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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. 



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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.



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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. 
 



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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. 

 



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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.  



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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.

 



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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. 

 



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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.



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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.



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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. 



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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.



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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?

 



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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. 



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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. 

 



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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:

 



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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.



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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. 

 



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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. 



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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.

 



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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. 

 



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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. 

 



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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.  

 



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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. 

 



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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.



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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.
 

 



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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: 



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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. 



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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. 

 



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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. 

 



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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.  

 



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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. 



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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. 



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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. 



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September 23 2014

Commentary by Eoin Treacy

China economic restructuring cuts demand for iron ore

This article quoting Fortescue Metals may be of interest to subscribers. Here is a section: 

Power said that while a slump in iron ore prices has pushed out some high-cost producers from the market, supply was "not being cut back fast enough to reduce the overhang in the market".

"The response by high-cost producers ... has been much slower than certainly what I thought and what most in the industry thought," he said. 

"But inevitably that needs to happen ... so the iron ore price will be low for long enough for that supply to exit the market. That's an economic reality." 

While stockpiles at China's ports remain high, Power said steel mills were running with relatively low stockpiles. 

Power said Fortescue's delivered cost into China is less than $50 a tonne.

"Our focus is on making sure that our production is as efficient and low cost as possible," he said.

 

Eoin Treacy's view -

The iron-ore oligarchy of Vale, BHP Billiton and Rio Tinto have been boosting supply even as prices have been declining. You don’t do that if you wish to sustain high prices. Rather they are attempting to drive high cost producers out of business in an effort to maintain market share and future pricing power. 

Iron ore prices dropped below $80 yesterday for the first time since 2009 and a break in this year’s progression of lower rally highs will be required to signal a return to demand dominance beyond potential for some short term steadying. 

 



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September 19 2014

Commentary by Eoin Treacy

Gold Falls on Equity Rally as Silver Slumps to Four-Year Low

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

Holdings in exchange-traded funds backed by gold slumped to a five-year low as price volatility plunged to the lowest since 2010. The metal has dropped 13 percent from this year’s high as theU.S. economy gained traction amid prospects for rising interest rates and muted inflation.

“We are seeing a rush for equities,” Tom Winmill, who helps manage about $220 million of assets in Walpole, New Hampshire, for Midas Funds, said in a telephone interview. “Many investors don’t see the need for a safe haven as the dollar has gained strength.”

Eoin Treacy's view -

There has been understandable speculation about where the money would come from to fund the Alibaba IPO and the conspicuous declines in precious metal markets, coinciding with the shares launch, represent a tempting candidate. However, the recent strength of the Dollar, improving governance in India where desire of a safe haven is easing and slower Chinese economic growth are all also factors in the recent weakness of precious metals. 



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September 16 2014

Commentary by Eoin Treacy

Copper Soars Most in 13 Months as Trading Stops on China

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

The surge triggered a “stop spike event,” and trading halted for 10 seconds with all transactions remaining valid, Damon Leavell, a spokesman for Chicago-based CME Group Inc. (CME:US), the Comex owner, said in a telephone interview. On Dec. 24, some deals were revised following an error after prices jumped as much as 4.2 percent.

Eoin Treacy's view -

Copper has not made headlines like this for quite some time. The price broke below the psychological $3 area in March as the massive Mongolian Oyu Tolgoi mine came on line but bounced back as the Chinese inventory fraud scandal broke. Today’s limit move suggests short covering and comes in the region of the progression of higher reaction lows evident since March. A sustained move below $3.05 would be required to question medium-term scope for continued higher to lateral ranging.



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September 15 2014

Commentary by Eoin Treacy

Sugar Has Longest Slump This Year Amid Expanding Global Glut

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

Anticipation of a large world crop and supplies are putting pressure on prices,” Boyd Cruel, a senior market analyst at Vision Financial Markets in Chicago, said in a telephone interview. “The market has also been weighed down by expectations for large deliveries” from Thailand, he said.

Raw sugar for March delivery fell 0.3 percent to settle at 16.27 cents a pound at 1:07 p.m. on ICE Futures U.S. in New York. The contract had a ninth straight loss, the longest streak since Dec. 9.

Traders in Thailand, the second-biggest exporter, plan to ship sugar for delivery against New York futures for the first time since 2012. About 625,000 tons probably will be supplied against the October contract, equal to 16 percent of this year’s surplus, according to a Bloomberg survey of analysts last month.

India, the second-largest producer, may export 3 million tons in the season starting next month, the National Federation of Cooperative Sugar Factories said today.

Money mangers more than doubled their bets on price declines last week, U.S. government data show. The net-short position reached 31,873 futures and options contracts as of Sept. 9, compared with 14,043 a week earlier.

 

Eoin Treacy's view -

The inclement weather than prevailed between 2011 and 2013 sent soft commodity prices higher and acted as an incentive for farmers to plant more. With supply disruptions easing the outlook for yields has improved and prices have fallen. This has been particularly evident in New York sugar prices which hit a new four- year low last week. 



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September 12 2014

Commentary by Eoin Treacy

India's love affair with gold may be over

This article by Rajendra Jadhav & Indulal PM for Reuters may be of interest to subscribers. Here is a section: 

A one-quarter drop in local gold prices over the past year has shaken the confidence of Indians in the precious metal as a store of value and dented demand in the world's second-biggest buyer.

The main beneficiary has been Indian stocks, which have been clocking up records on hopes that Prime Minister Narendra Modi can deliver on the promise of "better days" ahead that swept him to power in May's general election.

Beyond short-term sentiment, a major push by Modi for every household to get a bank account, better education and living standards, and falling inflation expectations, could herald a more secular change in investing habits.

"The attachment of Indians to gold will remain," said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives and Commodities Ltd., referring to gold's culturally embedded role in dowry gifts or decorating Hindu temples.

"But as the banking network expands and literacy rises, people in rural areas will explore other investment products like mutual funds or bank deposits. The mindset is slowly changing."

 

Eoin Treacy's view -

One could argue that having gold as an anchor in a portfolio is justified given its long history as a store of value but favouring it above all other alternatives is generally a sign of distrust in the financial system and value of fiat currency. Indian consumers have had more to fear from currency debauchment than most; with the Rupee susceptible to regular devaluations since independence. However as optimism grows that Prime Minister Modi can deliver on progressively higher standards of living for India’s burgeoning population, it is an open question as to whether India will represent such a potent demand growth region for gold in future. 



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September 09 2014

Commentary by Eoin Treacy

Email of the day on uranium mining investment vehicles

Your comment on the Uranium price is of interest to me. Prior to Fukishima , Geiger Counter was very much in vogue. Then came the collapse. I wondered what the view was now concerning the above and perhaps suggest other companies listed in London that have positive chart patterns .    

Eoin Treacy's view -

Thank you for this question which others may have an interest in. Geiger Counter generally runs a concentrated portfolio of high potential explorers and developers although its current holdings are peppered by some larger uranium names.  

I highlighted it as a potentially interesting fund offering exposure to the uranium market on August 22nd

 



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September 05 2014

Commentary by Eoin Treacy

Back to school, miners league table

Thanks to a subscriber for this interesting report from Deutsche Bank assessing the outlook for European listed diversified miners. Here is a section:

Vedanta's planned group restructuring was completed in 2H13 calendar, with the court clearance of Sterlite's merger into Sesa Goa. This was an important step in simplifying the group's structure, reducing the scope for future conflict between majority and minority shareholders. Post the merger of Sterlite and Sesa, we see the group's buyout of the Indian government's stakes in HZL and Balco as critical for maximising cash fungibility across all group entities and expect progress on this in the next 12 months. Beyond this, management has set three near-term priorities for improvement for the group: an iron ore mining re-start, bauxite sourcing in India, and Copper Zambia development. We expect all of these areas to show improvement in 2015. Buy. 

Valuation 
Our price target is set at a 5% discount to our DCF valuation, to reflect some of  the inherent delivery risks within Vedanta's growth plan. Our DCF valuation (10.9% WACC - cost of equity 13%, post-tax cost of debt 6.1% and target gearing 30%: RFR 4.0%, ERP 6%)is calculated using life of mine cash flow analysis. 

Risks 
Key downside risks include lower metal prices than we expect, sustained strength in the Indian rupee, higher import duties, slower execution of projects and the slow or noreceipt of government permits for the alternative bauxite mines in Orissa and the Lanjigarh refinery expansion programme. The company has a large capex program which may require further debt funding or capital raising, either at the Sterlite or Vedanta level.

Eoin Treacy's view -

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

The new Indian administration under Narendra Modi has lofty ambitions. Urbanisation, export oriented manufacturing and chipping away at the country’s infrastructure deficit are all goals the new government is working towards. Greater per capita consumption of just about all industrial and energy commodities goes hand in hand with these objectives and India needs a concerted strategy for sourcing the resources it needs to fuel growth. 



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September 03 2014

Commentary by Eoin Treacy

Uranium poised to enter bull market

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

Uranium is poised to enter a bull market amid tightening supply as producers shut mines and delay projects, more than three years after the Fukushima nuclear disaster in Japan sent prices lower.

The atomic fuel has advanced as much as 18 percent from a May 20 low of $28 a pound, according to data from Ux Consulting Co. in Roswell, Georgia, which provides research on the nuclear industry. Prices closed 0.5 percent higher at $32.65 yesterday and have averaged $31.80 in 2014.

Eoin Treacy's view -

The uranium market still has to recover from the post Fukushima backlash that saw reactors shuttered in Japan and even France retiring some of its older plants. The news flow has been somewhat more positive recently with Australia agreeing to supply Indian reactors. Indian demand represents a significant growth trajectory not least because of the new Modi led government’s development focus. 



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August 29 2014

Commentary by Eoin Treacy

PGMs: Rhodium The Come Back Kid

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

Alongside subdued supply growth, the PGM sector enjoys strong demand side trends. Indeed palladium and rhodium are closely tied to the fast growing gasoline markets of the US and China. Increased gasoline penetration in Europe will also skew upside risks to palladium demand in the event of an eventual recovery in European demand. However, of the group, China is set to be the major driver of tightening physical fundamentals across the PGM sector and specifically palladium and rhodium. This will be driven by efforts to balance the growth in car ownership with combating the country’s pollution problem.

We estimate that the combination of low car penetration compared to other more developed markets and increasing emission standards will mean China will be the largest single source of increased autocat demand for palladium, rhodium and even platinum between now and the end of the decade. Figure 6 shows that between 2013 and 2020 global palladium demand growth for autocats will rise 2,166,000 ounces of which China will represent just under 1,000,000 or 44%. The equivalent figures for platinum and rhodium are 23% and 30% respectively.

