also stymied investment in current and prospective tin mines, analysts say.

Eoin Treacy's view -

More than half of all demand for tin is accounted for by the solder which is used to assemble electronics devices such as smartphones and televisions, according to Fastmarkets, a metal research group.

China’s appetite for tin hasn’t fallen away in the way that it has for other base metals, such as iron ore, and China is tin’s biggest importer. Although this week’s devaluation of the yuan will make the metal more expensive in the Chinese market, electronics manufacturers are likely to be well-hedged and able to absorb price rises, said Ms. Bain.

Analysts see the biggest impact on prices coming from the supply side. Indonesia is the world’s largest tin exporter, with up to 35% of the global trade. New regulation this month bans all but refined products from legal mines leaving the country.

Myanmar, whose exports took off around 2011 after the fall of the ruling military junta led to the lifting of some sanctions, is a recent entrant into the tin market.

Now, though, output from Myanmar’s main tin mine is declining due to falling ore grades, and the challenges posed by the ethnic conflict raging nearby. The recent fall in tin prices also stymied investment in current and prospective tin mines, analysts say.



This section continues in the Subscriber's Area. Back to top
August 13 2015

Commentary by Eoin Treacy

Cotton Jumps Most in Three Years on Surprise U.S. Crop Estimate

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

Yields will average 795 pounds an acre, down from 819 pounds projected in July, the USDA said. Inventories in the 12 months ending July 31 will be 3.1 million bales, down 26 percent from last month’s forecast and a two-year low.

The USDA cut its estimate for global reserves by 2.7 percent to 105.19 million bales from last month’s forecast.

The report “was quite the surprise,” Keith Brown, president of Keith Brown & Co. in Moultrie, Georgia, said in a telephone interview. “They cut the U.S. crop. The real clincher was lowering the global carryout by 3 million bales, because that had been ascending every month.”

 

Eoin Treacy's view -

Yesterday’s USDA report set off fireworks in the agricultural futures markets. Upgrades to expectations for corn and soy sent prices lower while the downgrade to cotton expectations have resulted in prices leaping higher. This is an El Nino year with extreme weather already recorded with probably more to come, suggesting volatility in agriculture prices is more likely than not. 



This section continues in the Subscriber's Area. Back to top
August 10 2015

Commentary by Eoin Treacy

Farm machinery

Eoin Treacy's view -

Against a background where commodity related businesses have been under rather extreme pressure, farm machinery shares have exhibited relative strength. Crops have generally been favourable which has contributed to falling prices and the strength of the US Dollar has contributed to weakness. However as potential that agriculture prices have found at least a near-term low improves, the farm machinery sector may be worth studying in great detail. 



This section continues in the Subscriber's Area. Back to top
August 07 2015

Commentary by Eoin Treacy

Randgold riding gold price fall well as it bucks the peer trend

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

Bristow was preceded at the presentation by Randgold Chairman, Chris Coleman, who reminded those present that Randgold was formed almost exactly 20 years ago when the gold price was at a virtual all-time low. The point here being that the current low gold price is not as bad as it was back then, and Randgold has thrived since its very beginnings, in both lower and higher gold price environments.

Bristow continued on the same theme, saying that in terms of the gold price in real terms, Randgold was nearly back where it started! He re-iterated the company has always followed a basic strategy that allowed it to be able to continue to build, while many of its peers were still trying to figure out how to survive in the current gold price environment. “I’ve always tried to do the opposite to the industry and grow in the troughs,” Bristow said to Richard Quest of CNN. Randgold has not wavered from its strategy of only developing good-sized projects offering strong returns at $1000 gold and this policy has held it in good stead.

As far as the Q2 figures were concerned, not surprisingly, Bristow tended to dwell more on the positive aspects of the results. These included a solid all-round performance from its operations, with improvements in grade, throughput and recovery, leading to a new gold production record and a higher profit compared with Q1 in the face of a declining gold price. 

 

Eoin Treacy's view -

Gold miners are now trading at around the same levels relative to the gold price as they did before the commodity bull market. This highlights just how unsuccessful the sector on aggregate has been in controlling cost inflation. However as energy prices pull back and wage inflation moderates, or even contracts, the ability of miners with reasonable debt loads to prosper should improve. This means we can expect some wide variation in returns between miners. 



This section continues in the Subscriber's Area. Back to top
August 06 2015

Commentary by Eoin Treacy

U.S. Wheat Exports Jump to 2-Year High; Soy Cancellations Soar

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

Sales of wheat jumped to highest since July 2013 last week after prices fell to lowest in five weeks, government said Thursday in report.

Sales for delivery by May 31 rose to 838,463 mt in week ended July 30 from 699,418 week earlier, up from 590,871 year ago, USDA reported

Sales last week included 394,600 t purchased for delivery to unknown destinations; other major buyers included Dominican Republic, Japan, Philippines and Yemen

“The sales to unknown are a little surprising, but not a sign of improved demand given the premium U.S. wheat is trading to the rest of the world,” Roy Huckabay, exec. Vp for Linn & Associates in Chicago, says in phone interview.

NOTE: Total sales for delivery before May 31 down 17% from yr ago, USDA data show

NOTE: USDA reported net sales reductions of 447,307 t of soybeans in marketing year that ends Aug. 31; biggest weekly cancellation since government began collecting data in 1990
China canceled 500,000 t, rolling 300,000 for delivery after Sept. 1, start of new marketing year: USDA

“The China bean sales the prior week was an obvious error” of reporting the timing of the delivery, says Huckabay.

 

Eoin Treacy's view -

Soft commodities have been subject to a great deal of volatility over the last few years as commonality in the sector has been squeezed out by record crops. Individual commodities are now trading much more on their individual fundamentals than over the last decade which has led to increased variability in returns. 



This section continues in the Subscriber's Area. Back to top
August 05 2015

Commentary by Eoin Treacy

Email of the day on redenominating US Dollar instruments to Australian Dollars

Could you advise me again how to get access to the commodities in AUD? e.g. Copper price CMX in AUD? 

Eoin Treacy's view -

Thank you for this question and you may be interested in this video   explaining how to create your own Preset template which will allow you to redenominate any US Dollar instrument to Australian Dollars.

For example here is copper redenominated to Australian Dollars. 



This section continues in the Subscriber's Area. Back to top
August 05 2015

Commentary by Eoin Treacy

Citigroup Sounding Alarm on $13 Billion of Bank Bonds in Brazil

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

Speculation is mounting that Moody’s will be the second rating company to lower Brazil’s grade to the precipice of junk as the economy suffers its biggest contraction in a quarter century and a bribery scandal frustrates the government’s efforts to restore its finances.

Moody’s, which met with officials in Brazil last month, cited the country’s economic woes and deteriorating finances when it put the Baa2 rating on negative outlook in September.

Things have only gotten worse since then, with Moody’s predicting in a July 16 report that gross domestic product will shrink 1.8 percent this year.

Brazil’s real declined 0.7 percent to 3.4943 per U.S.dollar at 11:51 a.m. in New York. The currency declined 24 percent this year.

Just last week, Standard & Poor’s also revised its outlook on Brazil’s rating to negative. An S&P downgrade would plunge Brazil back into junk since the company rates Brazil BBB-, one level below Moody’s.

“Banks are a leveraged macro play and as such, given the recession, I see the bonds expensive,” Jorge Piedrahita, the chief executive officer of New York-based brokerage Torino Capital LLC, said in an e-mail.

Eoin Treacy's view -

The economic pressure Brazil is experiencing is perhaps most evident in the collapse of the Real which has almost completely unwound the bull market associated with the commodity bull market. The great tragedy is that the country squandered the economic dividend of an almost decade long commodity bull market by failing to introduce regulatory reform, build critical infrastructure and combat corruption. As Warren Buffett says “You don’t know who’s been swimming naked until the tide goes out” On the plus side the Olympics next year and World Cup in 2018 will be fun but are hardly relevant for investors. 



This section continues in the Subscriber's Area. Back to top
July 31 2015

Commentary by Eoin Treacy

Diageo Expects Return to Sales Growth After Two-Year Slump

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

The outlook reflects the prospect of stronger growth in selling volumes in the 12 months through June 2016, Chief Executive Officer Ivan Menezes said in a statement Thursday. He forecast “mid-single-digit” organic sales growth in the following financial years and a 1 percentage-point improvement in the operating margin within three years.

The guidance is “conservative and undemanding,” said Eddy Hargreaves, an analyst at Canaccord Genuity in London. “It’s below what we already have in our model and it’s a positive that they have reinstated guidance.”

As he starts his third year as CEO, Menezes has tried to gain more control over his sprawling liquor empire and restore sales growth after a two-year slump. He’s bought out India’s United Spirits Ltd., taken full ownership of Don Julio tequila and dissolved a South African joint venture. Diageo is also shifting to a model focused on purchases by consumers, rather than the amount of bottles it ships to distributors.

 

Eoin Treacy's view -

Premium distillers such as Diageo trended higher in 2010 and 2011 as Chinese demand surged not least on the back of Communist Party cadre largesse. They have subsequently had a more difficult time repeating those growth figures following Xi Jinping’s anti-corruption drive, contraction of the European economy and stagnant North American sales. Diageo is betting that India and Africa will represent its primary growth engines in future but it will take time to generate results large enough to move the needle in terms of earnings growth. 



This section continues in the Subscriber's Area. Back to top
July 31 2015

Commentary by Eoin Treacy

Noble Group Extends Worst Rout Since 1999 Amid SGX Warning

This article by Yuriy Humber and Jonathan Burgos for Bloomberg may be of interest to subscribers. Here is a section:

Noble has bought back its stock at least 11 times since last month and built up a 2.8 percent stake from zero. Companies listed in the city-state aren’t allowed to repurchase their shares two weeks before reporting earnings, according to Singapore trading rules. The company is due to announce its quarterly results on Aug. 13.

“The share buybacks so far have been relatively limited so we don’t expect immediate impact on the company’s liquidity or financial leverage,” Cindy Huang, an analyst at credit-rating agency Standard & Poor’s, said by e-mail.

Noble’s stock declines do not in themselves impact the trading company’s credit position, Huang said.

“The larger issue would be if confidence is affected or lenders’ sentiment is significantly affected,” Huang said.

 

Eoin Treacy's view -

Noble Group is currently trading on a Price to Book of 0.51 not least because its primary business is in coal, coke and petrochemical supply chains which have been under pressure as commodity prices have declined. With a forward P/E of 4 and a yield of 2.12% traders are pricing in either a major write down of their assets or are simply using the share as a vehicle for expressing a bearish view on commodities generally. 



This section continues in the Subscriber's Area. Back to top
July 30 2015

Commentary by Eoin Treacy

Pariah status

Eoin Treacy's view -

This has been an extremely difficult period for mining companies, not least as the major iron-ore and diversified mega-cap companies have ramped up supply into a falling market in order recapture market share. From an investor’s perspective, one is left with a dilemma. Many are asking whether it is better to hold on in the hope prices will recover. Others have been disappointed in their attempts to buy only to see prices fall even further. Against a background where technology shares such as Apple, Google, Amazon and Facebook have accounted for the majority of stock market returns this year, underperforming sectors such as commodities have fallen into relative obscurity. 



This section continues in the Subscriber's Area. Back to top
July 30 2015

Commentary by Eoin Treacy

Coffee drinkers beware: Brazil coffee harvest set to decline again

This article by Vladimir Pekic for Beverage Daily.com may be of interest to subscribers. Here is a section: 

Brazilian coffee growers will collect just 44.28m sacks (60Kg) of coffer in 2015, the second lacklustre harvest in a row for the world’s largest coffee producer and exporter. 

The result was unveiled this month in the second annual coffee crop forecast for 2015 published by Brazil’s National Supply Company (Conab). The state-run institution warned that the 2015 harvest would be 2.3% lower than the 45.34m sacks harvested in 2014. 

“If the latest forecast announced by Conab proves correct, this will be the third consecutive season in which coffee production in Brazil drops” warned Brazil’s Advanced Research Centre in Applied Economics (CAPEA) in a June 11 release. 

Nonetheless, the international Coffee Organization said that coffee prices continued their decline even after the latest Conab forecast – as speculation over the current 2015/16 Brazilian crop suggests that the market has no immediate supply concerns. Indeed, one major trading house has already forecast a global supply surplus for 2015/16. 

 

Eoin Treacy's view -

This is an El Nino year and it has certainly been hotter and muggier in Los Angeles this year than last as a result of the weather phenomenon. This graphic of Pacific Ocean temperature comparing this year to the strong 1997 event suggest that we can anticipate additional extreme weather events through the end of the year. This has the potential to act as catalyst for agricultural commodity prices so they are worth watching. 



This section continues in the Subscriber's Area. Back to top
July 28 2015

Commentary by Eoin Treacy

JPMorgan Just Cornered The Commodity Derivative Market, And This Time There Is Proof

Thanks to a subscriber for this article from Zero Hedge which may be of interest. Here is a section:

So in summary, this is what we do know:

In Q1, JPM cornered the commodity derivative market, with a total derivative exposure of just over of $4 trillion, an increase of 1,691% from just $226 billion in one quarter!

What we don't know is:
why did the OCC decide to effectively eliminate its gold derivative breakdown by lumping it with FX,

why there was a 237% increase in the total amount of precious metals (which include gold) contracts in the quarter, from $22.4 billion to $75.6 billion

We have sent an email requesting much needed clarification from the Office of the Currency Comptroller, although we are not holding our breath.

 

Eoin Treacy's view -

A large number of investment banks have closed or sold their commodity trading operations as prices declined and speculative interest migrated. JPMorgan and Citigroup have stepped into that void and now occupy outsized positions in the commodities derivatives market. 