While inventories are high across the PGM complex, market deficits over the coming years alongside increased ETF inflows will push inventory to consumption ratios down to critically low levels. Last month in the Commodities Quarterly report we attempted to establish which markets would experience significant inventory drawdown in response to market deficits and at what point inventories would hit levels that could trigger a more rapid appreciation in PGM prices. We showed that platinum inventories would only fall to 2007 levels by the end of the decade, but depending on ETF flows and how tightly this metal is held, the physical squeeze could occur as soon as next year. For palladium, inventories were estimated to drop to 2001 levels by 2018, but if ETF flows continued then physical tightness could start to take hold in 2016. A similar timeframe was seen for the rhodium market.

However, we find that ETF flows have been relatively modest into the rhodium market up until now. Indeed compared to market size and above ground inventories, there remains considerable room for more inflows if the platinum and palladium markets are a guide, Figure 9. Indeed the rapid price gains in palladium will increase the attractiveness of rhodium added to which rhodium is the most effective PGM at treating NOx emissions.

Eoin Treacy's view -

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

The platinum group metals (PGMs) have been subject to a great deal of variation in their performance over the last couple of years as the mixed picture on global economic growth, excess supply, South African labour relations and the unfolding Russian situation have come to bear on the respective fundamentals of the metals. 



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August 28 2014

Commentary by Eoin Treacy

Zinc, nickel prices to move dramatically higher

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

“Firmer potash and sulphur prices and the beginning of a recovery in uranium also contributed to the gain,” she noted. “Spot uranium prices have increased to US$31 per pound in late August alongside stepped-up Chinese buying, after bottoming at a mere US$28 in June.

Meanwhile, Mohr observed that the base metals rally in July was led by zinc with prices remaining firm at US$1.07 in late August, which is normally a time of summer doldrums. “Commodity funds and investors have bid up zinc prices, anticipating tightening supplies over the next three-four years—with mine supplies not keeping the pace with demand growth,” she said.

 

Eoin Treacy's view -

The sharp pullbacks currently underway among the major iron-ore miners tend to obscure the fact that the Continuous Commodity Index found support this week in the region of the psychological 500 area. Additional upside follow through next week would suggest at least a reversionary rally back up towards the MA is underway. 



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August 28 2014

Commentary by Eoin Treacy

Pretium Resources Inc.

Thanks to a subscriber for this informative report from GMP following a tour of the mine attended by a number of other analysts. Here is a section:   

An asset like Brucejack is a rarity today – high-grade, manageable capex and in a good location. We believe this will make Pretium of interest to existing mid/large-cap producers. The company also, however, seems to be preparing the way to build the project on its own. Financing would likely include a range of sources including equity, debt, and metal pre-sales and/or streams. We expect this to become clearer by year-end or the end of 1Q15 at the latest.

Where we HAVE changed our opinion is that we are now more comfortable with the geostatistically based approach for resource estimation. This comes from our direct observations of coarse electrum as streaks in narrow veinlets that are not part of the throughgoing structures which we focused on last year. Those structures ARE there and we expect that a large part of the gold to be mined will come from them, and that ultimately a mine plan will encompass both selective mining of such zones AND bulk mining of the type envisaged in the DFS. C$12.50 target price represents 0.66x our NAV10% of $16.97 at $1,350 gold. 

 

Eoin Treacy's view -

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

Photos such as that below, kindly forwarded by the same subscriber,  of heavy mineralisation in core samples within a wider high grade gold deposit are what miners’ dream of but it remains an expensive exercise to develop these resources. It will be two years before the mine reaches commercial operation according the above report.



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August 22 2014

Commentary by Eoin Treacy

Email of the day on uranium funds

I found your observations on uranium on the 19th very interesting. What vehicles for investing in this sector do you think might best suit private investors? There doesn't seem to be any ETC or the like - the closest I've come across is the Uranium Participation Corporation. This is a pure play on the Uranium price, but is currently trading at a hefty premium to NAV of about 26%. Many thanks! 

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. There were a considerable number of uranium funds listed when uranium prices were surging higher in 2005 and 2006. Many have since been delisted but there are still a small number that are reasonably liquid. 



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August 21 2014

Commentary by Eoin Treacy

Hormel pork margins to dip, as hog prices plunge

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

However, "pork operating margins are not expected to be as beneficial" in the current quarter, the last of Hormel's fiscal year, group chief executive Jeffrey Ettinger said.

Although pork producers are benefiting from lower feed costs, thanks to weaker corn and soybean prices, lean hog values have tumbled from the record high of 133.80 cents a pound for Chicago's spot futures contract on July 10.

Chicago's current spot lean hog futures contract, October, stood at 91.425 cents a pound on Thursday, down 1.2% on the day and 32% below last month's all-time high.

Futures have been undermined in part by the Russian ban on imports of US agricultural products, but also because of high hog slaughter weights, boosting supplies at a time when the knock-on effects of high retail pork prices are amplifying a seasonal downturn in demand.

"Cash pork markets have been on a downtrend, in part because of seasonality but also because the higher prices have finally been passed on at the retail level," a report from Paragon Economics and Steiner Consulting said.

"Ham prices are significantly lower and how they perform in the next 60 days will likely set the tone for the entire hog complex in the fall months."

 

Eoin Treacy's view -

Lean hog prices gave up their entire advance for the year from early July and returned to test the $80 area which offered support on a number of occasions from 2011. Some steadying in this area is taking place and there is some scope for an unwind of the short-term oversold condition. However, the most likely scenario is for a return to a predominately rangebound environment that prevailed from early 2011. 



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August 19 2014

Commentary by Eoin Treacy

Tony Abbott expected to sign uranium deal with India on visit next month

This article by Daniel Hurst for the Guardian may be of interest to subscribers. Here is a section:

Tony Abbott is expected to sign a deal to sell uranium to India during a visit to the country next month.

The Australian prime minister’s scheduled visit follows the completion of negotiations surrounding arrangements for the export of uranium, according to multiple news reports.

Indian officials convinced their Australian counterparts that the uranium would not be used for nuclear weapons, the Australian Broadcasting Corporation reported on Monday.

The Times of India reported earlier this month that negotiations between the two countries had concluded and the deal was likely to be signed during Abbott’s visit to India in early September.

The Australian government would not confirm the reports on Monday, but the assistant minister for infrastructure, Jamie Briggs, told the ABC it would be a welcome development if true.

 

Eoin Treacy's view -

Despite the fact Australia has the world’s largest deposits of uranium, it has no nuclear power stations and has often had a difficult relationship with its uranium mining sector; with the result that some states and territories permit mining while others don’t. Signing a deal with India for exports is a welcome development for the sector which has been languishing in the aftermath of the Fukushima disaster.

Uranium prices collapsed from their 2007 peak near $140 and, following a relatively brief rally in 2010, extended the downtrend to fresh lows. The recent three-week rally has closed the overextension relative to the 200-day MA but a sustained move above it will be required to begin to suggest a return to demand dominance beyond the short term. 



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August 18 2014

Commentary by Eoin Treacy

Email of the day on gold and silver

Good afternoon you seem to be positive on gold in the medium term, and more cautious on silver: isn't it necessary to see strength in silver to be optimistic on gold, as silver is usually a beta-gold play?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Generally speaking silver acts as a high beta version of gold. This is particularly true in a trending environment but is less of a factor in a range, as is currently the case. 



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August 15 2014

Commentary by Eoin Treacy

Ibovespa Rises as Investors Weigh Presidential Election Outlook

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

“There’s still a lot of doubts regarding Silva’s government program and views, but investors are focusing now on the fact that there are less chances of Rousseff winning,” Guilherme da Nobrega, the chief economist at the brokerage firm Guide Investimentos, said by phone from Sao Paulo. “We’ve got to wait to get a better idea of her proposals to see how good or bad a Silva administration would be for the economy.”

Silva’s party, PSB, will probably appoint her as a presidential candidate after Eduardo Campos died in a plane crash on Aug. 13, newspaper O Estado de S. Paulo reported today, without saying how it got the information. Silva was Campos’s running mate. She came in third in the 2010 presidential election with 19.6 percent of the votes.

Eoin Treacy's view -

Brazil is likely to be a beneficiary of increased geopolitical tension in Europe not least if it results in further sanctions being levied against Russian interests. The potential for a change of government to an administration capable of imposing the reforms required to reignite growth represents an additional cause for optimism. 



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August 08 2014

Commentary by Eoin Treacy

Bull market in cattle 'to last for years'

This article from Agrimoney, dated last week, may be of interest to subscribers. Here is a section:

 

However, the 6.2% drop in placements in June of cattle on for fattening on feedlots, revealed by US Department of Agriculture data, and the particular drop in buy-ins of heavier animals suggest that "mid-term beef supplies will be tighter than expected".

The drop in placements comes against a backdrop of record prices of feeder cattle, those ready for fattening, as feedlots battle for supplies with breeders desperate for livestock to rebuild herds, and exploit the lower feed prices and improved pasture conditions brought by benign US weather.

Indeed, the extent of herd destruction encouraged by the 2012 drought, which extended in the southern Plains ranching areas until early this year, was reflected in separate USDA data showing a 2% drop in US beef heifers in the two years to June 1.

"This implies that herd rebuilding will likely take longer than expected and the market may not see the full effect until at least 2016," Mr Narayanan said.

Eoin Treacy's view -

Feeder Cattle prices had been surging higher but the early July peak is looking increasingly like a penultimate peak, following the loss of uptrend consistency. Prices failed to hold the move to new highs and fell by the limit of $3 today. Considering how overextended prices remain relative to the 200-day MA, mean reversion remains the most likely scenario.  

 

 

 



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August 01 2014

Commentary by Eoin Treacy

Twin Corn Ears Push U.S. Yields to Bin-Busting Crop

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

Crop conditions are the best in a decade for this time of year, government data show, with 75 percent rated good or excellent as of July 27. The USDA probably will boost its production estimate in its monthly crop report on Aug. 12, said The Linn Group, a broker and adviser. The U.S. is the world’s largest grower and exporter.

“There will not be enough storage space for all the extra bushels this fall,” said Roy Huckabay, an executive vice president at The Linn Group in Chicago. He predicted on July 1 that the crop would increase 2.8 percent to 14.314 billion bushels with yields around 170 bushels an acre.

 

Eoin Treacy's view -

Corn prices continue to extend their decline but the pace of the fall has moderated somewhat since early July. A break in the short-term progression of lower rally highs, currently near 380¢, would signal more than a short-term low has been reached. 



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July 31 2014

Commentary by Eoin Treacy

Coffee Gains Most Since April on Brazil Crop Woes; Cotton Sags

This note by Fareeha Ali for Bloomberg may be of interest to subscribers. Here is a section: 

The current crop is severely compromised, and there will be lower production this season because of the drought and premature flowering,” Sterling Smith, specialist at Citi Futures, says in telephone interview.

“It’s impossible for next year’s crop to be bigger than this year’s, and it has sparked increased nervousness in the coffee world”

Eoin Treacy's view -

Arabica Coffee unwound its overbought condition relative to the 200-day MA following its impressive advance earlier this year and found support three weeks ago. A sustained move below $160 would now be required to question medium-term recovery potential.