This section continues in the Subscriber's Area. Back to top
July 22 2015

Commentary by Eoin Treacy

NA Gold & Silver Equities: Stress Testing the Balance Sheets

Thanks to a subscriber for this report from RBC Capital Markets focusing on North American gold miners. Here is a section:

Stress test highlights $1,100/oz as a critical level
At $1,100/oz gold and $14.50/oz silver, the North American gold sector remains ex-growth. In addition to the cost-cutting measures that have occurred to date, producers will need to place their higher cost mines in harvest and accelerated closure mode or on care and maintenance. We would expect to see a reduction in management and board compensation and the use of private aircraft travel curtained. And below $1,100/oz, we believe some companies could see their lines of credit reduced or withdrawn, and companies with elevated levels of debt may be forced to hedge revenues, sell streams on mining assets, and/or raise distressed equity. At $1,100/oz, companies that would need to continue making cuts to discretionary and fixed costs to improve their balance sheets include AngloGold, Barrick Gold, Hochschild, IAMGOLD, Kinross, Pan American, Primero, Teranga, and Timmins.

At $1,000/oz gold and $13.25/oz silver, we would expect mine production to begin to contract as mines are placed on care and maintenance or moved into accelerated closure. In addition to the cost-cutting measures mentioned above, we believe a number of the gold producers would need to consider mergers to capture operating synergies or other financial benefits. At $1,000/oz, all of the gold/silver producers in our coverage universe would continue to make cuts to operating and discretionary costs and the most leveraged companies would seek alternative sources of equity.

At $1,200/oz gold and $15.75/oz silver, we believe most of the sector can sustain their current operating mines, but mines with AISC above $1,100/oz would likely go into “harvest mode” with significant development capital spending deferred. In addition, at $1,200/oz the producers can still implement cash-saving measures, with further cuts to G&A, exploration, and sustaining capital.

 

Eoin Treacy's view -

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

Chinese central bank buying of gold is an important source of demand and has garnered a great deal of attention in the media following last week’s announcement. However that is not the only source of Chinese demand. Domestic Chinese investors are also large consumers of gold and it is plausible that with the volatility on the stock market retail investors have stopped buying or liquidated holdings to meet margin calls. 



This section continues in the Subscriber's Area. Back to top
July 17 2015

Commentary by Eoin Treacy

Gold Reaches Lowest Since 2010 as Traders Shrug Off China Hoard

This article by Eddie van der Walt, Joe Deaux and Laura Clarke for Bloomberg may be of interest to subscribers. Here is a section: 

China said it boosted bullion assets to about 1,658 metric tons, less than brokers at GoldCore Ltd and Sharps Pixley Ltd. expected. Futures dropped to the lowest since 2010 on Friday as signs of improving U.S. economic growth further diminished the metal’s appeal as a haven.

With investors in the U.S. scoffing at the precious metal, bulls were holding out hope that buying from China could help to buoy demand. The Asian country vies with India as the world’s top consumer.

“I’m shocked by how small the figure is,” Ross Norman, chief executive officer of dealer Sharps Pixley, said by telephone from London, referring to China’s gold reserves. “I don’t think I was alone in thinking they have accumulated three times as much.”

 

Eoin Treacy's view -

A clue to the fact that the Chinese government has not been accumulating vast quantities of the metal is in the fact that prices have held a sequence of lower highs since 2011. Generally speaking if on aggregate the metal had been under accumulation a progression of higher reaction lows would have been evident within the ranging phase of the last two years. 



This section continues in the Subscriber's Area. Back to top
July 16 2015

Commentary by Eoin Treacy

Glasenberg of Glencore to Rio Tinto, other miners: stop digging

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

Take iron ore, which is responsible for almost half of Rio Tinto’s revenue and more than two-thirds of its pretax profit. Global yearly output for all miners increased more than 25 percent from 2010 through 2014. Over the same period, the price of Australian iron ore exports to China declined 60 percent. That’s not a coincidence, Glasenberg says.

Yet the world’s miners—including Rio, BHP Billiton, and Vale—plan to increase production by an additional 16 percent by the end of 2018. “That’s what’s killing the supercycle,” Glasenberg said on Glencore’s August 2014 earnings call, referring to the idea that commodities prices had been on a decades-long climb due to surging demand from emerging markets, particularly China.

Glasenberg’s message to the mining industry is simple: You’re in a hole; stop digging. The problem is, mining execs think they’re in the business of digging. “There’s too much focus on big holes in the ground and not enough focus on return for capital,” says Paul Gait, a mining analyst at Sanford C. Bernstein & Co.

 

Eoin Treacy's view -

Iron-ore prices have paused in the region of $45 but will need to continue to hold the recent lows if we are to conclude that more than temporary support has been found.

Despite the fact that industrial metals prices have at least paused in their declines over the last week, the CRB Metals Index shows little evidence that support has been found. A sustained move above the 200-day MA currently near 760 would be required to question the consistency of the medium-term decline. 

 



This section continues in the Subscriber's Area. Back to top
July 14 2015

Commentary by Eoin Treacy

Lindt CEO Says Cocoa Prices Should Decline to Reflect Reality

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

Ernst Tanner says in phone interview that speculation has driven cocoa prices up too much.

Supply of beans in market is greater than demand, grindings going down, rather than up: Tanner

Arguments about Ebola have been used to justify higher cocoa prices, though outbreak hasn’t affected industry

Easier to raise prices in U.S. than in Europe

Lindt, Ghirardelli brands gaining share in U.S., integration of Russell Stover on track

 

Eoin Treacy's view -

Cocoa is trading in mild backwardation suggesting there is more to the recent run in prices than pure speculation as the above quotes would indicate. US Cocoa prices are currently testing the 2014 peak near 3400¢. On the run up from 2700 reactions have been limited to approximately 100¢ so a pullback larger than that would be required to signal more than temporary resistance in the current area. 



This section continues in the Subscriber's Area. Back to top
July 10 2015

Commentary by Eoin Treacy

Email of the day on mining shares:

Anglo-American, BHP and RTZ all seem to be breaking below the bases of their ranging zones. Commonalty. The dividend yields look attractive. Buy or sell?

Eoin Treacy's view -

Thank you for this question which I believe is of general interest to subscribers. Mining shares and metal prices did not respond particularly favourably to the run-up in China’s stock market earlier in the year but have been influenced by its recent decline because of fears the economy is slowing. If there is commonality in the mining shares it is because there has been such commonality in the commodity prices for their major products. Iron-ore, coal, oil, copper and aluminium prices are all at depressed levels. 



This section continues in the Subscriber's Area. Back to top
July 07 2015

Commentary by Eoin Treacy

July 03 2015

Commentary by Eoin Treacy

Platinum into the next decade

Thanks to a subscriber for this detailed report offering a nuanced view on the platinum market which may be of interest. Here is a section: 

The world still needs more platinum despite the fall in Autocat loadings
The rise in electric vehicles (EV’s with very low or no PGM’s) will reduce the average vehicle platinum loading and contribute to lower demand growth than we have seen historically. Importantly however, under what we consider reasonable (2.6% CAGR) vehicle demand growth, we still forecast growth in gross Autocat demand. A modest increase in fuel cell vehicles (with high platinum loadings) is likely to offset some of the platinum demand destruction from EV’s. Furthermore a “catch-up” in emission standards in the emerging markets such as India and China should also offset the general trend in declining loadings. We outline our forecasts for platinum. Under our base case, we forecast that an additional 1.5Moz will be required by 2030.

The Auto sector is nearly self sufficient due to recycling.
We forecast a continuation in the trend of the increasing metal units being returned to the market over the next fifteen years. The three major Autocat producers (BASF, Johnson Matthey and Umicore) are all adding recycling refining capacity, specifically targeting recycled material. Furthermore, the tranches of Autocats being returned to the market over the next few years all have higher PGM loadings, especially in platinum. We forecast Autocat platinum volumes to double by 2030, which equates to a CAGR of 4%. 

However, the CAGR between 2014 and 2021 is likely to be closer to 8%.
We estimate that the Autocat industry will be a net supplier to the market up until 2020, whilst the additional new ounces required by 2025 will be negligible. By 2030, the additional requirement should be 300koz, equivalent to a large platinum mine, or a two mid-sized mines. The net result is that Platinum demand (post recycling) growth should be slower over the next fifteen years, compared to the historical trend. We estimate a CAGR of 1.1% versus the trend (1975 – 2014) of 2.2%.

Enough replacement ounces from the existing supply base until 2021
The amount of new platinum ounces required from the Southern African mining industry is limited, especially over the next seven years. The existing fleet of development and replacement projects should be sufficient to offset the endemic grade decline and mine depletion (see Figure 6). Furthermore, these projects have favourable economics relative to the current production base, as most projects have also sunk significant capex, lowering the return requirement as a result.

 

Eoin Treacy's view -

The automotive sector is in a process of evolution with China mandating greater use of electric vehicles and tighter emission control while Tesla represents the cool side of the sector. Toyota, Linde, among others, and the platinum miners are championing the build out of hydrogen fuel cells. Both represent corollaries to innovation of solar and wind technology that is making distributed electricity production possible. Sergio Marchionne at Fiat is arguing for fabless manufacturing in the automotive sector which has the potential to act as an additional catalyst for the sector. 



This section continues in the Subscriber's Area. Back to top
July 02 2015

Commentary by Eoin Treacy

Corn Market Seen Tighter as Pigs Erode Reserves at 27-Year High

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

“It’s probably a combination of more pigs, chickens and cows eating corn, and USDA overestimating last year’s production,” said Dale Durchholz, the senior market analyst at AgriVisor in Bloomington, Illinois. “Supplies are tighter, and God forbid we have any hot, dry weather in July that damages this year’s crop.”

Feed and residual use for the grain in the three months ended in May climbed 31 percent, according to AgriVisor. The inventory of broilers, dairy cows and hogs suggests that such demand could be as much as 200 million bushels larger than the 5.25 billion bushels projected by the USDA, said Durchholz.

As of Sunday, 68 percent of the corn crop was rated in good or excellent condition in the top 18 producing states, down from 75 percent a year earlier.

Wet fields and declining crop conditions suggest a national yield at 162 bushels an acre, below the USDA’s estimate of 166.8 bushels,  Mark Schultz, the chief analyst for Northstar Commodity Investment Co. in Minneapolis, said Tuesday. That would leave a carryover next year of 1.2 billion bushels, below the 1.771 billion that the USDA forecast on June 10.

“The tightening supply and deteriorating crops in the field are a big change from the outlook a month ago,” Schultz said. “Most livestock producers were waiting for lower prices into the harvest, and now they will be scrambling to extend purchases.”

 

Eoin Treacy's view -

El Nino is a major weather phenomenon and this year’s event is expected to be stronger than normal. With droughts in some parts and floods elsewhere the potential for crop yields to undershoot is being priced into agricultural commodities. There has been a significant rally in corn, wheat and soybean prices which is a little overbought in the short term. There is room for some consolidation but clear downward dynamics would be required to question potential for some additional upside. 



This section continues in the Subscriber's Area. Back to top
July 01 2015

Commentary by Eoin Treacy

In Gold we Trust 2015

Thanks to a subscriber for this detailed heavyweight report from Ronald Peter Stoeferle at Incrementum AG which may be of interest. Here is section: 

Let us draw a comparison: if you were sitting in a rowboat in stormy seas, would you say that the lighthouse is moving from side to side and up and down? Or would you employ a rubber band as a tape measure? Certainly not, and for good reasons, as the lighthouse and steel are stable, and waves and rubber bands are not. The relationship between gold and paper currencies is roughly analogous.

This is not to say that the exchange value of gold would be perfectly stable. It would change over time, depending on the growth in the supply of gold, the change in the demand to hold cash balances, and the growth in goods and services on the market. However, given its much lower as well as easily foreseeable annual supply growth rate, it would be far more stable than paper currencies.

Ludwig von Mises always argued that money is a good like any other. It differentiates itself by one important characteristic: Money is the generally accepted medium of exchange, because it is the most marketable good. According to Mises, money's function as a medium of exchange is thus the central one, while its store of value and unit of account functions are merely subordinate functions (they are derived from, or implied by the central function). This also implies that a rising money supply must lower the exchange value of money.35

In 1913, the population of the US was 97 million. The monetary aggregate M3 at the time amounted to approx. USD 20 billion, i.e., USD 210 per capita. Currently the population of the US is 318.9 million, while the monetary aggregate M3 has increased to USD. 17.8 trillion. This translates into a money stock of USD 55,817 per capita.

Eoin Treacy's view -

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

Many of the arguments that speak to gold’s appeal as a financial resource resemble the arguments for the existence of Platonic ideals. Gold will hold its purchasing power over the long haul, gold does not represent a debt or reliance on cash flows, gold is immutable, has historic appeal, was the original money and cannot simply be printed or lent into existence. All of this is true.



This section continues in the Subscriber's Area. Back to top
June 29 2015

Commentary by Eoin Treacy

Coal Shares Jump After Supreme Court Strikes Down Mercury Rule

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

U.S. coal shares jumped after the Supreme Court struck down the Obama administration’s mercury and acid gases power plant rule, saying it hadn’t considered the billions of dollars in costs before issuing the rule.

Arch Coal Inc. jumped as much as 19 percent, Peabody Energy Corp. climbed 15 percent and Alpha Natural Resources Inc. was up 14 percent in intraday trading after the ruling was announced Monday.

The court’s decision calls into question an Environmental Protection Agency rule that targets mercury and acid gases. The rule has led to the closing of dozens of coal-fired power plants over the last two years.

 

Eoin Treacy's view -

It’s been a long time since coal caught a break and a great deal of bad news is already in the price. Coal is dirty, antiquarian, low tech and contributes to pollution but is cheap and abundant.  Over the last few years investors and regulators have concentrated on the former points and forgot the latter ones. Coal is the feed stock for a substantial portion of electricity production and today’s decision will mean that fewer power stations in the USA will need to be closed as a result of stringent regulations. 



This section continues in the Subscriber's Area. Back to top
June 25 2015

Commentary by Eoin Treacy

Brazil Bank Stock Goes From Worst to First After Investors Bail

This article by Francisco Marcelino and Ney Hayashi for Bloomberg may be of interest to subscribers. Here is a section: 

Among the largest Brazilian banks, Santander is the one with the highest capital ratios, Victor Martins, an analyst at Planner Corretora de Valores, said by phone from Sao Paulo.