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July 29 2014

Commentary by Eoin Treacy

Part II - The Tide Is Rolling In

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

As shown in Figure 1 the higher-levered seniors ABX and NEM have been focused on selling non-core assets (and were reportedly in talks to merge and rationalize assets; see our report Barrick/Newmont - Sorting Through The Noise). Meanwhile, AEM and AUY have taken advantage of healthier balance sheets and historically-depressed equity valuations to buy production and expand project pipelines. Looking to 2015, we expect GG to be in the best financial position to engage in M&A. That being said, we see NEM and AUY as having the capacity to make additional purchases, and ABX and KGC being the most challenged.

From a growth perspective, with their existing pipelines, both Agnico and Yamana are now both in a solid growth position after their joint purchase of Osisko – receiving not only operating assets, but both a near-term and longer-term development projects. Both Barrick and Kinross have little to no net growth ahead of them, and what production replacement they have will come at a heavy, up-front capital burden. With Barrick’s high financial leverage, we believe they will need to either delay major projects (Donlin, Goldrush, Turquoise Ridge O/P, Pascua-Lama completion), prioritize, or significantly reduce the initial scope – most likely all three. Like Barrick, Kinross has several large projects (Tasiast expansion, Lobo-Marte) that they need to execute on in order to counter declining existing production, but would face financial challenges.

Despite recent M&A activity, we see the senior gold producers as much better positioned both financially and operationally, to withstand a $1200/oz-$1300/oz gold price environment vs. last year. It is our view that they can now afford to make acquisitions to be built at a later date, and take advantage of low junior miner market valuations.

 

Eoin Treacy's view -

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

The gold mining sector continues to go through a painful period of rationalisation but companies that did not engage in overly profligate spending before gold’s decline are now being rewarded with relative strength in their shares. 

 

 



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July 24 2014

Commentary by Eoin Treacy

Caterpillar Sees No Sign of Mining Upturn as Outlook Misses

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

Mining companies have cut billions of dollars of capital spending amid surplus commodities production and a drop in prices for coal, iron ore and other metals. Caterpillar, which completed a string of mining-related acquisitions when the market was stronger, said today the industry remains “weak” and order levels are still low.

The “mining slump is the No. 1 headwind for Caterpillar,” Matt Arnold, a St. Louis-based analyst with Edward Jones, said by phone. “It won’t last forever, but the question is, how well can the company harness improvement in its other segments in the meantime?”

Caterpillar’s sales of mining machinery through dealers dropped 38 percent in the second quarter, with declines in every region except North America.

 

Eoin Treacy's view -

Miners had little choice but to curtail spending on expansion as commodity prices deteriorated and investors fled to more attractive sectors. The situation has been mitigated by this year’s rally in industrial metal prices and the realisation that tight market conditions can boost the allure of mining companies. Here is a section from an additional article quoted Rio Tinto’s CEO suggesting investors are beginning to worry about how miners are going to replace reserves as their fortunes improve. 

Rio Tinto Group, the world’s second- biggest miner, sees renewed investor appetite for spending as it seeks to balance shareholder returns with capitalizing on growth opportunities from Australia to Peru.

“A year ago the market was talking about returns, returns, returns and stop investing,” Chief Executive Officer Sam Walsh told reporters in Perth today. “Now people are taking a long- term view and recognizing the fact there has to be a balance.”

 

 



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July 21 2014

Commentary by Eoin Treacy

Indonesia ends 6-month ban of metal concentrate exports

This article by Wilda Anmarini may be of interest to subscribers. Here is a section:

However, last week shipments of iron ore, lead and zinc concentrate left the country, after two firms agreed to pay a 20 percent export tax, coal and minerals director general Sukhyar told reporters late on Friday.

"There are two firms that have started to export; Sebuku Iron Lateritic Ores (SILO), and Lumbung Mineral Sentosa," Sukhyar said, adding that SILO had sent two shipments or around 100,000 tonnes of iron ore concentrate and Lumbung had shipped around 8,000 tonnes of lead and zinc concentrate already.

"They finally wanted to pay it," Sukhyar said referring to the escalating tax that has been the subject of a legal dispute involving U.S. miner Newmont Mining Corp.

Silo expected to export 8 million tonnes of Iron ore concentrate a year, while Lumbung should ship 29,000 tonnes a year, he added. Both companies were exporting to China, Sukhyar said.

 

Eoin Treacy's view -

Indonesia’s ban on ore-concentrate exports was one of the primary drivers in nickel’s impressive advance this year. The fact that the ban has been relaxed by the new administration suggests that while Indonesia may now require a greater share in its mineral exports via taxes, that exports will proceed. The projected deficit in the nickel market may ease as a result. 



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July 18 2014

Commentary by Eoin Treacy

Petrobras Said to Seek Contract Extensions at Biggest Fields

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

The licenses include the three biggest producing fields in Brazil - Roncador, Marlim Sul and Marlim - which pumped 27 percent of Brazil’s total oil and natural gas output in May.

Petrobras started in 2012 a program to modernize infrastructure, increase efficiency and reduce operating costs at platforms in the basin to arrest faster-than-expected decline rates in recent years. The company’s overall output has remained stable since 2010 even amid a rapid expansion in the so-called pre-salt region in deeper waters of the South Atlantic.

Petrobras has been producing in Campos Basin since 1977 and its concessions include large areas where it hasn’t done exploration drilling. Petrobras acquired the licenses where it is seeking extensions in 1998 and has full ownership. Campos Basin provides about 70 percent of Brazil’s oil output.

Fields in the Santos Basin pre-salt area hold larger volumes of reserves and are set to surpass the Campos fields in production in the coming years as Petrobras adds platforms.

 

Eoin Treacy's view -

Petrobras has spent a great deal of money in its attempts to develop the pre-salt deep water fields that will eventually make it one of the most globally significant oil exporters. The fact that Brazil derives much of its electricity from hydro and has the world’s most efficient ethanol production and distribution system means that as oil production is ramped up, the country will benefit from increased revenue and growth in the petrochemical sector. 



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July 14 2014

Commentary by Eoin Treacy

Brazilian Real Climbs on Speculation Rousseff Will Lose Election

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

Speculation that Rousseff, who has overseen the slowest growth of any Brazilian president in two decades, is declining in popularity has helped push the real up 6.7 percent this year, the most among 24 emerging-market currencies. Brazil’s 7-1 defeat to Germany in a World Cup semifinal last week may hurt Rousseff’s standing in voter polls, according to Joao Paulo de Gracia Correa, a foreign-exchange trader at Correparti Corretora de Cambio in Curitiba, Brazil.

“Elections are going to be the main focus for investors now, and the real usually advances when Rousseff declines in polls,” de Gracia Correa said in a telephone interview.

A Datafolha poll conducted July 1-2 before Brazil’s World Cup loss to Germany indicated that Rousseff’s support jumped four percentage points to 38 percent following three straight drops this year. The poll of 2,857 people had a margin of error of 2 percentage points.

 

Eoin Treacy's view -

Speculation about the ramifications of Brazil’s failure to win the World Cup on home turf is unsurprisingly dominating headlines. By the time the presidential election’s first round, scheduled for October 5th, comes around, the World Cup is likely to be a distant memory. Dilma Rousseff’s failure to deliver on growth potentially opens up the potential for Aécio Neves, who has a successful record of infrastructure development, to pose a potent threat.  

 



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July 11 2014

Commentary by Eoin Treacy

Crop Forecast Sends Corn Prices to Near Taxpayer Subsidy Trigger

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

The $956.4 billion farm bill was touted as changing the subsidies that watchdog groups called excessive government support for farmers who last year had record profits. A $5 billion annual program to pay farmers regardless of crop price was eliminated, replaced by aid for insurance programs and a so- called Price Loss Coverage program, a vestige of the old subsidies approach that would still be an option for producers.

Booming prices for corn, soybeans, wheat and other commodities has led to less spending on traditional forms of payouts in recent years. Corn growers received $2.7 billion in 2012, down from a peak of $10.1 billion in 2005, according to Environmental Working Group, which tracks farm payments.

Assuming continued high prices, the farm bill was estimated to save $23 billion over 10 years, according to congressional estimates. That isn’t happening.

As surpluses push down prices, annual farm profits are forecast to drop 27 percent to $95.8 billion this year from last year’s record, the government said in February. Revenues from major crops will be $189.4 billion, down 12 percent.

Eoin Treacy's view -

Soft commodities and energy contracts have led declines on the Continuous Commodity Index this week sending it back below the 200-day MA despite the fact that industrial metals have been reasonably steady and precious metals advanced. 



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July 10 2014

Commentary by Eoin Treacy

Comments posted on central bank balance sheet charts

Terrific chart. Can you put it in the library please?

The BoJ appear to be keeping things afloat and rumours abound that they will have to go all in soon or the great experiment in Abemonics will get derailed. The economic stats recently have been less than encouraging...

And

I read that China is printing more money than the US - they have created Renminbi equivalent to 50 bn $ per month over the last six months. What is the graph like if this is added!

Eoin Treacy's view -

Thank you both for these additional comments on yesterday’s composite chart of major central bank balance sheet sizes.

The Bank of Japan has little choice but to proceed with QE, in its efforts to reignite growth and inflation, now that it has embarked on the extraordinary monetary policy route. While QE has had mixed results in achieving economic growth it has been much more successful in inflating asset prices. Loose monetary policy is important for Japan, but Abenomics is likely to succeed or fail based on their success in imposing regulatory and process reform and in controlling energy price inflation.

I have now also added the PBOC Balance Sheet Chart to the Chart Library and updated the total assets chart for the Fed, ECB, BOJ and PBOC. Unfortunately, it is not possible to add this chart to the Chart Library. 



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July 08 2014

Commentary by Eoin Treacy

Sibanye: Can raise $1B at 'the drop of a hat'

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

"We are looking at all platinum assets including what Anglo Platinum may sell," Froneman said, reiterating that he wanted to do a deal this year. He would not be drawn on who else besides Amplats was flagging platinum assets.

Sibanye's management team has a reputation for squeezing profit out of mines nearing the end of their lives and it could potentially fund the purchase by tapping cheap Chinese sources of finance given its connection to investors from the country. 

Froneman formerly ran Gold One where he oversaw its acquisition by a Chinese consortium. Sibanye itself acquired Gold One's Cooke operations in an all-share deal that saw it issue new shares worth 17 percent of its total stock to the Chinese group known as the BCX Consortium. 

Chinese investors open up avenues to cheaper rates of finance than South African companies can normally get, for example through the Chinese Development Bank, but Froneman said he had plenty of options. 

Asked if he could raise, say, $1 billion for a platinum deal, he said he could do so "at the drop of a hat".

But he added that he did not think that any of the assets Sibanye was looking at "are anywhere near" $1 billion. 

Analysts have said the five Rustenburg mines plus its Union mine that Amplats may put on the block could be worth between $1 billion and $2 billion. 