“If the economy picks up, they’ll be in a better position to take advantage of that,” Martins said. “It’s all in their hands to do it.”

Santander Brasil’s capital ratio of 16 percent compares with 16.02 percent at Banco do Brasil SA at the end of the first quarter. It exceeded Itau’s 15.3 percent and Banco Bradesco SA’s 15.2 percent.
Santander declined to comment on its performance since the share-swap offer, which began in April 2014. That’s when the bank offered to buy back the 25 percent stake in the Brazil unit it didn’t already own at a price 20 percent above where it was trading at the time. The deal was to exchange shares of the local unit for those of the parent.

The majority of analysts covering the company recommended investors accept the offer, citing what they saw as a fair price and the risk of holding a stock with low liquidity.

“The market doesn’t believe in our franchise, but we do,” Javier Marin, Banco Santander’s chief executive officer when the deal was announced, told reporters at the time. “That’s why we’re carrying out this transaction.”

 

Eoin Treacy's view -

Brazil remains mired in a political scandal which throws light on the inadequate standards of governance that prevailed over the last decade. Now that commodity prices have fallen and excess capital from exports has dried up, the ability of the economy to thrive without reform in how the country is administered is in question. The Real offers a powerful representation of just how much stress the economy is under. It has more than halved since 2011. Some additional evidence of steadying would be a welcome development from the perspective of foreign investors. 



This section continues in the Subscriber's Area. Back to top
June 24 2015

Commentary by Eoin Treacy

White-Sugar Premium at Nine-Month High as Demand Advances

The premium for white sugar over the raw variety has climbed 41% this yr, touching the highest since Sept. on Wednesday, as demand for the refined sweetener picks up after an earlier drop in prices.

White-sugar futures on ICE Futures Europe in London  have climbed ~6% since reaching a six-yr low on June 17; Raw-sugar futures also fell to six-yr low in N.Y. last week

 “There is still strong demand from West Africa” for the refined product, Claudiu Covrig, senior agricultural analyst at Platts Kingsman in Lausanne, Switzerland, says by e-mail

Demand associated with Islamic Ramadan holiday that started this mo. also supporting price, he says

Better-than-expected refined imports in China in April and May from Thai and Guatemalan suppliers “have contributed”

Perception in mkt of lower availability of white sugar for Aug. delivery on ICE Futures Europe, he says

NOTE: Brazil’s Center-South produced 6.75m mt of sugar this season, down from 7.76m yr earlier, industry data showed  Tuesday

Eoin Treacy's view -

White sugar has one of the most consistent downtrends in the commodity sector so it will be clear when the supply dominant environment changes. It has stabilised in the region of $350 over the last couple of weeks but a sustained move above $380 will be required to begin to question the consistency of the medium-term decline. 



This section continues in the Subscriber's Area. Back to top
June 22 2015

Commentary by Eoin Treacy

Golds (OW): Debunking the Bearish Case for Gold(s)

Thanks to a subscriber for this report from Canaccord Genuity. Here is a section: 

Gold(s) perform poorly before/after the first Fed hike. This was true over the last three tightening cycles of 1994-95, 1999-2000 and 2004-2006 (Figure 1) where rate hikes were ¡§mechanical¡¨ in nature, that is, the Fed raising rates by a 25bp increment at each meeting. But as Fed Chair Yellen repeated yesterday through the Q&A session, contrary to these episodes, the Fed does not intend to follow a pre-determined path to higher interest rates. Rather, a ¡§gradual¡¨ or “wait-and-see” approach was reiterated. Therefore, the next few months may well look like the 1986-87 tightening cycle where golds outperformed before and after the first Fed hike (Figure 1, fourth panel). Interestingly, the 1986-87 experience teaches us that despite a Fed hike in December 1986, gold equities surged until the second Fed hike which occurred in April 1986. So, if the Fed were to pre-emptively hike rates in September, the Fed could take a pass in December and the second hike could only happen next year if a “gradual” approach is implemented. This scenario could maintain or open the door to a cyclical rally in gold and gold equities.

Inflation is low and years away. Inflation went down to a multi-year low of 2.3% in 1993 and the gold sector rose 115%. Back to the 1986-87 episode, who would have said that in December 1986, US headline CPI would bottom at 1.2% and boom to 3.7% four months later? Interestingly, like today, the third panel of Figure 2 shows that wage inflation was running ~2%. The bulk of the inflation increase in 1987 came from the rebound in oil prices. We calculated that if oil prices reach $70/bbl next spring, US headline CPI would be near 2%. But like in early 1987, by moving progressively, the Fed runs the risk of allowing inflation expectations to build as headline CPI catches up to core CPI, hence the “inflation” trade on gold(s). The key points to remember here are the trend in inflation and expectations. Figure 3 shows that no matter the starting point in inflation, gold equities historically are strong outperformers (+18%>TSX over 12 months) from historical bottoms in US headline inflation. Yesterday’s headline CPI suggests the disinflation cycle is over.

 

Eoin Treacy's view -

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

The range of opinions on the outlook for gold remains varied. The majority of commentary focuses on the “what ifs” of how gold will respond to different stimuli not least the Greek drama and potential Fed tightening, but what it really needs is a good argument for why it should rally independently of other factors. Gold has been ranging with a mild downward bias for nearly two years so it is reasonable that investors are looking for a bullish catalyst to galvinise support beyond short-term steadying. 



This section continues in the Subscriber's Area. Back to top
June 18 2015

Commentary by Eoin Treacy

Piercing the gloom

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

China is decelerating – (a fairly consensual view) and this is coinciding with additional production ramp-up as projects started years ago come to fruition. The net outcome is over supply (again, a consensual view) and prices should fall (as they have done). A risk is to use pre China boom commodity prices as a guide to the future, because this is too bearish as many commodity prices hit century lows in the early 2000’s. Iron ore hit an annual low in 2002 for instance at US$36/t (real CIF) – so market fears of sustained iron ore prices of US$30-40/t would require iron ore to retrace to century low levels, into perpetuity. We do not think this is likely. Meanwhile, a number of the miners offer good value on their existing assets alone at normalised prices, the potential growth upside and high yields justify buying them – on top of that, dividends are both attractive and maintainable into the foreseeable future. Now is a good time to selectively pick up some value, in our view.

Eoin Treacy's view -

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

Investment in new green field projects has stopped and is unlikely to become a significant factor until there is evidence metal prices are tending higher. Having embarked on developing new mines, companies have little choice but to complete the projects and these sources of supply continue to come to market. This situation favours lower cost, more established companies. 

There is an important difference between Chinese demand growth and absolute demand. As a major economy, per capita demand has increased substantially over the last decade. A great deal of mine expansion was predicated on the trend of demand growth persisting indefinitely. The pace of growth has moderated considerably but there is no evidence it has reversed. Any major economy has an annual consumption rate for industrial resources. Generally speaking, commodity bull markets don’t end because demand decreases. Rather supply increases to overwhelm demand. This is exactly what we have seen happen and a new demand growth model will have to evolve in order to change the environment. 

 



This section continues in the Subscriber's Area. Back to top
June 10 2015

Commentary by Eoin Treacy

Vale Outlook for China Sends Ibovespa to Biggest Gain in World

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

“Several Chinese producers -- a higher number than people realize -- have already left the business,” Vale’s Ferreira, said Wednesday at a Rio de Janeiro conference. “I think we will have a better second half in China than the first half in terms of steel.”

On top of raw-material shares, banks also helped push the Ibovespa higher. Banco Bradesco SA recovered from an 11-month low while Itau Unibanco Holding SA was set for the best day since February. Still, Fides’ Vieira said the advance may not be sustained as Latin America’s largest economy continues to disappoint.

Inflation has accelerated as President Dilma Rousseff increases government controlled prices to shore up public accounts. That has sent annual consumer prices to the fastest pace in more than a decade, and the central bank has responded by boosting borrowing costs six consecutive times.

Bets on a further slowdown at a time when the economy is already forecast to show the worst recession in 25 years have dragged down the Ibovespa from this year’s high. The benchmark gauge had entered a bull market April 24, after rallying more than 20 percent from its 2015 low, on speculation government measures would revive growth and help Brazil keep its investment-grade credit rating.

 

Eoin Treacy's view -

The Brazilian market has been the subject of a number of challenges over the last couple of years not least the collapse in iron-ore and coal prices and the entanglement of the current administration in Petrobras’s corruption scandal. 

The Index has been rangebound, in nominal terms, for much of the last two years and found support today in the region of the 200-day MA. A sustained move below 52.500 would be required to question current scope for some additional upside. 

 



This section continues in the Subscriber's Area. Back to top
June 05 2015

Commentary by Eoin Treacy

12 reasons to own gold now: Part 2

This article by Anthony Hart for Mineweb may be of interest. Here is a section: 

Astute readers will notice this was the topic of my first blog post…and it hasn’t lost its relevance in the week since (surprising huh…). Due to some of the reasons contained within the dozen detailed in the last two days…and many more…gold continues to have a legitimate role to play in insuring your overall portfolio for the ongoing systemic risk, and volatility (and potential failure) inherent in the current global financial system.

Eoin Treacy's view -

Gold has always been a long-term store of value whose price has the potential to experience a high degree of volatility over the short term. As such it has some of the characteristics of a currency while also representing a diversifying quality within a portfolio. However gold does best when people lose confidence in the ability of other currencies to hold their value either through deflation and low interest rates or through runaway inflation and high rates. 



This section continues in the Subscriber's Area. Back to top
June 02 2015

Commentary by Eoin Treacy

Platinum sector faces Kodak moment in fuel cell technology

This article by Clara Denina & Silvia Antonioli for Mineweb may be of interest to subscribers. Here is a section: 

The world’s three largest platinum producers Anglo American Platinum (Amplats), Impala Platinum and Lonmin are all investing in projects related to fuel cell technologies, which generate electricity that can power vehicles by combining hydrogen and oxygen over a platinum catalyst.

But analysts doubt fuel cell vehicles will rival the growth of their electric counterparts, mostly because battery recharging stations are less costly and already more widespread than hydrogen refuelling stations.

“As out of the two new technologies only fuel cells use platinum, I guess the miners think they have no choice,” Macquarie analyst Matthew Turner said. “But people are buying electric cars…and that’s not the case for fuel cells.”

Amplats, which has invested about $35 million in the last five years in companies developing new uses for platinum, mostly through fuel cell technology, is mindful of the stakes.

“I don’t want Anglo American Platinum, or any of our partners or customers to be a Kodak,” Amplats Chief Executive Chris Griffith said last week, referring to the once mighty photography pioneer that was slow to transition to digital photography.

 

Eoin Treacy's view -

Platinum miners are not the only companies making big bets on hydrogen fuel cells. Toyota’s decision to release its Mirai fuel cell vehicle later this year and to open its patents to developers highlights their efforts to pioneer new technologies. After all it was Toyota’s Prius that was the first mass market hybrid vehicle. 

Nevertheless, electric cars are gaining increasing traction as solar cell efficiency increases. There is also the potential for wind turbines to be smaller and less noisy. With the advent of home batteries the outlook for electric vehicles is looking even more promising. 



This section continues in the Subscriber's Area. Back to top
June 02 2015

Commentary by Eoin Treacy

Seven diamond miners form group to fight synthetics

This article by Cecilia Jamasmie for mining.com may be of interest to subscribers. Here is a section: 

The group, called the Diamond Producers Association (DPA), will promote diamonds as a luxury item for high-end consumers and highlight the attraction of natural diamonds amid concerns that some consumers may soon begin favouring cheaper synthetic rocks.

The association, which counts with a $6 million yearly budget, claims to be “the first-ever international representative organization to be formed by some of the leading diamond producers,” DPA said in an e-mailed statement.

The freshly formed entity will step into a role once filled by De Beers, which at one point controlled over 80% of the world’s mined diamonds

The freshly formed entity will step into a role once filled by De Beers, which at one point controlled over 80% of the world’s mined diamonds and pioneered the use of diamonds in engagement rings.

Eoin Treacy's view -

The price of rough diamonds has little to no correlation with the price of polished/ cut stones. However, despite the fact that cut diamond prices have fluctuated considerably over the last year, rough stone prices have been very stable. This is cutting into the margins of intermediaries such as diamond dealers and jewellers. The Diamond Producers Association stated aim may be to counteract a nascent threat from lab grown diamonds but will probably also succeed in ensuring that miners continue to get an attractive price for their rough stones. 



This section continues in the Subscriber's Area. Back to top
May 29 2015

Commentary by Eoin Treacy

5 Junior Gold Miners Trading at Less Than $110 Per Ounce

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

A gold producer is often valued based on the Net Asset Value of its operations. In other words, an investor needs to value the company’s assets (reserves) and subtract its liabilities. Its future resource production is estimated based on current reserve levels, and it is used in accordance with projected gold prices to calculate future cash flows. With the current price of gold trading at the US$1,200 an ounce level, it is relatively hard to understand why certain companies trade at $100/ounce. Regardless, the five gold juniors on this list are being valued by the market at a substantial discount to its ounces in ground.
 

Eoin Treacy's view -

Gold miners are back trading at their lowest level relative to the gold price since 2001 which is an interesting situation. Looking at the above title one could be tempted to see value which is a view I am sympathetic with. However for this ratio to reverse what has been a major downtrend investors will need to see evidence that gold is going to hold the current range. Only then will they conclude gold miners represent a high beta play. In other words just because the above miners are trading at $110 per ounce does not mean that number won’t rise if gold prices fall. 



This section continues in the Subscriber's Area. Back to top
May 27 2015

Commentary by Eoin Treacy

Barrick deal fulfills Thornton aim of forging China link

This article by Simon Casey for Bloomberg may be of interest to subscribers. Here is a section

Barrick said Tuesday that Zijin will buy 50 percent of its interest in a Papua New Guinea mine for $298 million. Looking ahead, Toronto-based Barrick and Zijin will evaluate opportunities for future cooperation, including the potential to jointly construct mines. Barrick said it may take advantage of Zijin’s access to “low-cost capital from Chinese institutions.”

“A twenty-first century mining company with global reach and the intention to become an industry leader must, by definition, have a distinctive relationship with China,” Thornton said Tuesday in a statement.

Even before Thornton took over as chairman last year, succeeding Barrick founder Peter Munk, he was looking to build links with China. That’s a recognition of the nation’s growing importance not just as a user of key commodities but also as a producer. While Barrick has long been the world’s largest gold producer ranked by sales, Zijin is catching up fast and is now the second-biggest, according to data compiled by Bloomberg.

Eoin Treacy's view -

China is among both the largest consumers and producers of gold so it makes sense for Western companies to wish to gain access. They have an added incentive as access to additional capital for either acquisitions or expansion dwindles. Meanwhile Chinese companies are well capitalised and have access to attractive borrowing terms.

Barrick Gold needed this deal more than Zijin and the response of the respective share prices bears this out. Barrick has been ranging between $10 and $13.30 since November and pulled back from the region of the 200-day MA last week. It will need to sustain a move above that level in order to signal a return to demand dominance beyond the short-term  



This section continues in the Subscriber's Area. Back to top
May 19 2015

Commentary by Eoin Treacy

BHP left with $2.8bn of reject assets after spinoff

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

Despite BHP Billiton’s spin off and sale of about $15 billion of unwanted assets over the last three years, the biggest miner remains saddled with a portfolio of even harder-to-shift rejects.

A total of nine assets — from a US thermal coal mine to UK oil and gas platforms — haven’t made the cut for a new slimmed-down parent or the demerger company South32.

The unloved operations, valued at more than $2.8 billion according to RBC Capital Markets, are hampering Chief Executive Officer Andrew Mackenzie’s quest to halve the size of BHP’s core portfolio to focus on big ticket earners including crude oil, iron ore and copper.

“They did the big clean up with South32 and these are what are left,” said Michelle Lopez, a Sydney-based investment manager at Aberdeen Asset Management Ltd., which holds BHP shares. “I’m sure they’ve been on the sale slate for a long time. It’s a disappointment.”

Global mining companies are trimming portfolios to focus more closely on their most profitable operations as commodity prices have tumbled and amid a drive to reduce costs.

BHP, Rio Tinto Group and Glencore Plc have agreed the sales of $14.3 billion of assets since 2012, according to data compiled by Bloomberg.

An attempt to sell one of BHP’s reject assets, the Nickel West unit of mines and facilities in Australia, ended in November after it failed to attract a suitable bid. BHP has taken $1.8 billion in writedowns on the operation since 2012.

 

Eoin Treacy's view -

BHP Billiton has a market cap of approximately £78 billion. South32, which represents the spin-off of industrial metal businesses not least alumina, has a market cap of over £6 billion so the additional assets the company could neither sell nor spin-off represent a comparatively small proportion of the overall business. I have added both the UK and Australian listings of South32 to the Chart Library. 



This section continues in the Subscriber's Area. Back to top
May 18 2015

Commentary by Eoin Treacy

The Big Golden Book 26 Gold Stocks in the One Report

Thanks to a subscriber for this report from Morgan Stanley focusing on the Australian gold mining sector. Here is a section: 

Our gold price outlook remains relatively subdued:
A strengthening USD, rising US interest rates and a muted inflation outlook are all headwinds to gold prices, though geopolitical tensions (such as rising concerns around Greece’s debt position) and extensions to consensus views on timing of US rate tightening have added volatility. Under this backdrop, equity selection is critical.

Reduced capital spend has been the collective approach: 
Within the ASX gold miners discussed in the Big Golden Book, total cash costs have declined ~7% since the last Golden Book six months ago, while production is up 4%, implying relatively flat absolute operating costs over the period. The “cost-out” trend continued to include some capital spend reductions, particularly from Newcrest following completion of Cadia East and Lihir investments, but capex reduction trend looks to have slowed, with improved sector free cash generation appearing to now include real cost reductions at the operating level.

 

Eoin Treacy's view -

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

Australian gold miners have faced a number of the same issues as their counterparts elsewhere but have been insulated somewhat by the weakness of the Australian Dollar. The price of gold in Australian Dollars dropped from A$1800 to A$1400 between 2011 and early 2013. It broke out of a yearlong range in January and has returned to test the upper side of the underlying base near $1500. A sustained move below that level would be required to question medium-term scope for additional upside. 



This section continues in the Subscriber's Area. Back to top
May 18 2015

Commentary by Eoin Treacy

Ivanhoe, First Quantum lead the pack

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

Leading the pack is, hands down, First Quantum: up 50%. It had pretty close company, however. Copper Mountain Mining, Imperial Metals, Lundin Mining, and Turquoise Hill all zoomed ahead between 30-40%. Not far behind with 20-30% gains were Sherritt, Capstone, Freeport, Hudbay, and Southern Copper. Thereafter came Antofagasta, Trevali, Taseko and Nevsun between 10% and 20%. Then in the single digits, were BHP Billiton, Rio Tinto and Vedanta. Among a selection of leading base metal resource developers – 19 of the larger cap juniors on the TSX or TSX-V – the impact was more muted but still positive (see chart below). There were three heavy losers during the period: Highland Copper (-33%), Pilot Gold (-32%) and Panoro (-25%). Continuing up the ladder, but still in negative territory, were Rathdowney (-9%), North American Nickel (-8%), NGEx (-2%). Drawing more or less even was Western Copper and Gold.

Eoin Treacy's view -

Mining companies have been among the most unloved of any sector over the last few years as major declines in iron-ore and coal contributed to investor malaise while other sectors such as biotech took off. This forced them into major periods of consolidation where costs were cut, expansion cancelled and cashflow optimised. A number are now completing medium-term bases. 



This section continues in the Subscriber's Area. Back to top
May 18 2015

Commentary by Eoin Treacy

May 14 2015

Commentary by Eoin Treacy

DoubleLine Presentation: Summer insects

Thanks to a subscriber for inviting me to Jeff Gundlach’s presentation yesterday down the street in Beverly Hills. The presentation was an updated version of the talk he gave in May with a number of additional slides on debt issuance. I posted that presentation in Comment of the Day on May 7th

Eoin Treacy's view -

The title of yesterday’s talk “summer Insects” is in reference to a quote from the Chinese philosopher  Zhuangzi “You can’t discuss ice with a summer insect” This is in reference to the fact that almost everyone active in the bond market today has no experience of trading in a secular bear market. This is a point I have made repeatedly over the last few years not least at The Chart Seminar. If you started out in your career in 1980 and bought the dips in Treasuries for the next thirty five years you would be a wealthy person today and will have cruised into late middle age without experience of a secular bear market. 



This section continues in the Subscriber's Area. Back to top
May 14 2015

Commentary by Eoin Treacy

Solar and Silver

Eoin Treacy's view -

David posted an article from the Telegraph on Monday highlighting the role silver plays as a conductor in solar cells. Considering the fact that silver suffered from a loss of demand with the demise of photographic film, the potential for growth in another industrial sector is a potentially important bullish catalyst. In order to gain some additional perspective on just how much of a growth sector this might represent for sliver there are two key considerations. The first is demand growth projections which are bullish and second the capacity for technological innovation which is potentially bearish.



This section continues in the Subscriber's Area. Back to top
May 13 2015

Commentary by Eoin Treacy

Pareto Securities on Pretium Resources

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

We expect Brucejack to have sizeable production and free cash flow
Based on Pretium Resources' June 2014 feasibility study and starting from 2018, we believe the Brucejack deposit has the ability to produce average annual life-of-mine (LOM) gold production of 404.1koz at an all-in sustaining cost (AISC) of CAD 500/oz for 18 years, post an initial capital cost of CAD 811.9m.

We initiate with a BUY rating and a target price of CAD 10.88/share.
Our target price is based on a sum-of-the-parts valuation composed of the following: 1.0x NPV9% of our LOM assumptions for the Brucejack project, balance sheet items, the after-tax PV9% of general and administration and exploration costs, PV7% of the after-tax interest costs, financing assumptions and in-the-money (ITM) instruments.

Eoin Treacy's view -

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

The post credit crisis environment has been difficult for explorers as energy prices surged, access to credit was restricted and gold prices fell from their 2011 peak. More recently the outlook has improved not least because energy prices no longer represent so much of a headwind and gold prices have stabilised. The rationalisation that has purged the sector of wildcat investors has resulted in leaner, more disciplined and cheaper operations. This is reflected in the valuation of the Gold BUGS Index relative to the bullion price. 



This section continues in the Subscriber's Area. Back to top
May 12 2015

Commentary by Eoin Treacy

Continuous Commodity Index and related shares

Eoin Treacy's view -

The CCI which is the unweighted Old CRB, fell from 700 in 2011 to a recent low above 400. It has at least steadied, not least because energy markets have stabilised and industrial metals have been exhibiting relative strength. The consistency of the fall from above 550 has now been broken, but a sustained move above the 200-day MA will be required to confirm more than temporary steadying. 



This section continues in the Subscriber's Area. Back to top
May 11 2015

Commentary by Eoin Treacy

Miners balance out rough day for banks on ASX

This article by Max Mason for the Sydney Morning Herald may be of interest to subscribers. Here is a section: 

The bad performance of the banks on Monday was more or less balanced by a strong day for the big miners.

BHP Billiton lifted 1.7 per cent to $31.82 and Rio Tinto pushed 0.3 per cent higher to $58.62, while iron ore miner Fortescue Metals Group gained 2.8 per cent to $2.57.

Miners were enjoying a strong run, thanks to a 30 per cent jump in the price of iron ore over the past weeks to $US61.40 ($77.76) a tonne, Metal Bulletin said.

However, UBS was forecasting iron ore to fall back to $US45 a tonne in the second half, thanks to increasing supply and China's economy continuing to soften.

This is more likely to affect the smaller miners, who have higher costs and lower-quality ore.

"We have back-calculated our company net present values to the current share price in order to determine what iron ore price the equity market is currently factoring in," UBS analyst Glyn Lawcock said.

"Our analysis suggests an average implied price of $US51.50 per tonne, which suggests the market is still implying discount to spot."

 

Eoin Treacy's view -

At The Chart Seminar in Sydney last year delegates were at pains to highlight that fact that just about all of them had positions in Australian banks because it had been the go-to sector since the resources sector peaked not least because the banks continue to have full franking on top of attractive dividends. 

The sector has outperformed since 2009 but has pulled back sharply over the last month and is now testing the relative uptrend and the upper side of the underlying congestion area. This is now an important point for Australia¡¯s banks since they are approaching potential areas of support. Westpac is representative and will need to find support within the next $1 if the medium-term progression of higher reaction lows is to hold. 



This section continues in the Subscriber's Area. Back to top
April 27 2015

Commentary by Eoin Treacy

April 24 2015

Commentary by Eoin Treacy

Iron Ore Rallies Into Bull Market After BHP Billiton Shift

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

Iron ore advanced into a bull market after BHP Billiton Ltd. curbed expansion plans and supplies from higher-cost mines dropped, easing concern global output will outpace demand and feed a global glut. Miners’ shares jumped.

Ore with 62 percent content at Qingdao rose 5.5 percent to $57.81 a dry metric ton on Friday, the highest since March 16, according to Metal Bulletin Ltd data on its website. The benchmark is still 60 percent below the peak of $144.18 reached in August 2013.

Iron ore has jumped 14 percent this week after BHP said it was curbing the pace of its expansion by deferring port works in Australia. A floor in prices may now be forming, according to Australia & New Zealand Banking Group Ltd. and Pacific Investment Management Co. There’ll be no net growth in supply in 2015 as new low-cost output is offset by mine closures, CLSA Ltd. said Tuesday.

 

Eoin Treacy's view -

It’s a little hasty to declare iron-ore is in a bull market. However the decline from $140 accelerated to recent low and a mean reversion rally may now be underway. The iron-ore oligarchy of BHP Billiton, Rio Tinto and VALE pursued a deliberate policy to drive prices lower more than a year ago and have succeeded in driving higher cost producers out of the market. 

There have been a number of bankruptcies not least African Minerals and London Mining. Additionally the decline in prices has necessitated emergency measures among a number of miners to contain costs which has reduced potential for supply to increase further. With iron-ore prices down significantly over the last year, the decision of major producers to restrict investing in additional supply may be the catalyst the market has required. 

 



This section continues in the Subscriber's Area. Back to top
April 20 2015

Commentary by Eoin Treacy

Report from The Chart Seminar in Singapore

Eoin Treacy's view -

Last week’s event was another enjoyable visit to Singapore and was an apt time to ruminate on Lee Kwan Yew’s legacy of turning a tropical backwater into a first world private banking and high end manufacturing centre. Delegates came in from Argentina, Australia, Japan and of course Singapore which led to some interesting and varied discussions.

Singapore’s stock market is being led higher by the banking sector and shares a high degree of commonality with Taiwan and South Korea. The Index is somewhat overbought in the short-term and some consolidation of recent gains in looking likely. However a sustained move below the 200-day MA, currently near 3400, would be required to question medium-term scope for additional upside.

As one might imagine the main topic of conversation was on the outlook for the Asian region not least following China’s explosive breakout over the preceding three weeks.  Delegates were also interested in the outlook for the European region and we also looked at the S&P 500. We looked at the oil price and a number of related instruments. We also looked at gold prices and a number of miners, select Singapore shares as well as a wide range of international bank shares. We also had a wide ranging discussion on currencies. 



This section continues in the Subscriber's Area. Back to top
March 31 2015

Commentary by Eoin Treacy

Randgold: Ups reserves, raises dividend, seeks more growth

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

Bristow commented, “We have looked closely at all our mines to ensure that they will still be profitable at $1,000 per ounce and we’ll continue to review our operations against a range of gold price scenarios. With the inclusion of Gounkoto underground we are now able to demonstrate a 10 year plan of plus 1 million ounce production per year and all our operations will be profitable at a $1,000/ounce gold price which is unique in the industry.”

In the event, despite mining 1.15 million ounces thereby effectively ‘depleting’ its reserves by this amount, the company managed overall to actually increase its total ore reserves by 1% mainly through ongoing brownfields exploration and drilling programmes. It would seem there is plenty of scope around its existing operations, to continue to do so in the future, even though it is mining at a plus 1 million gold ounces/year rate.