"Since we have made our intention public, all the major investment banks have provided us with funding proposals. And in addition we have the support of our shareholders and in particular the Chinese," he said.

"We generate a lot of free cash ourselves. So it could well be a combination of equity, debt and other instruments. But the bottom line is that everything that is possibly doable in the sector can be financed by ourselves."

 

Eoin Treacy's view -

Sibanye has prospered since being split off from Goldfields not least because they have successfully contained costs and followed through on their commitment to become a high dividend paying South African gold miner.  The company’s commitment to only engage in an acquisition that helps achieve that goal should help moderate investor anxiety about the cost of talking additional mines. 



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July 08 2014

Commentary by Eoin Treacy

Minerals & Energy Commodities Update

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

Spot prices exhibited less volatility in June than they did in May –trading in a narrow range across the month –in contrast to a persistent downward trend since late 2013. In late June, prices for 62% fines edged back above US$95 a tonne (having fallen as low as US$89 a tonne)

Unlike other bulk commodities, imports of iron ore into China have remained strong –increasing by almost 19% in the first five months of the year to 383 million tonnes.
The strong level of exports have seen stockpiles at Chinese ports rise to record levels –at almost 114 million tonnes –albeit the level has remained fairly stable in June.

MySteelResearch had previously estimated that around 40% of stocks were connected to shadow banking-related financing deals, however a more recent estimate by Bank of America-Merrill Lynch suggests steel mills control 70% of current stocks.

Reuters report that some Chinese steel mills are selling future iron ore cargoes (delivered under long term contracts) and purchasing material currently at ports –for which the prices are lower. This trend may have supported the recent (albeit modest) recovery in spot prices.
Lower prices are likely impacting the viability of Chinese ore producers –with estimates that around 80% of Chinese iron ore mines have cash costs at between US$80 and US$90 a tonne (MySteel).

Our forecasts for iron ore prices are unchanged –our hybrid price consists of a weighted combination of spot and contract prices –however the recent weakness in spot prices highlights downside risk. We expect ironore at around US$100 at the end of 2014 and down to US$95 a tonne at the end of 2015.  

 

Eoin Treacy's view -

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

We can assume that Chinese production of iron-ore represents the marginal cost for the global sector. Below $80 and part of China’s mining sector would need to be shuttered. Above $90 and they are still profitable. Quite apart from the fact that major foreign suppliers have better quality ore and long-term contracts, prices are unlikely to fall much below the $80 to $90 area. 



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July 04 2014

Commentary by Eoin Treacy

Rare earths industry teeters as Lynas heads to full ramp-up

This article by Sonali Paul for Reuters appeared in Mineweb. Here is a section: 

"The pressure is on Lynas and Molycorp to demonstrate that rare earths is a viable business," said Dudley Kingsnorth, a rare earths expert at Curtin University in Western Australia, whose forecasts are widely used in the industry.

Lynas now expects to reach its initial output rate target by December at the latest, which should shore up its shaky cash position, its new CEO said in her first interview.

Lynas mines rare earths at Mount Weld in Western Australia and then ships concentrated material in 2.5-tonne bags to Kuantan in Malaysia, where it has built the world's biggest rare earths plant on a 100-hectare site surrounded by other chemical plants and peat swamp forest.

It had hoped to be producing rare earth oxides of lanthanum, cerium, neodymium and praseodymium, used in super magnets for wind turbines, car brakes, batteries for hybrid and electric vehicles, and energy efficient light bulbs by early 2012. 

But more than two years later it has yet to hit a stage one capacity of 11,000 tonnes a year, stalled by opposition to the project on environmental grounds and technical problems. Once it reaches that rate, Lynas will be cash flow positive, CEO Amanda Lacaze, who took the role in June, said on Wednesday.

"We have an opportunity here to take something and be significant in a worldwide sense," Lacaze said. "On the other side, there are a few hurdles or mountains to be climbed or pushed over to get to there."

Lynas is being shored up by the Japanese, who have looked for an alternative supply ever since China held back supplies amid a territorial dispute over the Senkaku Islands in 2010.
Trading house Sojitz Corp and state-run Japan Oil, Gas and Metals National Corp (JOGMEC) provided $225 million in debt for the second stage of its Malaysian plant, which included Sojitz taking 8,500 tonnes of product.

 

Eoin Treacy's view -

Rare earth elements represent strategic resources for a number of companies so developing multiple sources of supply makes sense. However China is jealous of its dominant position. Following the ill-calculated attempt to force high-end manufacturing to relocate and to influence geopolitics, China has flooded the market once more with supply in order to maintain market share. The result has been that nascent rare earth miners racing to get production underway saw their share prices plummet as access to credit became a lot more difficult. I’ve recreated the rare earth miners section from my Favourites in the Chart Library. 



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July 02 2014

Commentary by Eoin Treacy

The China Mini Stimulus Starts To Work

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

The copper market is showing the classic signs of tightness in the near term, with diminishing exchange inventories, widening spreads and high regional premia. However, we think SRB purchases have given the impression of a tighter market than is actually the case. The SRB bought nearly 500kt of metal in January and again in March/April, and has stated that its intention is to increase inventories to 2Mt, which implies a further 400 – 500kt of purchases. Given our view of a cumulative surplus of 1.4Mt, the purchase of c.1Mt certainly goes a long way to “balance” the market and would be supportive of prices.

Our view of price support at USD6,000 – 6,2000/t is based on the 90th percentile of the all-in-cash cost, but if SRB buying behavior continues when prices fall, there is perhaps a further reason to suggest support below USD6,500/t. In our view there are perhaps four key motives for SRB behaviour in supporting prices. The first may be as simple as the expectation of continued strong demand, and the need to stock up when there is perceived value in the metal. However, we expect the main reason is to keep prices at a reasonable level in order to continue incentivizing new production, support domestic production and also to keep a lid on price volatility for China’s downstream consumers, essentially acting as a buffer.

Figure 17 shows the drawdown of exchange stocks, with a con-current increase in China bonded warehouse stocks. The most recent drawdown in exchange stocks has seen bonded warehouse stocks also fall, suggestive of SRB buying. SRB purchases were also timed with sharp falls in the LME price. The current SHFE – LME arbitrage has closed suggesting higher exports in the coming months.

 

Eoin Treacy's view -

I suspect that SRB stands for Strategic Reserve Buying by China which represents a significant potential demand driver and has likely been boosted by the fact that stockpiles were not as large as previously expected. 

I thought that since copper prices continue to bounce from the lower side of their three-year range it might be an opportune time to re-highlight copper mining shares. I have recreated the copper miners section from my Favourites in the Chart Library and the View All Charts function is now also available in these sections. 



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July 01 2014

Commentary by Eoin Treacy

Gold investors pile into equities

This article by Deborah Roy for Bloomberg appeared in today’s Mineweb newsletter. Here is a section:

Gold prices are down 31 percent from an all-time high of $1,923.70 reached in September 2011. Holdings in global ETPs backed by the metal declined more than 47 metric tons this year, after slumping 869 tons in 2013, capping six straight quarters of declines, data compiled by Bloomberg show.

While investors are shunning gold, they’re buying ETPs backed by equities, which added $27 billion in June through June 27 and $44.8 billion in the second quarter, the data compiled by Bloomberg show. The Standard & Poor’s 500 Index of shares is up 6.1 percent this year, touching a record on June 24, while the MSCI All-Country World Index advanced for five straight months.

“The equity market continues to attract money as people expect that the economy will improve further,” Scott Gardner, who helps manage $450 million at Verdmont Capital SA in Panama City, said in a telephone interview. “Gold has risen this year, but it seems that some investors don’t expect the gains to stick.”

Eoin Treacy's view -

Generally speaking equity valuations are no longer cheap but momentum is still a powerfully bullish force. However value investors will be on the lookout for cheap sectors that have the capacity to play catch up. Following a painful process of rationalisation, gold miners have rediscovered the fact that they need to concentrate on making net profits if they wish to attract investor interest. As one of last year’s worst performing asset classes, a worst case scenario was priced into gold mining equities.

The Gold/NYSE Arca Gold BUGS Index ratio retraced its entire bull market advance over the last few years but has firmed in the region of the 2001 lows. Gold prices are reasonably stable above $1200 suggesting gold miners are cheap on a relative basis. 



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July 01 2014

Commentary by Eoin Treacy

Daily iron ore mine closures in China mean Citigroup is bullish

This article by Jasmine Ng appeared in Mineweb and may be of interest to subscribers. Here is a section

Local suppliers in Asia’s largest economy are cutting production even as mills increase steel output on improved margins, according to analyst Ivan Szpakowski. An iron ore mine in China is being shuttered every day, with closures seen in all main producing regions, he said in an interview from Shanghai.

Producers in China, the world’s largest user, face a rising challenge of lower-cost supplies from BHP Billiton Ltd., Fortescue Metals Group Ltd. and Vale SA after the biggest miners in Australia and Brazil expanded output and spurred a global glut. While benchmark prices in China posted the biggest three- month loss since 2012, they rose 2.2 percent in June, the first monthly advance since November.

“We’re one of the most bullish people in the market,” said Szpakowski, reiterating a forecast for prices to average $100 a ton in the fourth quarter and $104 this year. “Imported ore is much cheaper than domestic ore, so the shift in buying has moved to imported ore. That’s supporting imported prices.”

Eoin Treacy's view -

Earlier this year the major iron-ore miners made clear they were willing to tolerate short-term pain in order to re-establish their competitive advantage in the market. The central aim of this strategy has been to drive Chinese miners, dependent on high prices, out of business which now appears to be showing some success.

Iron-ore prices have at least stabilised near $90 over the last couple of weeks but will need to hold this level in order to convince investors the worst is over. 



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June 30 2014

Commentary by Eoin Treacy

Zinc Prices Surge as Supplies Shrink

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

The amount of zinc held in the LME's global warehouse network fell to a 3 1/2 -year low of 674,375 metric tons on Thursday. While the stockpiles increased by 1,900 tons on Friday, the amount of zinc in LME storage is still down 28% this year.

"That decline in stocks is helping to drive zinc higher, no question about it," said Michael Turek, senior director of metals with Newedge in New York. "In the meantime, demand is quite good in the U.S., and Europe isn't the basket case we expected it to be."

Global demand for zinc is likely to grow 5.7% this year to 13.85 million metric tons and expand a further 5.2% in 2015, according to Morgan Stanley analysts.

Zinc traders have been tapping the LME's stockpiles as they grapple with reduced output from the world's mines.

Last year, Glencore PLC shut down the Brunswick and Perseverance mines that produced zinc and lead in eastern Canada. MMG Ltd.'s Century mine in Australia, the world's third-largest open-pit lead-and-zinc mine, is expected to be closed by the end of 2015, as is Vedanta Resources PLC's Lisheen mine in Ireland. Lead and zinc are often found together, and the deposits sometimes contain other metals, such as silver or gold.

 

Eoin Treacy's view -

Zinc prices have been ranging mostly above $1700 since 2010 and have recently rallied back to test the $2200 area which has been an area of resistance since 2012. A growing trend of miners closing operations suggests the $1700 area represents a floor where additional production cuts would be necessitated. Some consolidation in the region of the range highs is a possibility but a sustained move below $2075 would be required to question current scope for continued higher to lateral ranging. 



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June 30 2014

Commentary by Eoin Treacy

Corn Heads for Biggest Decline in Year on Climbing Inventories

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

“Inventories were larger than expected and signal no shortfall in supplies ahead of the harvest this year,” Dale Durchholz, the senior market analyst for AgriVisor LLC in Bloomington, Illinois, said in a telephone interview. “Corn supplies are comfortable.”

Corn futures for December delivery fell 4.5 percent to $4.2725 a bushel at 11:39 a.m. on the Chicago Board of Trade, heading for the biggest decline since June 28, 2013.

Global grain stockpiles, excluding rice, are forecast to climb to a 15-year high by the end of the 2014-2015 season, the London-based International Grains Council said on June 26.
Soybeans Tumble

Soybeans fell to the lowest since January 2012 as the USDA said farmers will plant more than analysts expected.

Seedings will reach an all-time high of 84.839 million acres. Analysts expected 82.213 million acres, according to a Bloomberg survey. The USDA said in March that growers intended to plant 81.493 million.

“Certainly, we were all fearing for a record number, but this was way out of the range of expectations,” Bill Nelson, senior economist at Doane Advisory Services in St. Louis, said in a telephone interview. “We had the wet start to the corn planting season. In the end, that might have encouraged some farmers to switch from earlier intentions into soybeans.”

 

Eoin Treacy's view -

Due to a confluence of factors the commodity complex has experienced a rotation where the metal and energy sectors have returned to outperformance while volatility within softs and agriculture has resulted in a great deal of variability in terms of performance. Grains and beans have come under particular pressure.



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June 27 2014

Commentary by Eoin Treacy

Cattle Drop First Time This Week on Demand Concern; Hogs Gain

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

While supplies remain tight, high prices may spur a slowdown in demand, Chad Henderson, president of Brookfield, Wis.- based Prime Agricultural Consultants Inc., says in a telephone interview

“Even the most bullish markets can’t go up every day. It’s a pause, and the real question as we move forward is what are consumers going to do, and will we see a slowdown in demand?”

Eoin Treacy's view -

Cattle prices are no longer in backwardation across the curve but that is not unusual for this time of year considering how cyclical the slaughter schedule is. Last year’s drought and the high price of feed contributed to the present shortage of both cattle and hogs. The result of this year’s rally is that demand for calves and suckling pigs will have increased as farmers aim to profit from the high prices. Therefore this scenario is unlikely to be an exception to the commodity market adage that “the cure for high prices is high prices.” 



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June 26 2014

Commentary by Eoin Treacy

China Finds $15 Billion of Loans Backed by False Gold Trades

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

The London-based WGC said it was confident that any fraud in China did not affect its overall estimate for gold demand.

The National Audit Office’s report was delivered by its chief, Liu Jiayi, at a National People’s Congress meeting June 24 and posted on the office’s website. The report covers a period beginning in 2012 and doesn’t specify an end date. It doesn’t identify companies or banks.

And 

Local lenders and foreign banks including Standard Chartered Plc, Citigroup Inc. and Standard Bank Group said they are reviewing potential fallout from any lending linked to Qingdao.

The Chinese agency that stockpiles strategic commodities is checking to ensure its copper purchases are free of collateral risks while the customs authorities issued new rules to help prevent goods being pledged multiple times as collateral, people with direct knowledge of these matters said previously.

Of the as much as $160 billion in transactions projected by Goldman, $80 billion may involve gold, $46 billion copper, $13.8 billion iron ore and $10.3 billion soybeans, according to a March 18 report.

 

Eoin Treacy's view -

China’s gold imports represent a major source of demand for the global market. Therefore any threat to this driver is a potential headwind for gold prices. On the other hand, the fact that inventories are $80 billion less than previously anticipated means someone will need to buy in order to reach their desired holding. 

 

 



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June 25 2014

Commentary by Eoin Treacy

Capex about to turn up: The missing link in the US recovery

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

Spending on non-residential structures fell to unusually depressed levels following the financial crisis and has remained weak during this recovery. Similar to residential investment, much of this weakness can be attributed to a need to work through the overbuilding that occurred during the run up to the financial crisis, as structures share of GDP rose rapidly from 2004 through 2008. There are some indications that this excess supply has diminished materially and that pent up demand for non-residential structures should lead to stronger spending going forward. For example, the vacancy rate for office space nationally has declined steadily over the past four years toward historically more normal levels (Chart 18). In addition, in response to the shale energy boom in the US, investment in energy-related structures has been notably strong. This supports the outlook for a pickup in investment in commercial structures.

IPP: Uptrend should continue
Spending on IPP – composed of spending on software, R&D, and entertainment, literary and artistic originals – has displayed a steady uptrend as a share of GDP over the past several decades, which has been relatively impervious to cyclical factors. Recent strength in IPP spending has been driven primarily by the R&D component. IPP spending may also benefit from a shift away from investment in information processing (IP) equipment.

Equipment: IP equipment has been notably weak
Equipment spending as a share of GDP remains well below historical averages for this point of the recovery. In this section we take a more granular look at equipment’s components to analyze the underlying causes of this weakness. We have already determined that transportation equipment is near longer-term averages. We also find that recent contributions to BFI from industrial equipment and the “other” equipment category appear to be in line with longer-term averages. Conversely, IP equipment appears to be the component driving much of the softness in total equipment spending. Spending on IP equipment has been consistently below its longer-term average contribution to overall fixed investment during this recovery (Chart 19). 

Eoin Treacy's view -

The majority of established technology companies rely on corporate spending to boost earnings. The outperformance of the Nasdaq-100 highlights the fact the corporations have been spending on software and other services. The return to outperformance of the industrial sector in 2012 reflects increased spending on machinery and embedded processors. Generally speaking there is a perception that the US recovery is weaker than one might expect but the fact that companies are embarking on increased spending is a sign of confidence. 



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June 25 2014

Commentary by Eoin Treacy

Australia lowers 2015 iron ore price forecast to $94.60/t

This article by James Regan for Reuters may be of interest to subscribers. Here is a section

BREE's forecast iron ore price for 2015 is just above the current price of 93.30 .IO62-CNI=SI, following a 30 percent price drop this year. However, exports in fiscal 2014/15 were forecast to rise 13 percent to 720.7 million tonnes, BREE said, just below its previous estimate.

Jefferies has cut its earnings estimates for iron ore miners by 5-9 percent below consensus between 2014 and 2016, owing to expectations ore prices will continue to weaken as supply swells.

"This tsunami of supply is still rolling in, and supply growth is likely to be substantial until 2016," it said in a client note.

BREE also forecast a sharp dip in metallurgical coal prices to $118.90 a tonne in 2015, well down on its March forecast of $134.60. It slightly increased its forecast for exports to 180.5 million tonnes in 2014/15, just up on a year earlier.

Commissioning of new coal mines has more than offset lost production from ones that have closed, BREE said, but many producers were unprofitable at prevailing prices.

"This demonstrates the business of mining bulk commodities like coal and iron ore is almost exclusively the domain of big producers, which can benefit from their large economies of scale," said Minelife analyst Gavin Wendt in Sydney.

Eoin Treacy's view -

Over the last week iron-ore prices have stabilised near the 2012 low at $90. A short-term oversold condition is evident so even in a bearish scenario there is scope for a bounce from these levels. However investors are probably going to require some evidence of steadying before concluding a meaningful floor has been reached.

Coking Coal prices have fallen even further and are currently trading below their 2008 lows. A sustained move back above the 200-day MA would be required to begin to suggest more than a short-term low has been reached.



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June 20 2014

Commentary by Eoin Treacy

Brazil Highs and Lows

This article by David Biller for Bloomberg offers what might be considered the most common interpretation of Brazil’s potential. Here is a section: 

Critics assert that Brazil has yet to ignite the next stage of growth by reducing the tax burden, the byzantine bureaucracy and the steep tariff wall. These would boost investment, they say, and more flexible labor laws would improve productivity. They want Brazil to shift reliance away from consumption, which along with government spending still accounts for about 85 percent of GDP. Morgan Stanley counts Brazil as a member of its “fragile five” afflicted with high inflation, widening current-account deficits and vulnerable currencies. While the nation’s squad is a 3-to-1 favorite to win the World Cup, the real’s depreciation during Rousseff’s term — the second-worst among the world’s most traded currencies — is a sign investors aren’t betting on Brazil.

Eoin Treacy's view -

The weakness of the Real from 2011 had become a political liability by early this year as the 2008 lows were retested. Since then the Bank of Brazil has indicated it is willing to intervene to support the currency in the region of BRL2.4. The 30% devaluation over the last three years will have improved the competitiveness of Brazil’s exporters, while a more hawkish stance by the central bank has helped ameliorate investor anxiety about the currency. 



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June 19 2014

Commentary by Eoin Treacy

Gold miners

Eoin Treacy's view -

The attraction of gold mining shares has been cannibalised by ETFs over the last decade and they did not offer the same degree of leverage to gold prices as seen in previous cycles. The failure of gold miners to respond to this situation and their subsequent inability to control costs resulted in the sector underperforming by a considerable margin for much of the last four years. By late last year the NYSE Arca Gold BUGS Index/Gold ratio had fallen back to test the 2000 lows; unwinding the entire early bull market advance in the process. 

Faced with the prospect of extinction boards reined in spending by reducing head count, slashing marketing and investor relations budgets, cancelling exploration and expansion projects and by developing a newfound respect for free cash flow. The result was that prices stabilised and now offer leverage to the gold price once more.  



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June 18 2014

Commentary by Eoin Treacy

Qingdao Metals Trader Facing Probe over Collateral 'Got 15 Bln Yuan in Loans'

This article by Wu Hongyuran for Caixin.com may be of interest to subscribers. Here is a section:

Banks were eager to lend to Dezheng Resources and its subsidiaries in recent years. "We all do business with Dezheng companies," one employee of the finance department of a large bank's Qingdao branch said.

Banks are apparently worried that the borrowing total the CBRC arrived at may only be the beginning. "The figure only shows the loans in Qingdao, and banks are examining whether there are other loans to Dezheng Resources and its subsidiaries across the country," an employee of another bank said.

Sources that participated in a June 16 meeting held by the Qingdao branch of the banking regulator said the loans include 4 billion yuan from the Export-Import Bank of China and 2.1 billion yuan from Bank of China. Industrial and Commercial Bank of China, Construction Bank of China, Agricultural Bank of China and China Minsheng Bank each lent 1 billion yuan.

City and Shandong Province banks, such as Rizhao Bank, Qilu Bank and Evergrowing Bank, each lent around 800 million yuan. Some joint stock banks, like China CITIC Bank, Industrial Bank and China Merchants Bank, extended loans of around 600 million yuan.