But looking ahead, Bristow notes that there is great potential in the existing low price environment for additional growth opportunities resulting from the squeeze on developers and explorers resulting from this. “Organic growth will remain our core driver but, as we look ahead from this position of strength, we will consider opportunities that are often generated by stressed markets and may well elect to play a part in the likely restructuring of the gold mining industry,” he says.

 

Eoin Treacy's view -

Randgold Resources is in an enviable position within a benighted sector. By concentrating on an all-in cost of production metric that is well below current prices the company has the wherewithal to engage in M&A activity. However while this is likely to create shareholder value over the medium-term the share is still subject to short-term swings in sentiment. 



This section continues in the Subscriber's Area. Back to top
March 20 2015

Commentary by Eoin Treacy

Golden dragon

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

By 2020 Barclays sees China surpassing its banner year for gold consumption (based on somewhat contested statistics, a matter it acknowledges) in 2013 by 150 tonnes. Simply put, it bases its vision on increasing personal incomes in China amid ongoing urbanisation and with gold’s dual attraction as jewellery and store of value for investment. It notes China’s saving rates were as high as 42% a few years ago with gold benefitting as a result.

Price wise Barclays sees some, albeit moderated, bargain hunting. “We believe longer term, this year and next are likely to offer sound buying opportunities with (gold) prices approaching their nadir,” writes Barclays. “It is not our base case that we will see triple digit gold prices, but in turn we are not likely to see a repeat of 2013’s buying frenzy.”

 

Eoin Treacy's view -

There has been a great deal of commentary centring on the ability of gold to find support at the lower side of its range, not least as the Dollar has rallied. However as the Dollar unwinds its short-term overbought condition, it is lending a tailwind to commodities generally, not least the precious metals. This pump piece, kindly forwarded by a subscriber, from Malaysia’s The Star highlights the fact Asian buyers are being encouraged into the market. 



This section continues in the Subscriber's Area. Back to top
March 04 2015

Commentary by Eoin Treacy

Glencore profit tops estimates

This article by Jesse Riseborough for Bloomberg appeared in Mineweb and may be of interest to subscribers. Here is a section: 

To combat falling prices and waning demand, investors have demanded the world’s biggest mining companies slash spending on new mines and return more cash to shareholders.

Producers will cut spending on projects and exploration by $20 billion this year, according to estimates from Macquarie Group Ltd., as they rein in growth plans amid waning prices. Last month, Glencore trimmed its spending for 2015 to a range of $6.5 billion to $6.8 billion from an earlier target of $7.9 billion.

Net debt dropped 15 percent to $30.5 billion, Glencore said. The company booked $847 million of impairment charges on platinum, iron ore and oil assets for the year.

Glencore completed the $29 billion acquisition of Xstrata Plc in 2013 to add coal, copper, zinc and nickel mines to its trading empire.

Its approach to Rio Tinto about a possible merger was rebuffed by its larger rival in October. That effectively barred it from bidding for six months under U.K. takeover rules. Rio last month reported a 9 percent decline in underlying profit for 2014 and announced a plan to buy back $2 billion of shares.

Eoin Treacy's view -

Miners have spent a great deal of money developing new supply which is increasingly reaching market. Unfortunately the demand growth forecasts this investment was made under are not panning out. 



This section continues in the Subscriber's Area. Back to top
February 23 2015

Commentary by Eoin Treacy

Interesting charts

February 13 2015

Commentary by Eoin Treacy

A Cynical Ukraine Deal That Just Might Work

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

The more important ambiguity, however, concerns sealing the border between Russia and the separatist-held areas of Donetsk and Luhansk. Thursday's agreement says that Ukrainian border guards should resume control of the frontier. This is a rare win for the Ukrainian side, and vital, because as long as there is no functioning Russian-rebel border, the separatist-held areas are in effect a frozen conflict zone. Only with Ukraine's border sealed can there be any hope for stability in the country.

Unfortunately, though, in a clear concession to Putin, the agreement turns re-establishing the border into a process that will take at least until the end of the year, after the separatists have consented, the two regions have held elections, and Ukraine has adopted a new constitution. Until then, Russia may continue to supply the rebels with weapons and troops as needed, until it gets what it wants from the government in Kiev.

As frustrating as this loaded process must be to Poroshenko, he and his European supporters must press ahead in the hope that Ukraine’s border can be resurrected. Whether Ukrainian forces keep or lose control of Debaltseve in the coming days won’t determine the success or failure of the agreement. But if Ukraine can ultimately control its eastern border and regain stability, it will have a chance -- with help from the International Monetary Fund's new $17.5 billion support program -- to restore its wrecked and bankrupt economy.

 

Eoin Treacy's view -

Just how Ukraine can secure a border with Russia when it will lack a clear supply line across separatist-held territory remains a question that has not been answered. The result is that this agreement gives Russia most of what it was looking for without any clear indication that discipline can be enforced on separatists. 

The Russian stock market retested its 2008 low late last year and a reversionary rally is currently underway. Despite the reasonably favourable technical picture this remains a high risk environment subject to political whim. 

 



This section continues in the Subscriber's Area. Back to top
January 28 2015

Commentary by Eoin Treacy

Email of the day on Caterpillar earnings

I've attached below the transcript of CAT's conference call following its latest earnings report-I believe the company is a good bellwether for the global economy. A bit depressing, but does give you a good picture of slow growth worldwide.  Note how Chairman expects stronger dollar & how that will hurt US manufacturing.  Also note how CAT expects that there might be a quarter or 2 delay in a slowdown of their sales (they'll work off their inventory first which will hit profits right away).  Company has cautious view on mining and expects flat oil & gas prices for 2015.

Eoin Treacy's view -

As a globally diversified company with operations in power systems, construction and resources Caterpillar is heavily influenced by both the extraction and construction sectors. The sharp declines in oil, iron-ore and copper represent significant headwinds for the company’s customers who have been cutting back on spending plans. Since investment in energy projects in particular represents a significant source of income for the company the outlook is likely to remain uncertain for the foreseeable future as spending on new projects is cancelled. 



This section continues in the Subscriber's Area. Back to top
January 23 2015

Commentary by Eoin Treacy

Review of the FTSE 350

Eoin Treacy's view -

The ECB’s massive QE program will put pressure on the BoE to delay any plans it may have had to raise short term interest rates. Along with its own easy monetary policy, the prospect of recovering demand on mainland Europe should be a positive for the UK’s economy and it may also be subject to additional capital flows since not all the money created by the ECB will stay inside the Eurozone. 

I thought it might be an opportune time to look at the FTSE 350 since its constituents may be among the beneficiaries of ECB largesse. The Index has surged over the last two weeks to retest its peak and a while some consolidation is possible in the current area a sustained move below 3500 would be required to question medium-term scope for additional upside. 

I clicked through the constituents of the FTSE 350 this morning and also created a section for the FTSE All Share REIT Index in the Chart Library. Here is a link to an Excel sheet of the FTSE350’s constituents ranked by sector then by market cap. 
Among Autonomies:

In the banking sector HSBC (Est P/E 10.65, DY 5.27%) has firmed in the region of 600p. It is now testing the 200-day MA and a sustained move below 600p would be required to question potential for additional upside.  

 



This section continues in the Subscriber's Area. Back to top
January 21 2015

Commentary by Eoin Treacy

BHP Billiton cuts US shale oil rigs by 40% amid sliding price

Thanks to a subscriber for this article from The Guardian which may be of interest. Here is a section: 

BHP said on Wednesday it would reduce the number of rigs from 26 to 16 by the end of the June in response to weaker oil prices. However, shale volumes were still forecast to grow by approximately 50 percent during the period.

“In petroleum, we have moved quickly in response to lower prices and will reduce the number of rigs we operate in our onshore US business by approximately 40% by the end of this financial year,” chief executive Andrew Mackenzie said.

“The revised drilling programme will benefit from significant improvements in drilling and completions efficiency.”

Mackenzie said while the firm’s drilling operations would focus on its Black Hawk field in Texas, “we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production”.

 

Eoin Treacy's view -

Energy companies are aggressively cutting back on investments in additional supply as prices fall but production from existing wells continues to flow. The constant need for new drilling, associated with the swift peaking of unconventional wells, means that the supply response of related drillers is likely to be swifter than might have otherwise been the case. This may bring forward the point at which the market returns to balance but some evidence of short covering will be required before we can conclude that demand is returning to dominance. 



This section continues in the Subscriber's Area. Back to top
January 19 2015

Commentary by Eoin Treacy

Email of the day on total ETF holdings of gold

I remember seeing a chart in a comment of the day of total gold holdings in GLD (or maybe it was all physical Gold ETFs combined)

Eoin Treacy's view -

Thank you for this question. Considering how much of an influence ETFs have on the gold market it is reasonable to monitor their holdings as a barometer of investment demand. You can find the chart for the Total Known ETF Holdings of hold in the Chart Library by using a keyword in the search such as “holdings” or with the ticker ETFGTOTL. It can also be found in Commodity Indices section 

Gold has now posted a failed downside break from its $1200 - $1400 trading range and is currently rallying towards the upper boundary. ETF holdings increased last week but more will be needed to signal renewed investment demand beyond the short term. 

 



This section continues in the Subscriber's Area. Back to top
January 14 2015

Commentary by Eoin Treacy

Copper breakdown

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

As the price falls, miners are now coming under greater scrutiny. It’s not yet a panic. By and large copper miners have enjoyed a healthy profit margin with copper over $3/lb and around $2.70/lb – if quite a bit lower – few market observers see massive issues for miners at this point. That would require a much deeper and persistent decline in the copper price.

But the falling price is starting to bite, at least a little, and there is smoke on the horizon. As others, BMO Research notes in a recent commodities overview that at $2.80/lb copper, more than 90% of miners have lesser basic cash costs (BMO’s C1). Yet add more expenses and consider miners according to BMO’s C3 cash costs and the field shrinks to 75%. The C1 midpoint, for reference, is about $1.50/lb.

So for now the copper miners are relatively safe. The spectre of widespread mine shutdowns and project delays or cancellations along with painful writedowns is not yet clearly on the horizon at recent sub-$3/lb copper prices. That would take much lower prices.

Speaking with Reuters Robert Edwards, CRU consultant on mining costs, pegged $5,000/tonne (or about $2.30/lb) as being very uncomfortable for miners. At that point pressure to close down money-losing mines and delay projects would mount.

Likewise, copper prices would have to persist in the mid-$2/lb range for several years to force major writedowns, BMO Research says. “Unlike the precious metals sector, most of the copper producers’ reserves are calculated at prices at or below spot (averaging US$2.65/lb, ranging from US$1.60/lb to US$3.30/lb), so copper prices would have to remain below US$2.65/lb for three years to warrant a notable revision.”

 

Eoin Treacy's view -

The above section throws into sharp relief just how much of a decline in prices would be necessary to force mines to shut down. The low price of oil may reduce production costs even further. A meeting I had with a Beijing based project manager at the International Copper Association Asia in December highlighted the fact that the Chinese government considers aluminium a more important industry than copper. 

The number of people employed in aluminium production far outweighs that of copper and is one of the reasons aluminium is still used as a conductor in China.  Chinese copper demand will increase as copper prices decline but as building permits slow, demand growth forecasts for the metal may have to be revised downwards  

 



This section continues in the Subscriber's Area. Back to top
January 14 2015

Commentary by Eoin Treacy

2014 in the Rearview Mirror; 2015 as Cool as the Other Side of the Pillow

Thanks to a subscriber for this report from H.C.Wainwright & Co focusing on emerging gold miners. Here is a section: 

Highlights: We anticipate a number of coverage companies with a focus on gold to continue forward in 2015 irrespective of volatility in the gold markets. Of note, we anticipate Pretivm Resources to be in a position to make a construction decision at the high-grade Brucejack project in 2H15. Looking into Nevada, Gold Standard is striving to further expand the Railroad-Pinion project as well as upgrade components of the deposit to higher resource categories. Allied Nevada Gold is striving to improve operations at the Hycroft Mine which has the potential to improve cash flow in 2015. Pershing Gold has a goal of completing a Preliminary Economic Assessment (PEA) at the Relief Canyon project, which could allow the company to make a production decision shortly afterwards. Brazil Resources continues working not only on its multiple gold projects in central Brazil but also is making plans to pursue a spin-out of the Rea uranium project into a separate public company. Vista Gold plans on a number of optimization studies at the Mount Todd project in Australia with an eye on final environmental permits in hand by the end of 2015.

In our opinion, the key to success in 2015 is fairly basic for each company although dissimilar goals have been set forth. Each management team should not over promise either on the timeline or scope of what can be accomplished in 2015. While we have seen a modest rebound in the gold market since fall 2014, the overall climate does not warrant nor reward overreaching endeavors. Our advice to any gold company is to dedicate time and efforts toward more efficient and long-term enhancements to individual projects while keeping a tight budget. The companies which can deliver better operating results in a cost effective manner could see a positive reception from the market.

 

Eoin Treacy's view -

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

The falling price of oil in tandem with the relatively steady performance of gold is generally positive for gold miners provided they can control costs in other parts of their businesses. The sector was one of the worst performers for two consecutive years with the result that individual miners are now being judged on their individual merits. 

There is considerable variation in the performance gold miners and those that pay a dividend have tended to outperform.



This section continues in the Subscriber's Area. Back to top
January 13 2015

Commentary by Eoin Treacy

Copper Falls for Fifth Day, Extending Drop to Lowest Since 2009

This article by Joe Deaux and Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

Copper fell to the lowest in more than five years on speculation that cheaper energy costs will encourage mining companies to increase production.

Crude oil in New York traded below $45 a barrel today and has plunged about 50 percent in the past year as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. The decline will help cut costs to produce and transport metals, according to Natixis SA.

“OPEC is sticking to the plan of continued production, which is driving oil lower,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “That’s seemingly driving the cost of production lower for copper, which was already seen as being in surplus.”