It is common for companies in China to use commodities as loan collateral. However, sources close to Dezheng Resources say police are investigating whether the company and its owner, Chen Jihong, used duplicate receipts from Qingdao Port Group Co. to get loans from different banks. It is unclear what police were involved.

Eoin Treacy's view -

When this story broke it was bearish of industrial metal prices because one of the arguments that helped support prices was that Chinese demand was still relatively robust. The fact that stockpiles were not as large as previously believed gave the impression the Chinese economy is slowing more than expected. 



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June 17 2014

Commentary by Eoin Treacy

Mining bearish pendulum swinging, in a big way, in other direction

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

“A new menace is lurking just around the corner,” MRG warned, “the likes of which will shake the industry to its very core.”

“When asked about their views on retirement within the next five years, 46% of executives expect to retire from full-time engagements or expect to reduce their workload drastically,” MRG observed. ‘With nearly half of all mining executive planning to have one foot out the door in the very near future, this represents a brain-drain, the like of which the industry has never seen and a cataclysmic shift in the demographics of boardroom everywhere.”

 

Eoin Treacy's view -

Mining companies have had to pay up for labour over the last decade because of a lack of skilled people willing to work in what are often inhospitable environments. The fact that so many mining executives are nearing the wind down stages of their professional lives represents a significant challenge from the perspective of shareholders who wish to see companies persist with a safe pair of hands at the helm. 

Nevertheless, this represents a secondary consideration compared to the fiscal constraints imposed on management teams by their creditors over the last few years. The era of abundant capital to throw at any project with little regard for free cash flow has ended and mining companies balance sheets are the better for it. The sector remains in need of a catalyst to stoke investor interest but a loss of downward momentum is evident among the majority of mining stocks suggesting that the worst of the decline is over. 

 



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June 16 2014

Commentary by Eoin Treacy

Email of the day hypothentication of industrial metals in China

Thank you for the series of graphs you did this week, could you explain the implications of the rehypothecation mess in China? I found this article from zero hedge : http://www.zerohedge.com/news/2014-06-14/chinas-collateral-rehypothecation-fraud-systemic http://finance.caijing.com.cn/2014-06-13/114259836.html http://www.zerohedge.com/news/2014-06-10/goldman-explains-how-big-chinas-rehypothecation-problem-hint-very

Eoin Treacy's view -

Thank you for this question which may be of interest to subscribers. I wrote about the implications of Chinese companies buying industrial metal and posting it as collateral with multiple lenders on June 4th.  The main problem is that because so much metal was posted as collateral perceptions of inventories, outside the LME warehouse system, were inflated. This has had a negative impact on prices over the last couple of weeks. 



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June 12 2014

Commentary by Eoin Treacy

Platinum Tumbles With Palladium on South Africa Mining Accord

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

Trading in the metals almost tripled compared with the average for the past 100 days for this time, data compiled by Bloomberg showed. Holdings in exchange-traded products backed by the metals rose to records this week.

Anglo American Platinum Ltd., Impala and Lonmin Plc expect to get feedback from the union tomorrow. South African government-led meetings ended June 9 without agreement. The AMCU is meeting members at various mines today to obtain members’ opinion on the proposal. The strike was the industry’s longest and costliest.

“Regardless of the outcome, this is being construed as a positive step forward, and bets are being taken off the table,” Steven Scacalossi, the global head for metals sales at TD Securities in Toronto, said in a report.

Demand for the metals will exceed supplies for the third straight year, according to data from Johnson Matthey Plc, which makes a third of the world’s catalytic converters. In China, the largest auto market, passenger-vehicle sales rose 14 percent in May, according to an industry group

 

Eoin Treacy's view -

Power cuts drove platinum prices to impressive heights in 2008 and highlighted just how sensitive the market is to South African supply disruptions. The labour unrest which has plagued a number of platinum miners for much of the last year held out the potential for a similar bullish catalyst. It did not materialise because supply from other sources proved enough to confine prices to a range.  



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June 05 2014

Commentary by Eoin Treacy

ANZ Gold Market Report

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

The ANZ Physical Demand Barometer for China continued to decline in May, extending weakness since mid-April. The lack of interest in physical gold from the Chinese suggests onshore supplies remain ample. 

We maintain the view that a significant fall in prices is required to spark renewed interest from the Chinese. 

China’s net imports of gold through Hong Kong were reported at 67 metric tonnes in April, down 22% from March. Our measure of demand suggests imports to remain subdued in May. 

The Shanghai Gold Exchange premium to London spot gold remains depressed at below USD2.0/oz.

While the domestic gold price has declined by 9% since mid-March, the Shanghai premium still remains at stubbornly low levels.

This is indicative of the state of demand for fresh gold, suggesting that prices will need to move lower before China becomes a supporting factor for the market once more.

Indian market premiums have declined significantly since the Reserve Bank of India (RBI) loosened gold import restrictions in May. 

The domestic premium to London spot gold declined to USD27/oz from over USD100/oz in mid-May. While having declined substantially, conditions remain far from normal, with a “regular” premium at around USD5.0/oz. 

We expect that Indian gold imports could pick up to 50 tonnes per month under the new conditions, from the ~25 tonnes per month currently. 

Eoin Treacy's view -

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

Annual Indian and Chinese demand for gold is outstripping mine production so why are prices still under pressure? The simply answer is that someone else is selling. Investors liquidating long positions in ETFs were a major influence last year, but are less important this year as the pace of selling has trailed off. This week Ecuador swapped 466,000 ounces for liquid assets with Goldman Sachs in an effort to fund its deficit. Meanwhile, the ECB’s aggressive monetary stimulus is likely to stoke the ire of Austrian school potential gold investors.   



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May 30 2014

Commentary by Eoin Treacy

China trims long-term iron ore contracts as glut hits market

This article by Manolo Serapio and Ruby Lian for Reuters may be of interest to subscribers. Here is a section:

Chinese steel mills are under pressure from poor demand growth due to slower economic growth, as well as an anti-pollution campaign launched by Beijing.

With cashflow already squeezed by weak margins and tighter access to credit, mills are looking to slash costs to help find the funds to meet stricter environmental rules.

A Xiamen-based iron ore buyer for a Chinese steel mill told Reuters he was negotiating to delay deliveries of iron ore shipments under long-term contracts that amount to 5 million tonnes a year.

A growing number of steel mills are running down their inventories, selling iron ore cargoes back to the market, often even before they arrive.

"There are more Chinese steel mills reselling their long-term contract cargoes this year and they prefer to buy from port inventories at lower cost," said an official at a state-owned Chinese steel producer.

Mills seeking short-term supplies can buy iron ore stocks sitting at Chinese ports for about $5 a tonne less than seaborne cargoes, on average, said a trader in Shanghai.
Stockpiles of imported iron ore at 44 Chinese ports hit a record high 113.3 million tonnes as of May 23, according to Steelhome, which tracks the data.

Goldman Sachs expects a seaborne iron ore surplus of 72 million tonnes in 2014, rising to 175 million tonnes in 2015.

Big miners, however, argue that as prices fall, imports will replace high-cost Chinese producers who will be squeezed out.

 

Eoin Treacy's view -

Iron-ore prices are generally quite difficult to obtain. The Metals Bulletin price we used to receive from Bloomberg was discontinued in March. In the Chart Library, I would suggest looking at the price paid by Chinese steel companies for the ore they import which we can reasonably assume is reflective of the global benchmark. 

The China Iron-Ore Imports of 62% Fines to Tianjin has returned to test the 2012 lows near $90. While a short-term oversold condition is increasingly evident, a clear upward dynamic will be required to check momentum and increase the possibility of a reversionary rally. 

 



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May 29 2014

Commentary by Eoin Treacy

Cocoa Shortage Looms as Growers Opt to Farm Rubber

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

Cocoa shortages are poised to extend into the next decade as West African growers struggle with underachieving farms or switch to more lucrative crops, such as rubber.

As worldwide demand increases -- the average Chinese consumer eats only a little more than two candy bars’ worth of chocolate a year -- producers are considering ways to boost grower income and coax higher yields from cocoa farms in Ivory Coast and Ghana. Despite two years of shortages, prices haven’t risen enough to persuade many farmers to stick with cocoa while other crops pay more.

“Cocoa farmers are becoming more aware of the bad deal they’re getting on the cocoa value chain,” said Edward George, head of soft commodities research at Lome, Togo-based lender Ecobank Group. “It takes something quite dramatic to get a farmer who has been cultivating cocoa his entire life to tear up his cocoa plantation and switch to rubber. But you can see a trend is under way.”

Worldwide cocoa demand will outpace production again in the next season that starts Oct. 1, according to a Bloomberg survey of five analysts and traders. The deficit is expected to grow ninefold to 1 million metric tons by 2020, which would equal about one-quarter of global output if growers maintain the current rate of production, said Zurich-based Barry Callebaut AG, citing an industrywide forecast. How to satisfy global demand will be a topic discussed at the World Cocoa Conference, which starts June 9 in Amsterdam.

Sustainable Farming
Part of the problem is unrealized potential, said Damien Thouvenel, a cocoa trader for Sucres et Denrees SA, or Sucden, in Paris. Growers in Ivory Coast, which, combined with neighboring Ghana, is the source of 55 percent of the world’s cocoa, harvest an average of 400 kilograms (882 pounds) of beans per hectare (2.5 acres) while a farm that’s well-managed with fertilizers and pesticides can yield up to 1.5 tons per hectare, Thouvenel said.

To address this, 12 of the world’s largest chocolate and cocoa companies, including Barry Callebaut, Ferrero SPA, Hershey Co., Mondelez International Inc., Mars Inc., Cargill Inc. and Nestle SA, signed an agreement with the Ivorian government in Abidjan on May 20 to “accelerate actions to make cocoa farming in the country sustainable,” according to a statement on the website of the World Cocoa Foundation, which will coordinate strategy.

Eoin Treacy's view -

The life cycle of a cocoa tree means that new supply is difficult to bring on line quickly. Additional measures such as modern farming methods including fertilisers and pesticides are required to boost yields over the next few years. Both London and New York traded Cocoa are in backwardation and both exhibit consistent medium-term uptrends suggesting demand dominance.

In absolute terms prices are still well below the highs reacted in 2010 which means they could rise further before demand destruction becomes a factor. A break in the progression of higher reaction lows currently near £1790 and $2850 respectively would be required to question medium-term uptrend consistency.



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May 27 2014

Commentary by Eoin Treacy

Email of the day on a comment to my article on gold last week

"The decline in ETF positions represented a significant headwind to prices last year even as physical demand remained high"

Eoin - when ETFs are "redeemed" this releases physical gold into the market which is just what the bullion banks want/need. They have supplied gold that wasn't theirs to sell (fractional reserve banking works with gold too) and this is one of the ways they get to exit their "shorts" in the physical which is still as rare as hens teeth in large size. Regardless $1200 looks to be a crucial level if we are not to see $1000 in pretty short order. The ranging price action might say otherwise but look at the chart upside down and ask if you would be a buyer or a seller. Best wishes to you and David 

Eoin Treacy's view -

Thank you for this comment which was posted following my article on ETF holdings of gold from May 21st and for your well wishes which I will pass on to David. .  You can create an inverse chart of the gold price in the Chart Library by following these steps.

1. Select gold from the menus or via the search.
2. Click on the Charting tab, located directly above the chart area.
3. Check the (1/data) box in the lower right of the subsequent dropdown area.
4. Hit Apply.



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May 23 2014

Commentary by Eoin Treacy

Noble Returns to London LNG Trading as U.S. Adds Volume

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

U.S. gas traded at $4.391 per million British thermal units on Louisiana’s Henry Hub by 5:21 p.m. London time. Northeast Asian LNG for delivery in four to eight weeks cost $13.50 a million Btu in the week to May 19, according to assessments by World Gas Intelligence. U.K. front-month gas, a regional benchmark, was at 44.51 pence a therm ($7.48 a million Btu) on ICE Futures Europe.

Sanchez Gestido is returning to Noble after leaving “about a year ago when a decision was made that the business wasn’t ready for this initiative,” Griffiths said.
Cheniere Energy Inc. will start exporting LNG in the first quarter of 2016, Jean Abiteboul, president of Cheniere Supply & Marketing Inc., said on May 19 in Amsterdam. The Houston-based company’s Sabine Pass terminal is the first to win full approval for U.S. exports from the Federal Energy Regulatory Commission since ConocoPhillips’s Alaskan Kenai plant in 1967. There were 14 more U.S. export terminals proposed to FERC as of May 21.

Cheniere will charge 115 percent of Henry Hub prices plus $3.50 a million Btu in liquefaction fees, and estimates shipping costs of $1 per million Btu for Europe to $3 for Asia, according to an April presentation on the company’s website.

 

Eoin Treacy's view -

The global market for LNG remains on a growth trajectory as ambivalence towards coal is unlikely to moderate anytime soon. A great deal of additional supply from the USA, Australia and Africa is set to come online in the next decade which will help allay the liquidity fears potential consumers may have towards the market. 

Based on the above figures, US exports will probably be more competitive in Asia supplies than Europe. Meanwhile China will be a less attractive market than other countries following its agreement with Russia. As gas markets become more fungible there is potential for US prices to appreciate somewhat while Asian prices should contract somewhat. 

 



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May 22 2014

Commentary by Eoin Treacy

Why Nickel is heading to $30,000/t sooner than you think

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

In the last great nickel bull market in 2006 and 2007 the key theme was the lack of sulphide nickel supply from Australia and Canada. Back in the day, analysts wrote at length about the lack of investment in these traditional sources of supply. The Chinese read those same reports and invented nickel pig iron to get around the problem of $50,000 per tonne nickel. The success of NPI and the negative impact it had on the nickel market was much greater than anyone expected. Today, we are in a similar theme as to 2006. We have had 5-8 years of limited investment in the traditional sulphide producers at a time when the NPI industry in China has been cut back dramatically because of the export ban. In reality there is no reason why nickel prices won’t repeat what they did in 2006-7 and go back to $50,000 per tonne but for now we think $30,000 per tonne is more realistic given the metal overhang on the LME. The key risk of course is that the ban is lifted, but we think that is highly unlikely near term. Physical tightness in the nickel markets is about to become more pronounced as NPI’s take downtime and inventories on the LME begin to drawdown. To put the Indonesian export ban into perspective it’s the same as if Russia, Saudi Arabia and Iran switch off their oil wells and reduce global supply by at least 30% overnight. Imagine what that would do the oil price so that is why $30,000 per tonne nickel is not inconceivable near term.

Eoin Treacy's view -

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

The export ban on unprocessed ore is a positive for Indonesia as it attempts to develop a greater value added minerals sector to help boost economic growth. The greater uncertainty however is whether the ban will persist beyond the upcoming election since we can assume that vested interests on both sides will be vocal in expressing their arguments. 

The London listed Nickel ETFS broke out of an almost yearlong base in early March and hit at least a short-term peak last week. However, this remains a fundamentally driven rally and prices have bounced over the last couple of days. $30,000 can be viewed as an ambitious target for this rally but if current prices are sustained, the fortunes of nickel miners should improve. 

 



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May 21 2014

Commentary by Eoin Treacy

Eventual Range-Break in Gold Will Likely Be To The Downside

Thanks to a subscriber for this interesting report from ANZ Bank. Here is a section: 

The theme of “little conviction” in gold has continued and the market is clearly waiting for an event that will see prices break out of the USD1,270-1,320/oz range of the past 6 weeks. China will be a key market to watch as a mild retracement in USD/CNY over the past fortnight (from a high of 6.26 to 6.23) has helped to improve the Shanghai-London gold premium. However, at less than USD3.0/oz, this is not enough to stoke a response that would be supportive of prices in our view. India remains at the forefront, with hopes high that the expected incoming government will relax import restrictions on gold. On the downside, further ETF selling continues to pressure gold as holdings have declined by 48 metric tonnes (mt) since March, more than unwinding the gain of 34mt that had been made this year. In this environment, it is difficult to see gold sustaining any significant gains and our bias is that the eventual break-out of the range will be to the downside.

Positioning in Comex gold has seen speculative gross shorts unchanged for three weeks and longs are quick to take profit on rallies. Implied volatility in the options market remains near 12-month lows, but likely to spike when the awaited rangebreak occurs. The ANZ Physical Demand Barometer for China has reached a level inline with the trough over the past 12 months, and could be in store for a rebound, but not while the Shanghai-London premium remains depressed. Meanwhile, the continuing tensions between Russia and Ukraine warrant monitoring, but the market reaction to new headlines is waning.

 

Eoin Treacy's view -

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

Investment demand has come to represent a powerful marginal buyer of gold over the course of the bull market from the early 2000s. While both China and India represent demand growth drivers, total ETF holdings went from nothing in 2000 to the fifth largest holdings by 2011. The decline in ETF positions represented a significant headwind to prices last year even as physical demand remained high. 





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May 21 2014

Commentary by Eoin Treacy

Rocket Eggs Revive China Soy Demand as New-Crop Orders Rise

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

China’s soybean demand is rebounding as surging prices of eggs and pork help the world’s biggest meat producer recover from first-quarter losses for oilseed producers, feed makers and farmers. Chinese crushers last week ordered about 600,000 metric tons to be shipped after Sept. 1 when the new-crop year begins for U.S. marketing, according to a Bloomberg News survey of seven  China based traders and researchers. Since April 1, egg prices in China have surged about 26 percent while hogs jumped 20 percent, according to data from Shanghai JC Intelligence Co.

“The surge in egg prices, dubbed ‘rocket eggs’ to describe the sharp gains, followed by gains in pork are quickening a turnaround in the feed industry,” said Tommy Xiao, an analyst at Shanghai JC, the country’s biggest independent animal feed researcher. A resumption of Chinese purchases, which account for more than 60 percent of the world’s traded volume, will lift futures traded on the Chicago Board of Trade. Last month, China was seen at risk of defaulting on some orders for shipment after bird flu and slumping pork prices curbed soybean-meal demand.

 

Eoin Treacy's view -

Any market is a story of the interaction between supply and demand. Brazil’s ongoing drought is contributing to reduced supply and this spring’s harsh weather in much of the USA may have an impact on its harvest. Meanwhile, pig and cattle prices are at all-time highs. This is encouraging attempts to increase supply by investing in breeding programs which require more feed.  

 

 



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May 19 2014

Commentary by Eoin Treacy

Email of the day on the inverse correlation of gold to the US Dollar

It seems to me that with US gradually winding back monetary ease and Europe and Japan going the other way - surely the US Dollar must continue to appreciate while this status quo remains. Hence the gold/silver prices seem to have a major head-wind and further weakness may be in store. What are your thoughts and are you and David on the same wavelength?

Eoin Treacy's view -

Thank you for this question which was posted as a Comment to my piece on Centamin Gold last week and may be of interest to subscribers. David and I discuss markets every day and our opinions are seldom at odds. Part of the reason for this is because we base our interpretation on facts and try to eschew theories. I believe we share similar perceptions on precious metals. 



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May 16 2014

Commentary by Eoin Treacy

Centamin profit falls 58% as production shrinks

This article by Silvia Antonioli for Reuters may be of interest to subscribers. Here is a section: 

The earnings were hit by a 15 percent fall in output to 74,241 ounces in the quarter due to mechanical problems which caused a temporary reduction in the average grade at Sukari, Centamin's only operating mine.

However, the mining company said the issues had been resolved and its 2014 production target of 420,000 ounces at a cash cost of $700 per ounce remained intact as it expects output to increase while it expands capacity at its processing plant.

"We are in the process of ramping up production and smoothing out those early teething issues that you always get with commissioning," head of business development Andy Davidson said. "But we are progressively increasing production through the remainder of the year so you'll see an increase in output and earnings."

Sukari is located in the Eastern Desert, 700 kilometres from Cairo and is Egypt's first large-scale modern gold mine. It is expected to reach a maximum annual production capacity of 450,000-500,000 ounces. It has been largely unscathed by political turmoil in the country.

 

Eoin Treacy's view -

Gold miners returned to their pre-bull market lows relative to the gold price late last year. They were the worst performing sector on the S&P last year and one of the best performing in the first month of this year. The inability of gold prices to break above $1400 has contributed to their subsequent underperformance as a group. 



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May 15 2014

Commentary by Eoin Treacy

GFMS Platinum & Palladium Survey 2014

Thanks to a subscriber for this informative report from Thomson Reuters which is mostly backward looking but may be of interest. Here is a section:

Investment in platinum rose by 13% to 297000 ounces (9.2t) in 2013. In indicative value terms, investment demand amounted to approximately $442 million, up by 23% year-on-year.

Investor interest in platinum was boosted by renewed supply-side concerns revolving around mining sector wage negotiations in South Africa. Nonetheless, platinum investment demand was somewhat restrained by a major shift in investors sentiment towards gold.

Investment in palladium remained negative territory for the second consecutive year, reaching just over 940000 ounces (29.3t) in 2013. In value terms, outflows equivalent to $682 million on a net basis.

Considerable selling in the OTC market, along with a smaller degree of long liquidation in the futures market and a lack of fresh buy-side interest from ETF investors for the year as a whole, contributed to last year’s selling. 

Eoin Treacy's view -

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

Unfortunately we do not have total known ETF holding figures for either platinum or palladium. ETF Securities’ holdings of platinum, within its physically backed ETF, have been static for nearly three years. However since there are other ETFs holding the metal it is impossible to deduce from this data alone whether investment demand has been trending higher or lower. 