 

Eoin Treacy's view -

Energy represents a major factor in the cost of production for just about every commodity from grain to industrial metals. Falling oil and natural gas prices have contributed to lower costs for miners and allowed marginal production to survive at lower prices than many might once have expected. This reduced the price at which a tightening of supply due to lower prices might occur for at least some commodities. 



This section continues in the Subscriber's Area. Back to top
January 09 2015

Commentary by Eoin Treacy

Bank of America Sees Norilsk as 2015 Standout: Russia Overnight

This article by Halia Pavliva and Elena Popina for Bloomberg may be of interest to subscribers. Here is a section:

The weaker ruble has driven inflation to the highest in more than five years while at the same time helping some commodity exporters that make sales abroad while covering their costs in the local currency. Nickel prices may rise 18 percent on average this year, according to Bloomberg Intelligence.

Norilsk pays half its earnings before interest, taxes, depreciation and amortization as dividend, plus a special payout for 2015, according to Bank of America’s research report dated Jan. 5. Analysts also cited its exposure to nickel and palladium as well as an “attractive valuation” as reasons they like the stock. The London-traded shares trade at 5.5 times projected 12- month earnings, less than half the average of 16 global peers, data compiled by Bloomberg show.

“Investors are focusing on non state-run companies that benefit from a weaker ruble, demonstrate strong cash flow and pay dividends,” Slava Smolyaninov, the chief strategist at UralSib Financial Corp. in Moscow, said by phone Monday. “The idea is that they can avoid the sanctions risk that way.”

 

Eoin Treacy's view -

It is open to question whether one really needs to get involved in Russia considering the geopolitical risk attached to the current administration. Falling oil prices have been an enormous benefit for many Asian countries but couldn’t be worse for countries like Russia or Venezuela. The Ruble has bounced from its lows but we do not yet have conclusive evidence of bottoming while the threat of an additional geopolitical deterioration remains non trivial.



This section continues in the Subscriber's Area. Back to top
January 07 2015

Commentary by Eoin Treacy

Email of the day on gold, oil and shorting opportunities

I'm finding the current moves in the dollar versus gold to be fascinating. Usually, if the dollar is going up, gold goes down in dollar terms (almost as if gold is a currency, hmm). Right now, both are going up, which of course means gold is really going up in non-USD currencies... suggesting that demand is quite strong.

I'm short again, market-wise... shorted QQQ this morning... so many of the big stocks have made lower highs and lower lows (AAPL, CAT....) and others, (F, SBUX, DE) have 1 or the other. The QQQ now has both. Even the transports (IYT) look toppy to me. Of course the price action will tell...

Lol, this morning oil had a 5 hour rally, which the bobbing heads on TV claim is a bottom... of course it's dropped 1.60 in the past hour or so. Reducing drilling plans for next year does not shut down the rigs currently completing wells (rig count is still not dropping - it will, but these things take a lot of time). Short term, everything still points to increasing supply in the next few months. 

As always, your comments would be greatly appreciated :)
Hope all is well...

 

Eoin Treacy's view -

Thank you for your kind words and this informative email. In an environment where almost every central bank, with the notable exception of the Fed, is increasing supply of fiat currency, the relative attraction of gold tends to be burnished. In many respects deflation is a more bullish factor for gold than inflation since it is less likely to have to compete with higher yielding assets.

For example, while gold experienced a deep decline in US Dollar terms over the last few years it has been confined to a range when redenominated to Yen which has been among the weakest currencies. While gold is holding steady relative to weak currencies it will a more convincing bullish catalyst to reignite medium-term demand dominance against the US Dollar. 
 



This section continues in the Subscriber's Area. Back to top
January 06 2015

Commentary by Eoin Treacy

Commodities Outlook 2015

Thanks to a subscriber for this report dated December 15th from Deutsche Bank which may be of interest. Here is a section: 

The fundamentals of copper do not mirror that of oil. In copper, there is no technological breakthrough which has opened up vast new resources, therefore copper should not suffer the same fall in pricing as that of oil. The fallout from oil has however impacted the overall sentiment towards commodities. However, copper remains a well-supplied market, and a lower oil price in combination with weaker producer currencies will lower the marginal cost support level, which we now estimate at USD5,800/t.

We continue to forecast a surplus market in copper for 2015E and 2016E, which in our view will see prices grind lower. However, we have cut the magnitude of the surpluses in both 2014 and 2015E by 200kt over the course of the year. The big increase in mined supply growth that we had previously forecast has been eroded by the latest round of downgrades to company guidance. Although we forecasts a more substantial surplus in 2016, we think risks are skewed to the downside, given the poor industry track record in delivering growth.

 

Eoin Treacy's view -

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

Energy represents a significant cost for mining companies and has been a major contributor to the commodity price inflation witnessed over the last decade. One might expect lower energy prices to be a benefit for mining companies and they are. However the hard reality is this only helps marginal producers to survive longer and therefore prolong the supply surplus.

Oil prices are accelerating lower so energy costs for mining operations have halved since the summer. This has contributed to the recent weakness in the industrial metal prices. The LME Metals Index broke downwards to new three-year lows this week and a clear upward dynamic would be required to check potential for additional weakness. 

 



This section continues in the Subscriber's Area. Back to top
December 30 2014

Commentary by Eoin Treacy

Iron Ore in Longest Streak of Gains Since July on China Stimulus

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

The steel-making ingredient is set for the biggest annual loss in at least five years as BHP Billiton Ltd., Rio Tinto Group and Vale SA expanded output. Gripped by a property downturn and excess capacity, China is set to grow 7.4 percent this year, the slowest expansion since 1990. To support growth, the central bank will broaden the definition of a deposit in 2015, boosting the lending capacity of Chinese banks.

Iron ore received support “after the PBOC changed its savings deposit definitions, which effectively increases funds available for commercial bank lending,” Melinda Moore, a London-based analyst at Standard Bank Plc, said before today’s price data. China will probably scrap housing purchase limits next year, adding to positive sentiment, she said in a note.

 

Eoin Treacy's view -

The decline in iron-ore prices has lost momentum somewhat over the last month. However a rally of more than $10 will be required to question the consistency of the medium-term decline. The four-day rally suggests that a reversionary move, back up towards the still declining 200-day MA, is increasingly likely.  



This section continues in the Subscriber's Area. Back to top
December 29 2014

Commentary by Eoin Treacy

Copper Drops to Four-Year Low in London on Slowing China Growth

This article by Joe Deaux and Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

China’s industrial profits fell the most in more than two years last month, according to National Bureau of Statistics data published last week. A private report scheduled for later this week is expected to show manufacturing in the country contracted. The London Metal Exchange resumed trading today after a two-day holiday.

“The international picture hasn’t been great, the growth story out of Asia is not robust,” Timothy Evans, the chief market strategist at Long Leaf Trading Group Inc. in Chicago, said in a telephone interview. “It’s amazing how copper so accurately predicts what economic activity will look like globally.”

Eoin Treacy's view -

This morning’s two-second bear raid on copper highlights just how active automated programs remain in the commodity markets. From a medium-term perspective the large banks are selling off their warehouses and closing trading operations but open interest in the front month of Comex copper is at five year highs. This suggests that while big investment banks are exiting the market, their place is being taken by private trading houses and automated programs. This leaves the market more susceptible to intraday volatility and temporary price swings.

 



This section continues in the Subscriber's Area. Back to top
December 23 2014

Commentary by Eoin Treacy

The Commodity Manual

Thanks to a subscriber for this report from Morgan Stanley. Here is a section on the cattle market: 

Cattle on feed data partially vindicates last week’s stampede. Cattle markets locked limit-down early in the week as participants squared positions ahead of Friday’s Cattle on Feed report in the face of weakening slaughter data and concerns over potentially improving seasonal feeder cattle supply. The feeder cattle contract, which has outperformed live cattle by 1100 basis points YTD, lost 4% in the first three days of the week before recovering slightly on Friday. Live cattle faced a similar, though shallower decline, ending the week down less than 1% WoW. Friday’s data largely justified the bearish move, with Dec 1 feedlot inventories rising 1.4% YoY vs consensus expectations of a 1.2% increase. Some may read this report as more bearish for live cattle than for feeders, as an 11.1% decline in marketings YoY (vs consensus expectations of just a 9.8% decline) indicated continued weakness in slaughter demand. Meanwhile placements down 4% YoY (vs consensus predictions of a 3.4% decline) could be read as a sign that feeder supply remains challenged. However, we see the weakness in placements as signaling poor demand from feedlots rather than supply constraints. Average placement weights set a 5+ year high in Nov, signaling that ranchers are still holding back cattle to raise them to higher weights, artificially inflating prices. With high feeder cattle prices keeping feedlot margins under pressure and slaughter demand prospects weakening, feeder cattle prices may need to weaken further relative to live cattle to increase the flow of feeder cattle onto feed as winter reduces grazing options.

Eoin Treacy's view -

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

Cattle prices have been among the best performing commodity contracts this year. Part of the reason for this was that the 2013 surge in grain and feed prices advanced the slaughter schedule resulting in a smaller herd and an inability to increase supply in 2014. Against this background demand has been relatively stable. 

A look at a long-term chart of cattle pricing highlights its cyclical nature. What has been different about this move has been its size and longevity which can at least be partially explained by rising feed and energy costs as well increasing demand from the global middle class. 

 



This section continues in the Subscriber's Area. Back to top
December 17 2014

Commentary by Eoin Treacy

Ruble Rebounds on Central Bank Stability Steps as Sberbank Soars

This article by Ksenia Galouchko and Lyubov Pronina for Bloomberg may be of interest to subscribers. Here is a section: 

“Authorities made a combined effort, giving strong signals to the market that they are doing anything it takes to stem the ruble rout and turn things around,” Bernd Berg, a London-based emerging-market strategist at Societe Generale SA, said in e- mailed comments. “As a result the ruble is gaining strongly.”

Russian lenders and companies are concerned about coming foreign-currency debt payments, central bank First Deputy Governor Ksenia Yudaeva said in an e-mailed statement today. The measures are intended to balance supply and demand to help stabilize the ruble rate as soon as possible, she said.

 

Eoin Treacy's view -

Yesterday’s action had a climactic feel to it and today’s rebound suggests that the central bank’s interest hike to 17% is gaining some traction. However if yesterday’s low is to hold beyond the next few weeks and months some bullish catalysts will need to fall into place for Russia. Among these would be a firmer oil price, easing of sanctions or a de-escalation of military tensions in Ukraine.



This section continues in the Subscriber's Area. Back to top
December 16 2014

Commentary by Eoin Treacy

Global Metals Playbook: 2015 Outlook

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

Metal’s flagship has got upside: Copper’s price has come under pressure late in the year, reflecting the energy sector sell-off and a perceived short-term metal surplus. Weaker, but the price remains well above its long-term average, and above the industry’s 90th percentile. Robust support of its value comes mainly from two drivers: China’s overwhelming dependence on imports (70% of supply); and the fickle nature of copper’s complex supply chain (mine supply; concentrates; scrap). Unlike other commodities, copper’s mine supply growth never quite matched demand growth during the Super Cycle, a condition that is unlikely to change over the medium term – underpinning our bullish price outlook.

Why so bearish? Consensus view: copper’s trade will now report persistent surpluses. Yes, current signals point to adequate supply: inventories are rising; key merchant premia are soft; backwardation may just reflect concentrated LME positions. Elsewhere, concentrate flows are adequate (TC/RCs are high); scrap flows are expanding. We acknowledge these bear signals. We’re just not convinced by the mine supply growth story. Low-risk re-rating of Escondida output over the past two years was actually unusual. To expect short-term green/brownfield deployments to proceed without disruptions at a lower price level (assuming unchanged demand growth) ignores the history of this industry.

Projects to watch: Key mine supply growth drivers to watch include Las Bambas, Toromocho, Sentinel, Cerro Verde; track Codelco’s ability to fund growth to >2Mtpa; Indonesia’s exports remain at risk, politically; in 2016, Escondida may de-rate again on lower grades; Rio Tinto has pared Kennecott’s supply outlook. We expect ongoing supply disappointments, simply because it is a feature of the industry.

 

Eoin Treacy's view -

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

There are a lot of moving parts to the commodity sector but the biggest change by far to the economics of production has been the falling oil price. We do not yet know at what level prices will eventually stabilise but the fact remains energy costs have fallen almost 50% in six months. Considering how important energy costs are for miners, this move will improve the average cost of production and prolong the ability of marginal producers to increase supply.



This section continues in the Subscriber's Area. Back to top
December 16 2014

Commentary by Eoin Treacy

Norway Krone Drops to Parity With Sweden, First Time Since 2000

This bulletin by Paul Dobson for Bloomberg may be of interest to subscribers. Here is a section: 

NOK/SEK -2.2% to 0.9992, having fallen 5.8% so far this year.
* Norway’s krone is worst-performing major currency in 2014, having dropped more than 20% versus USD
* USD/NOK +1.5% today to 7.5989, reached 7.6091, strongest level since 2003
* NOTE: Sweden Readies Arsenal of Measures to End Deflation

 

Eoin Treacy's view -

As a major energy exporter Norway has not been immune from the effects of the falling price of oil. However considering the fact that it has one of the world’s largest sovereign wealth funds and standards of governance on par with anywhere in the world, one might conclude that the indiscriminate selling of commodity currencies has fallen disproportionately on the Nordic nation. 



This section continues in the Subscriber's Area. Back to top
December 15 2014

Commentary by Eoin Treacy

Ethiopia Agriculture ministry rolls out specialized phone service for farmers

This article for GizMag may be of interest to subscribers. Here is a section: 

Populous Ethiopia has one of the fastest growing GDPs on the continent after years of famine and civil war. The nation now has one of the largest "agricultural extension" systems in the world, after major powers such as China and India. These days it is a broad term but generally it means the educating farmers on how to apply scientific research and new farming methods. The nation has some 60,000 agricultural extension officers. The 8028 phone service is a new component of that. Farmers can request targeted information via SMS or Interactive Voice Response. The project, still in its pilot phase, began in July and according to a government source has already had calls from some three million farmers. It is run and operated by government ministries and the national telco and it was created by the Ethiopian Agricultural Transformation Agency (ATA). The Economist reported last year that Ethiopia lags behind its neighbors in terms of cell phone penetration; only 25 percent of its 90 million people use cell phones compared with the regional average of 70 percent.