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May 14 2014

Commentary by Eoin Treacy

Big miners get some media shine

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

Earlier this week JPMorgan Cazenove analyst pulled a u-turn on the mining sector going from underweight to overweight. To sum it up, JP Morgan analysts noted, “We believe the risk-reward for miners appears better due to a strong cost-cutting drive, a huge past repricing in earnings and in performance, especially if near-term data flow picks up." It created flurry of shareprice action for diversified miners especially with Rio Tinto jumping some five percent on especially rosy statements about potential it holds for share buybacks or a special dividend later.

Now it's not worth getting too excited about a few kind words from JP Morgan and subsequent shareprices jumps. The quick gains could prove fleeting as the headline excitement dissapates. Indeed, in grand scheme of shareprice moves, the latest action was slight on the yearly scale

Eoin Treacy's view -

We have been looking for a recovery in the resources sector for the last few months not least because laggards often engage in a powerful catch-up play in the mature stages of a cyclical bull market. Following the valuation expansion that accompanied last year’s powerful rally, value investors have been looking for reasonably cheap sectors in which to invest. The mining sector has become more alluring in this regard following deep write downs and a newfound respect for free cash flow. 



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May 13 2014

Commentary by Eoin Treacy

Port Hedland facing $100m a day strike threat

This article from the Sydney Morning Herald may be of interest to subscribers. Here is a section: 

''If the Port operations are suspended, Australia's iron ore exports are significantly impacted. We estimate this will cost suppliers who ship out of Port Hedland around $100 million a day,'' a spokesman for the company said..

''Significant royalty and tax revenue will be lost to the West Australian and federal governments. Mining companies like BHP Billiton are not able to make up lost volume of this nature, and governments cannot recover these lost royalties and taxes.''

The major benefactor of a strike could be Rio Tinto, which exports through its own Pilbara port - Cape Lambert - just south of Port Hedland.

The major loser could be Fortescue Metals Group, which needs to run at "sprint capacity" for the entire June quarter to meet its full year iron ore export guidance

Eoin Treacy's view -

It is unlikely that Australia will experience a damaging disruption of iron-ore exports because of a strike by deckhands on tug boats, but it is an outside possibility. Broadly speaking the threat of labour unrest has increased across the commodity spectrum as workers have been forced to tighten their belts amid cost cutting by their employers. The geopolitical risk premium has also increased with Russia’s actions in Ukraine and investors have begun to look further afield for investments that could potentially benefit from supply disruptions. 



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May 08 2014

Commentary by Eoin Treacy

Latin America Dollar Index

Eoin Treacy's view -

The Latin America Dollar Index is dominated by the Brazilian Real and Mexican Peso, which both occupy 33% weightings. The Index returned to test its 2009 lows in February not least because of the underperformance of the Argentinean Peso and a more general pull back by emerging market currencies. It has since rallied to close the overextension relative to its 200-day MA and a sustained move below last week’s low near 91.5 would be required to question additional recovery potential. 



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May 07 2014

Commentary by Eoin Treacy

BlackRock World Mining boosts income

This article from the Investors Chronicle dated February 5th may be of interest to subscribers. Here is a section:

About half the trust's income comes from ordinary dividends, which Mr Hambro says are on the rise, but it has also boosted its income by investing in royalties. This is where in exchange for putting money into a company the trust, for example, receives a percentage of the revenue from the company's mine over its life. The trust holds three royalties, though can invest up to 20 per cent of its portfolio in these and is looking to increase exposure.

It entered into its first royalty agreement in 2012 with London Mining (LOND). For a consideration of $110m, the trust gets a 2 per cent revenue related royalty calculated from iron ore sales over the life of the mine from London Mining's Marampa licence in Sierra Leone. This is paid quarterly.

 

Eoin Treacy's view -

Over the last month we have highlighted a number of energy and resources companies which have returned to positions of relative outperformance. As part of my search for suitable vehicles likely to benefit from this theme, I took a look at the Blackrock World Mining Trust’s constituents. 

While Rio Tinto and BHP Billiton remain its largest weighting, London Mining is its four largest at 6.7% of the portfolio. The trust may hold a royalty in the company’s production but the share remains in a medium-term downtrend and its market cap has declined to a mere £80 million. This underperformance may be contributing to the trusts inability to sustain a rally. 

 



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May 06 2014

Commentary by Eoin Treacy

Steel

Eoin Treacy's view -

The last few years have been difficult for the majority of steel companies as uncertainty about the outlook for global growth prompted firms to write down investments in ambitious expansion projects. However as the prospect of China finally beginning to address its oversupply and the threat of additional sanctions against Russia increase, a number of shares are exhibiting interesting chart patterns.

Additionally the recent return to form of at least some steel companies is in line with our contention that basic resources oriented cyclical sectors often move to positions of outperformance in the latter stages of cyclical bull markets. 



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May 06 2014

Commentary by Eoin Treacy

Copper miners

Eoin Treacy's view -

Despite the fact that copper prices have been dribbling lower for nearly three years they are still more than 200% above their 2009 lows. This is a significant position of relative strength versus the other industrial metals and speaks to the tightness of the copper market. Prices failed to sustain the March drop to new lows and a break in the short-term progression of higher reaction lows would be required to question potential for additional higher to lateral ranging.



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May 02 2014

Commentary by Eoin Treacy

Kibali gold mine, one of the biggest in the world, opened officially

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

As 45% owner AngloGold Ashanti’s CEO, Srinavasan Venkatakrishnan (Venkat), says, though, to meet its full potential it was of the utmost importance that the DRC’s mining code remained supportive of the gold mining sector. The process so far has gone remarkably smoothly with the mine being brought on stream ahead of schedule despite it being located in one of the most remote parts of the African continent in the north eastern DRC. Indeed the heavy equipment had to be transported across from Africa’s east coast – quite a remarkable logistical achievement in its own right.

The other 45% owner is Randgold Resources (with the 10% balance owned by DRC parastatal SOKIMO) and it is Randgold which is the operator and was responsible for managing the mine’s construction. The company has great African experience in mine building and it seems to have transferred this across successfully to the DRC environment.

Eoin Treacy's view -

2013 represented a landmark for many gold miners as they rediscovered their regard for free cashflow and slashed exploration and development budgets. Today’s official opening of a major project in the DRC is welcome and a testament to the prowess of Anglogold Ashanti and Randgold Resources in developing African mines. However the pace of new mine development has stalled and the prospects of significant additional new supply sources opening up in the near term is a deteriorating possibility.

Most media commentary on gold has been in reference to bearish reports by Goldman Sachs and Morgan Stanley, as well as how prices are reacting to the evolving situation in Russia. Generally speaking this represents a sideshow tor the broader issues such as the withdrawal of ETF speculative flows, shortage of physical supply, India’s tax on imports and damaged investor sentiment. 



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April 30 2014

Commentary by Eoin Treacy

Japan approves energy plan reinstating nuclear power

This article by Osamu Tsukimori and Mari Saito for Reuters, dated April 11th, may be of interest to subscribers. Here is an important section: 

But the plan may be too little too late for Japan's moribund atomic industry, which is floundering under the weight of estimated losses of almost $50 billion, forcing two utilities to ask the government for capital last week.

Plant operators have had to pay out almost $90 billion on replacement fossil fuels, with domestic media saying they have also spent an estimated 1.6 trillion yen ($16 billion) on nuclear plant upgrades to meet new safety guidelines.

A recent Reuters analysis shows as many as two-thirds of the country's 48 idled nuclear reactors may have to be left closed because of the high cost of further upgrades, local opposition or seismic risks.

 

Eoin Treacy's view -

Japan faces a daunting energy challenge as the weakness of the currency and collapse of the domestic electricity generation sector push energy prices up. The decision to reactivate stalled nuclear plants is to be welcomed but as the above article highlights many of these plants are badly in need of expensive remediation work which is unlikely to be done. This suggests that while restarting some plants at least partially ameliorates the situation, Japan needs to do a lot more to fix its energy policy. 

 

 



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April 30 2014

Commentary by Eoin Treacy

Supreme Court upholds EPA rule limiting cross-state pollution

This article from the Washington Post may be of interest to subscribers. Here is a section:

EPA Administrator Gina McCarthy called the ruling “a resounding victory for public health and a key component” of the agency’s effort to “make sure all Americans have clean air to breathe.” She said the court’s decision underscored the importance of basing clean air rules “on strong legal foundations and sound science,” declaring it a big win and “a proud day for the agency.”

Richard Lazarus, an environmental law professor at Harvard, called the cross-state pollution rule “one of the most significant rules ever” promulgated by the EPA, and supporters said the cost of carrying it out would be more than offset by health benefits.

 

Eoin Treacy's view -

The last few years have represented a perfect storm for coal companies. Low natural gas prices took over market share among utilities. Stricter environmental standards have also increased the cost of using coal for the same utilities which has further bolstered the allure of natural gas. As a result a number of coal miners have run into financial difficulties. For example, James River Coal defaulted on its debt two weeks ago. 



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April 17 2014

Commentary by Eoin Treacy

Mining Equity Outlook Q2/14 - Seasonality Buy in June Then Sell in September?

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

BMO Research expects 42% of the 136 stocks in its mining coverage universe to generate free cash flow in 2014E. In 2015E, the percentage is expected to increase to 56% of the entire stock coverage.

BMO Research recommendations tend to reflect a preference for strong free cash flow generation at spot commodity prices.

Iron ore and steel, then aluminum and diversified miners have the strongest FCF for 2014-2015E; coal, diamonds and copper have the weakest using spot.

Price to Net Present Value
BMO Research mining stocks demonstrate a wide range of price to net present value multiples when calculated using a 10% discount rate and spot commodity prices. A number of companies trade at high multiples due to high debt or low project value while others trade at lower multiples reflecting political or execution risk.

Steel, iron ore, diamonds and copper stocks miners have the most attractive valuations using spot prices.

Price to Earnings
BMO Research estimates for 2014E price to earnings at spot prices display a wide range of results. In general, most of the diversified, copper, iron ore, and steel producers tend to cluster around 10-15x EPS, while precious metal producers average around 25-35x EPS.

At spot prices, many coal, uranium, and aluminum producers would not be expected to report meaningful earnings

Enterprise Value to EBITDA
Enterprise Value to EBITDA results appear much more consistent than EPS measures with the distribution of company multiples clustered closer to sector averages.

Diversifieds, iron ore, steel, diamond and larger copper companies tend to trade around 5x 2014E EBITDA at spot prices.

Copper developers, senior gold producers, and silver companies are generally observed at 5-10x EBITDA with relatively few exceptions. Uranium, coal, and PGM stocks appear the most expensive.

Eoin Treacy's view -

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

Free cash flow has been the buzz word in the mining sector over the last couple of years as companies have been forced by declining commodity prices to cut back on aggressive expansion programs. The net result has been a tighter supply environment in the industrial metal complex. Nickel has broken out of a six-month base while both zinc and lead are firming from previous areas of support and look primed for additional upside.



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