"Farmers can 'pull' practical, real-time advice available in their regional language by calling 8028 as often as they like," says Ato Khalid Bomba, Chief Executive Officer of ATA. "The hotline administrator can 'push' customized content (such as in cases of drought, pest and disease) to callers based on crop, geographic or demographic data captured when farmers first register to use the system." Given the dozens of languages spoken, targeted information remains important, though the system is only operating in some half dozen of the more than 60 regions in Ethiopia at this point. It’s estimated that currently the 90 service lines get close to 1375 phone calls each hour.

 

Eoin Treacy's view -

Africa has not been spared from the pressure coming to bear on commodity producers with currencies and stock markets pulling back. However when one contrasts the improving governance and positive demographics of Africa compared to the deterioration in somewhere like Russia, the current period of underperformance represents a potential entry opportunity when signs of bottoming emerge.



This section continues in the Subscriber's Area. Back to top
December 12 2014

Commentary by Eoin Treacy

Email of the day on targets

Would be interested to know whether - using your behavioral chart analysis approach - it is possible to even begin to predict how low iron ore prices might go 

Eoin Treacy's view -

Thank you for a topical question. Estimating how high or low prices might move can only begin with the understanding that any conclusion is at best a guess. Regardless of what method one uses no one definitively knows at what level prices will find support. What behavioural technical analysis will help with is analysing the price action so that you will be able to recognise a bottom when you see it. 

“A consistent trend is a trend in motion” has been an adage at The Chart Seminar for decades. Provided the trend remains consistent we can conclude that it will proceed as it has been doing. Let’s look at iron-ore prices and ask whether the trend is consistent?

 



This section continues in the Subscriber's Area. Back to top
December 12 2014

Commentary by Eoin Treacy

December 09 2014

Commentary by Eoin Treacy

Pretium Resources

Thanks to a subscriber for this note from Cowen & Company which may be of interest. Here is a section: 

Zijin Mining Group has agreed to make a strategic investment in PVG, which, upon closing, will make Zijin a 9.9% owner of PVG's outstanding shares. Upon closing of the transaction, Zijin will own approximately 12.84MM PVG shares; PVG will receive gross proceeds of C$80.87MM.

Pretium intends to use the proceeds from the Offering to fund capital expenditures including the procurement of long-lead items and camp infrastructure. In November, PVG announced that AMEC had been awarded EPCM services for Brucejack. ¦ Permitting continues to move through the 180-day Environmental Assessment application period, which commenced on August 13, 2014. Provincial and Federal reviews remain coordinated. The company continues to expect receipt of permits in 1H15. Once permits are received, conditional on a positive production decision, the company plans to initiate construction in 1H15.

The offering is scheduled to close on or about January 16, 2015, subject to regulatory approvals and approvals from the Chinese government. Zijin will be entitled to nominate one person to the PVG Board, and will have a pre-emptive right to participate in any of PVG's future equity financings to maintain its approximately 9.9% interest.

 

Eoin Treacy's view -

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

Zijin’s investment in Pretium highlights the fact that Chinese buyers are still in the market to secure promising resources following major price declines. Over the last decade there have been plenty of examples of this type of investment timing. From a supply and demand perspective, the entry of buyers of distressed companies represents a change from the environment that has prevailed over the last year; when the majority of gold mining shares fell to historic lows relative to the gold price. 



This section continues in the Subscriber's Area. Back to top
December 03 2014

Commentary by Eoin Treacy

December 02 2014

Commentary by Eoin Treacy

Gold miners in trouble Hambro/Raw

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

One has to add though that the previous speaker, Peter Boockvar of the US’s Lindsey Group, was more positive on current prospects for the gold price pointing to the continuing scale of central bank money printing, despite the US Fed’s withdrawal; the Fed’s worries about dollar strength impacting the US economy; the symbolism of the Swiss gold referendum, despite the ultimate low vote, the loosening of import restrictions by the Indian government and with his comment that demand for physical gold is off the charts. He predicted that the gold price has bottomed – but warned that he also said that a year ago too!

But back to Evy Hambro’s update since his last Mines & Money presentation two years ago. He commented that the gold mining sector faces huge challenges with cash flows for most having fallen dramatically, which means that there are ongoing strictures on the sector in repaying the vast debt levels built up when they were being pushed into, in retrospect, debilitating hugely expensive new mine developments and expansion programmes. They also dropped grades which was part of the reason for the ever ongoing cost pressures they found themselves under when the gold price started falling three years ago. 

Some of the cost pressures have indeed been addressed and there have been non-core asset sales to try and mitigate some of the debt problems, although given that some have been at low valuations which may provide some great opportunities for perhaps more flexible junior and mid-tier purchasers, they will probably not have helped much in terms of debt reductions. 

 

Eoin Treacy's view -

Gold miners have been underperforming the gold price and the wider market for years as a result of the issues outlined in the above paragraphs. Declining ore grades, a dearth of new discoveries and rising costs have all taken their toll while the advent of ETFs has sapped a major source of demand for gold shares.  

The NYSE Arca Gold BUGS Index fell to a new low relative to the gold price in November, emphasising just how deep the crisis is for the sector. 

 



This section continues in the Subscriber's Area. Back to top
December 01 2014

Commentary by Eoin Treacy

Email of the day on BHP Billiton and Australian monetary policy

Today's audio was very thought provoking.  Please keep up the good work.

Your audio made me realize I have been too sentimental with some of my investments in particular I have kept a modest holding in BHP.  BHP will survive and prosper - especially with the three big economies in this region of Japan, China and India.  However investment prospects look more attractive elsewhere in particular the new economy.

The RBA should lower the OCR next Tuesday.  Will they wait for more data?  This opportunistic timing pre-Christmas should compel them to go sooner rather than later. Once the RBA starts lowering the cash rate it will not stop at a single 1/4 point drop.  They could easily lower rates by 1% over the next 9 - 12 months.  Of course I have no special information on RBA monetary policy however I did make a good living many years ago pre-empting RBA rate moves.

Thank you again for the excellent commentary in today's Audio.

 

Eoin Treacy's view -

Thank you for your kind words. There are some big new items in the pipeline with regard to BHP Billiton’s demerger and Glencore’s potential acquisition of Rio Tinto both of which have the potential to be market moving events. At least in BHP’s case the rump of long life assets with established mines will carry less risk than those spun off and the company’s title as the only miner that is an S&P Europe 350 Dividend Aristocrat is likely to remain intact. 

The share bounced from a new low today and potential for a reversionary rally has increased. 

This note from Alliance Bernstein kindly forwarded by a subscriber may be of interest with regard to the RBA’s intentions. Here is a section:

 



This section continues in the Subscriber's Area. Back to top
December 01 2014

Commentary by Eoin Treacy

Email of the day on the Friday review of copper and other large movers:

Eoin, the steep reactions in these charts appear to offer opportunities, whether buying energy shares or shorting airlines. Your thoughts?

Eoin Treacy's view -

“Acceleration is a trending ending but of undetermined duration” has long been the definition of Type-1 trend ending as taught at The Chart Seminar, so yes these extreme moves increase potential for reversions toward the mean and potentially medium-term bottoming and topping activity.



This section continues in the Subscriber's Area. Back to top
November 28 2014

Commentary by Eoin Treacy

Copper Falls to 8-Month Low on Concern Oil Slump Will Cut Costs

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

Mining is an energy-intensive industry and lower oil costs have a deflationary impact on producers, according to Macquarie Group Ltd. Copper also declined as a strike was set to end at Peru’s Antamina mine, the world’s sixth-largest copper mine.

“Whatever positive connotations lower energy might have for global growth, the extent and pace of the decline in oil seems the more worrying factor for the moment,” RBC Capital Markets Ltd. said in a note.

 

Eoin Treacy's view -

Shale gas and oil are gamechangers for the energy sector has been a refrain here at FullerTreacyMoney since 2007. Just how much of a gamechanger is quickly coming into focus. Oil is by far the most globally significant commodity because of its utility, portability and energy intensity. Increasing global supply prompted by the high price environment represent a problem for traditional producers. Additionally, rising energy prices were a substantial component in the rising cost of producing just about all commodities. 

Falling energy prices improve the economics of mining operations, allowing greater production. However, in a falling price environment this is not a positive factor. The medium-term result of falling energy prices will be to encourage economic growth and therefore demand but prices could easily fall further before a rebalancing is achieved. 

 



This section continues in the Subscriber's Area. Back to top
November 26 2014

Commentary by Eoin Treacy

Shorting Chickens Becomes Hot Trade in Stock Market

This article by Megan Durisin and Shruti Date Singh for Bloomberg may be of interest to subscribers. Here is a section: 

With higher chicken prices and lower feed costs, the industry has been “operating under the most advantageous conditions possible,” Francesco Pellegrino, a New York-based analyst for Sidoti & Co LLC, who recommends buying Sanderson Farms shares, said in a telephone interview yesterday. He doesn’t cover Pilgrim’s Pride. Short interest has risen because investors are questioning how much longer “peak” conditions can persist, he said.

Whole chickens sold by farmers in Georgia, the biggest producing state, rose 9.4 percent this year to an all-time high of $1.14 a pound, which has held through much of November. A retail gauge of composite wholesale-chicken prices has climbed 24 percent this year to average 90.404 cents a pound in October, USDA data show.

Chicken production will climb 3 percent next year to an all-time high of 39.206 billion pounds, the USDA forecasts.

That’s at least 65 percent higher than estimated beef or pork output. A USDA index of chicken-feed costs was 24 percent lower in September than a year earlier as American farmers collect record corn and soybean crops.

Eoin Treacy's view -

While there is no futures contract for chicken we do have the price of boneless chicken breast in the Chart Library Library. Prices have been volatile but a progression of higher reaction lows is evident since 2008 and a sustained move below 180 would be required to question medium-term potential for continued higher to lateral ranging. 



This section continues in the Subscriber's Area. Back to top
November 21 2014

Commentary by Eoin Treacy

Email of the day on the outlook for 2015

Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

Eoin Treacy's view -

Thank you for your kind words and your question. This is a topic we cover almost daily in the written commentary and the audio but it is a good time to summarise our views. 

Let’s ruminate for a moment though on the timing of your question. Generally speaking, the last six weeks of the year is given over to thinking about the possibility of a Santa Claus rally and people don’t generally look at the outlook for the next year until the last week of December or the first week of January. It made headlines during the week that Goldman Sachs had released its prognostication for the coming year, which may have prompted your email. However I believe it is worth considering that the stock market is a discounting mechanism and as a bull market progresses we tend to want to discount cash-flows from increasingly further into the future. It is a measure of how strong the market has been over the last month that investors are already planning for next year. Five consecutive weeks to the upside suggest some consolidation is increasingly likely.

 



This section continues in the Subscriber's Area. Back to top
November 20 2014

Commentary by Eoin Treacy

Email of the day on the iron-ore price

The Iron Ore price in The Chart Library doesn't seem to be updating past November 3rd. Has Bloomberg changed something? It seems a bit of Murphy's Law as the Iron Ore price has been slumping further of late!

Eoin Treacy's view -

Thank you for continuing to highlight the iron-ore price. One of the primary reasons we are having such difficulties with providing a reliable price for the commodity is because it is not freely traded. Following some consultation with Bloomberg I have updated the price once more and will monitor it daily to ensure it continues to update. 

Iron-ore remains in a consistent medium-term downtrend. Major investment in new supply has resulted in the three major producers ramping up supply just as demand peaked. Mines cannot simply be closed because prices have fallen since some revenue is better than no revenue and debt needs to be repaid. This is similar to the conditions that resulted in the triple waterfall crash of resources shares during the early 1980s and the greatest pressure falls on higher cost producers. 

 



This section continues in the Subscriber's Area. Back to top
November 18 2014

Commentary by Eoin Treacy

Uranium Climbs to Highest Since January 2013 Amid Utility Demand

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

Demand from utilities is driving prices higher after uranium entered a bull market in September amid a labor strike at Cameco Corp.’s McArthur River operation in Canada, the world’s biggest mine for the fuel. Kyushu Electric Power Co. this month received local approval for reactors at its Sendai power station to resume operations, clearing the way for the first nuclear plants in Japan to restart as soon as early 2015.

While uranium for immediate delivery is in demand through January, there’s also been a rise in buying interest for distribution of supplies later in 2015, Ux said. It has recorded 22 transactions for 3.8 million pounds this month.

Uranium and nuclear energy is on a “more positive trajectory with a lot of upside to come,” John Borshoff, the chief executive officer of Paladin Energy Ltd., said on a conference call Nov. 13. Global production cuts of 6 million to 8 million pounds are starting to take effect, he said.

 

Eoin Treacy's view -

Increasing tensions with Russia have reduced supplies from that country while the restarting of at least some of Japan’s reactors represents some good news from the demand side of the equation. 

Uranium prices rallied in August to break the almost four-year progression of lower rally highs and continue to extend the rebound. Until recently the majority of related shares have been slow to respond but as metal prices extend the breakout investor interest in the sector is increasing once more. 

The following charts are in log scale in order to highlight the base formation characteristics without focusing on the depth of the prior declines. 

 



This section continues in the Subscriber's Area. Back to top
November 17 2014

Commentary by Eoin Treacy

Peg worth its weight in gold: a detailed analysis of the Swiss gold referendum

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

On 30 November, the Swiss will vote in a referendum to amend the constitutional mandate of the Swiss National Bank (SNB) with respect to its gold reserves. The proposal is that

the SNB never sells any gold reserves once acquired,
the SNB stores all its gold reserves on Swiss territory,
the SNB holds at least 20% of its official reserve assets in the form of gold.

Gold reserves would have to be repatriated within two years of the referendum, while the SNB would be given five years to align its gold reserves to the 20% minimum requirement. 

The background to the proposal is concern among conservative observers that the SNB’s reduction in its gold reserves in recent years has constituted a plundering of the nation’s intergenerational wealth and economic status. The rationale behind a gold reserve ratio is the perceived association of gold backed currencies with price stability: the exogenously constrained supply of gold is hoped will restrain the central bank in its creation of fiat money.

Opponents of the proposal have warned against the constraints that would be placed on the SNB¡¦s monetary policy instruments. While the camps appear to have reached stalemate over the fundamental objectives of monetary policy, opponents of the “gold initiative” have argued that gold reserves in the central bank’s balance sheet yield no distributable interest and are excessively vulnerable to price shocks. Two-thirds of SNB profits have traditionally been distributed to the cantons and are an important source of regular income.

Eoin Treacy's view -

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

There are a number of moving parts to this argument not least because of Switzerland’s long history as a strong currency regime. The Austrian school of economics, which has a suspicious attitude to the inflationary bias of modern central banking is particularly strong among a certain segment of the Swiss electorate so there is a real possibility that at least some of the above measures will be adopted. Repatriating Swiss gold has obvious merit from a security perspective for example. However the other questions impose limits on the central bank’s ability to influence the currency market which would be a headwind for exporters. As a result they will be more difficult to pass.  

 



This section continues in the Subscriber's Area. Back to top
November 07 2014

Commentary by Eoin Treacy

Gold mining companies making losses

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

Around 50% of the world’s gold mining companies are now making losses. Close to 100% of platinum mining companies are. Silver miners may be faring better, but as the bulk of silver is produced as a by-product of base metal mining we do not think silver production itself will be hurt by lower prices. Scrap sales of gold are down as sellers are seeing prices too low, so market supply overall is falling.

Eoin Treacy's view -

Miners have done a bad job of containing costs in a declining gold price environment. Issues relating to free cash flow and offering investors the leverage to the gold price they desire are well known and fully priced in. If half of all miners are now selling gold at below their all-in cost, the situation is unsustainable beyond the short term. Some will go bust, but the stronger performers will subsequently be left in a better position to compete. 

The NYSE Arca Gold Bugs Index / Gold price ratio hit a new all-time low this week.  Gold shares are now trading below where they traded relative to gold before the bull market started. 

 



This section continues in the Subscriber's Area. Back to top
November 03 2014

Commentary by Eoin Treacy

Email of the day on lithium

LITHIUM SUPPLY/DEMAND PROJECTIONS 2015 & Beyond. Please advise whether You or the Collective have some figures/feedback on the above subject? Thanks, and regards

Eoin Treacy's view -

Thank you for this question which the Collective may have some additional input on. What is clear from a brief perusal of the shares in the lithium miners section of the Chart Library is that there are some clear winners and losers. This suggests that the more efficient producers are prospering and those with a longer lead time to production are struggling. We might also conclude that supply is ample at this stage.



This section continues in the Subscriber's Area. Back to top
November 03 2014

Commentary by Eoin Treacy

Email of the day on iron-ore price charts

The China Iron ore chart isn't updating. It’s stuck on Sept 30th has Bloomberg changed the code number? 

Eoin Treacy's view -

Thank you for this email which highlights just how difficult it is to get reliable data for iron ore. Part of the reason for this is because a large proportion of the global market is represented by relatively long-term contracts. 

This is the third time in as many months that Bloomberg has stopped updating a price for what is a globally significant commodity. I have now replaced the China 62% fines price with the new index that rebases the old index to Qingdao port prices. This can be found in the Metals section of the Chart Library.
 

 



This section continues in the Subscriber's Area. Back to top
October 28 2014

Commentary by Eoin Treacy

Email of the day on commodity market correlations

As an occasional medium term commodity investor (Long or short) and hopefully aware of the importance of risk management in regard to correlation between commodity markets do you have any advice or data as to historical correlation between individual commodity sectors i.e. corn to wheat to soybeans (especially the grains) also correlation between the major country stock indices? I appreciate that at times we may read too much into this and often (apparent) correlation may be just random coincidence but in some cases the correlation is obviously relatively recurring and a useful guide in balancing risk and positioning sizes.

Back to my question; Do you have any reference data and/or views on market correlation?

Eoin Treacy's view -

Thank you for this question and the Collective may have additional feedback. We do not have any specific data sets on inter market commodity correlations but I found this report on commodity market correlations which may be of interest.

Here are some additional thoughts: 



This section continues in the Subscriber's Area. Back to top
October 27 2014

Commentary by Eoin Treacy

Email of the day on resources company shares

Hello I bought Vale and BHP Billiton, but reading this article quoting Goldman Sachs on copper has me worried, could you please comment? May it is too early to buy miners? : 

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. The article you attached appears to assume there will be a property and investment crash in China. This is still an open question but it seems reasonably clear that infrastructure investment is not going to just stop. Recently announced easing measures suggest the Chinese administration is well aware of the risks. 



This section continues in the Subscriber's Area. Back to top
October 17 2014

Commentary by Eoin Treacy

Ebola and iron ore price put London Mining on life support

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

But London Mining was already on the downward path before the ebola outbreak struck its host country and exacerbated the situation, although no-one at the mine site appears to have fallen victim to the disease. Mining and upgrading 31% tenor iron ore to compete with those like Rio Tinto, Vale and BHP who can dig the stuff out of the ground at around 60% just became less and less economic as iron ore prices slumped. The company’s share price on London’s AIM market fell from comfortably over £4 in April 2011, down to around 4 pence and now trading is suspended. 

The company had been trying to find an investor to plug a financing gap which meant it had been running out of money to maintain operations. Indeed only a week ago the company’s CEO, Graeme Hossie commented that there was little or no value remaining in the company’s shares.

Now it is down to the PwC administrators to try and salvage something from the wreckage.  According to an announcement confirming the appointment of administrators, Russel Downs, joint administrator and PwC partner said "The collapse in iron ore prices and the resulting impacts on this business have been very dramatic and our focus is to ensure that a buyer is found for the Marampa Mine operations given it is such an important part of the Sierra Leone economy. We are liaising with key stakeholders and asking for a short window of forbearance as we look to conclude a transaction." 

 

Eoin Treacy's view -

This is exactly the kind of news the major iron-ore miners were looking for when they decided to flood the market with supply in order to overcome competition from higher cost producers. Cliffs Natural Resources announcing a $6 billion write down today on its iron-ore assets is an additional sign that their strategy is having the desired effect. They will now be waiting for similar news from Chinese iron-ore miners before attempting to stabilise the market. 

Despite the fact that the ebola scare has little to do with London Mining’s demise, the emotionality of the debate on how best to deal with the disease represents an additional impediment to securing an additional line of credit. 

This article from the Wall Street Journal, kindly forwarded by a subscriber, highlights how political correctness appears to be overcoming common sense in terms of the USA’s response to containing the disease in West Africa. I’ve even seen news commentary to the effect that it is racist to suggest a travel ban from the countries most badly affected. As this article from The Economist highlights, the disease has nothing to do with race and everything to do with limiting new exposures. 

 



This section continues in the Subscriber's Area. Back to top
October 15 2014

Commentary by Eoin Treacy

Gold Set for Longest Rally in Two Months on Revived Haven Buying

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

“We are seeing some renewed interest in gold,” George Gero, a New-York based precious-metals strategist at RBC Capital Markets LLC, said in a telephone interview. Investors are “responding to weak economic numbers and the slump in the U.S. equities,” he said.

Eoin Treacy's view -

Gold posted an upside weekly key reversal last week from the lower side of its more than yearlong range and is following through to the upside this week. A clear downward dynamic would be required to question potential for an additional reversionary rally. 

 



This section continues in the Subscriber's Area. Back to top
October 14 2014

Commentary by Eoin Treacy

Giant Battery Unit Aims at Wind Storage Holy Grail

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

Electric-car battery prices already have fallen by 50 percent since 2010 to about $500 per kilowatt hour, and “by drawing on auto-battery technology, battery makers may also be able to supply storage batteries at a lower price,” Citigroup said in a Sept. 25 report. Tesla Chairman Elon Musk said in July that battery packs for electric cars will drop to $100 in the next 10 years. The Tehachapi batteries are supplied by LG Chem Ltd. and are the same type used in General Motors’ Volt.

The Southern California Edison project is part of a push for more wind and solar power in the state, among the sunniest in the U.S. A third of California’s electricity must come from renewable sources by 2020, and mandates also require that the three biggest investor-owned utilities store 1,325 megawatts by 2024. California already has more than 12,000 wind turbines, the most of any state, according to the American Wind Energy Association.

Eoin Treacy's view -

Many of the efficiencies claimed by battery manufacturers have been achieved via scale in manufacturing rather than technological leaps. Tesla’s gigafactory takes this process further by introducing additional economies of scale to further reduce the price of lithium batteries. So far ground breaking innovation has been more difficult to achieve than previously envisaged by companies but one benefit of building utility sized batteries is that power to weight ratios which are so important for car batteries are no longer a consideration.  

 



This section continues in the Subscriber's Area. Back to top
October 13 2014

Commentary by Eoin Treacy

Corn, Soybeans Gain as Wet Weather Seen Adding to Harvest Delays

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

“It’s going to be pretty wet and soggy through the eastern belt this week,” Brian Grete, editor of the Professional Farmers of America newsletter in Cedar Falls, Iowa, said in a telephone interview. With projections for record U.S. corn and soybean output, “it’s going to be a long harvest season.

There’s no doubt about that. It’s just a matter of how many temporary slowdowns we have.”

Corn futures for December delivery rose 1.9 percent to $3.4025 a bushel at 10:19 a.m. on the Chicago Board of Trade. The most-active contract rose 3.3 percent last week, the largest advance since Aug. 15.

Soybean futures for November delivery gained 0.9 percent to $9.3075 a bushel. Trading was 43 percent above the 100-day average for this time of day, data compiled by Bloomberg show.

Eoin Treacy's view -

A lot of good crop news is already in the price for corn and soybeans which have experienced accelerated declines over the last couple of months to return to test multi-year lows. This is an important area of temporary support and with record yields priced in, any news that might reduce the extremely positive outlook may help prices unwind deep oversold conditions relative to their respective 200-day MAs. 



This section continues in the Subscriber's Area. Back to top
October 09 2014

Commentary by Eoin Treacy

Long Run Crop Price Outlook: $6 Corn and $13 Soybeans

I met Michael Devlin from Cere Partners at last week’s Contrary Opinion Forum and had a long chat about the merits of farmland in a diversified portfolio. Here was kind enough to send me their outlook for corn and soybeans which they farm in Indiana. Here is a section: 

Brazil has been expanding its soybean acreage for 20 years, but $16.00 soybeans made the economics attractive on even marginal ground, which may not yet be fully conditioned to neutralize the naturally high acidity. Consequently, we witnessed the second biggest expansion of Brazilian soybean acreage ever. (See Exhibit 3) Furthermore, $7.50 corn made not only 1st-crop corn attractive in Southern Brazil, but also 2nd-crop or safrinha corn. In some parts of the world, including major parts of Brazil, farmers are often able to get 2 crops by planting a soybean variety with a shorter growing season, and then immediately planting the second crop (often corn, cotton, or sorghum). "is acreage is able to rotate annually to whichever crop offers the best economics. But second-crop corn is risky. Farmers are gambling that the rainy season will continue until the corn is mature. However, at $7.50 or even $6.00 the economics have been compelling and in Brazil there was a major expansion of second crop corn in 2012 and 2013. For the first time ever, second crop corn (safrinha means “little crop” in Portuguese) was bigger than first crop corn, comprising 56% of the total production. 

Where $7.50 corn (and $16.50 soybeans) signals an expansion of acreage, Ceres believes $4.50 corn (more precisely $10 soybeans) signals a reduction of acreage. Mato Grosso State in West Central Brazil grows approximately 10% of the global soybean crop. But Mato Grosso soybeans must be hauled more than 1,000 miles by truck over poor roads to get to market. Net of transportation costs, the price farmers receive for soybeans is significantly below the price quoted in Chicago.

Currently the “basis” on bids for 2014 soybeans is reportedly ~$3.00 under Chicago. So $10 soybeans in Chicago (the ~price equivalent to $4.50 corn) translates into $7 soybeans in Mato Grosso. But $7 is the breakeven price for the average producer in the state (See Exhibit 4) according to IMEA, the Mato Grosso Institute for Agricultural Economics. Put another way, half of the soybean producers in Mato Grosso, comprising ~5% of worldwide soybean production, would be below breakeven in a $4.50 corn/$10 soybean environment. $10 soybeans might not have an immediate elect on soybean acreage because Brazilian farmers typically buy inputs and market their crops in advance. So it could take $4.50 corn/$10 soybeans lasting a full year for soybean acreage to drop significantly.

Additionally, at $4.50 corn, we would anticipate much less corn acreage in the second crop. Based on crop budgets from IMEA it will cost ~$2.50 to grow a bushel of second crop corn in 2014. "is breakeven at ~$5.00 corn given that IMEA estimates it costs another $2.50 a bushel to truck corn from the interior to the major grain exporting ports. Second crop corn would at best be a breakeven proposition at $4.50-$5.00. We would see some acreage planted as farmers need a cover crop, but it will be significantly less than we saw in 2013.

 

Eoin Treacy's view -

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

Farmers respond to higher prices by planting more in an effort to capture as much benefit as possible. Inevitably supply increases. In the period from 2006 relatively high historical prices have been sustained for lengthy periods of time. The weak Dollar, high cost of energy, inclement weather, expensive nutrients and rising labour costs all contributed to this situation but the effect has been that supply increased nonetheless. 



This section continues in the Subscriber's Area. Back to top
September 26 2014

Commentary by Eoin Treacy

Commodity currencies

Eoin Treacy's view -

The decline in the Continuous Commodity Index represents a challenge for commodity producers. What has been a constantly growing source of income has morphed into a much more volatile price environment which has been deteriorating of late. As investors take stock of the implications for the respective countries, pressure has come to bear on their currencies not least because of the relative strength of the US economy and the Dollar. 



This section continues in the Subscriber's Area. Back to top