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April 14 2014

Commentary by Eoin Treacy

Brazilian Real Bears Foiled by Presidential Election

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

Henderson forecasts authorities will steer the currency to as strong as 2 per dollar this year, reaching that level the first time since May.

Analysts at Citibank and BBVA say the central bank is using its intervention program of currency swap auctions to support the real and combat inflation by limiting import price increases. Brazil has been selling as much as $200 million in daily foreign-exchange swaps under a program announced in December. The currency surged the most in emerging on April 4 when the central bank resumed rolling over the contracts.

“At this moment, the only ally the central bank has to act in the fight against inflation is the appreciation of the currency,” Mario Toros, a partner at Ibiuna Investimentos and a former central bank monetary policy director, said at an event in Sao Paulo on April 10.

Eoin Treacy's view -

Brazil was named one of the “Fragile Five” by Morgan Stanley last October as the outlook for a number of emerging market currencies deteriorated. However, the result of downward pressure on emerging market currencies have been central bank efforts to restore confidence, tame inflation and make imports more expensive. 

BRL 2.4 has been an area of support for the Real on three separate occasions since 2009 and it strengthened from the region again from early February. It has now pushed through the 200-day MA for the first time since 2011 and a sustained move by the US Dollar above BRL2.4 would be required to question potential for additional support building. 

 



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April 14 2014

Commentary by Eoin Treacy

Show Me The Money The HSBC Global Capex Monitor H1 2014

Thanks to a subscriber for this informative report by Colin Gibson and Michael Hagmann for HSBC which may be of interest to subscribers. Here is a section: 

Global capex forecasts for 2014e are almost 4% higher than they were when we last published our capex monitor in October last year. This would still represent a decline of 2% versus 2013, but leave us 13% above the pre-crises level of 2008. Capex by the global manufacturing companies is set to rise by 6%, very diverging trends within transport add up to flat capex levels, whereas capex by the process industries and utilities is set to decline by 3% and 4%, respectively. Capex by construction companies is set to decline a significant 9%. However, this is solely driven by a decline of 19% in APAC. Construction companies in Europe are expected to spend more on capex (as shown in our graph below).

The biggest revisions over the past six months we have seen are in Manufacturing and Construction, where capex forecasts have risen by 6%, Process (+4%, driven by Oil & Gas and Food & Pharma) and Transport (+3% driven by Airlines and Haulage & Logistics). We note that there is little variance in the revisions by region for 2014. However, there is a big divergence in the actual outcome in 2013 as capital spending in EMEA fell 2% short of analysts’ expectations.

Manufacturing capex (short-cycle) close to long-term trend
Global manufacturing capex (some 20% of total) is set to rise 6% in 2014e, leaving it 2% above its 2008 peak, and at 1.30x (6% above its 20-year average capex/depreciation ratio of 1.22x). Within manufacturing, we see both cyclical and structural growth potential; capital is still cheap, whilst “land” (natural resources) is now expensive (commodity prices still >2x 1990s averages) and labour increasingly so (cf EM wage growth). We see SKF (55% of 2012 sales from the manufacturing sector) and Sandvik (40%) as the potential winners in our global, large-cap, Capital Goods coverage.

Construction (short-cycle): residential leading the recovery, non-residential to follow
Global construction capex (some 5% of listed total, but we estimate up to 40% including unlisted & public sector) was much stronger than expected in 2013. Despite strong growth in Europe, global capex is set to fall 9% in 2014e because of APAC. Capex is 22% below its 2008 peak, and at 1.33x, 9% below its 20-year average capex/depreciation ratio of 1.46x. The decline is primarily driven by the 19% decline in Asia Pacific. We see Schneider Electric (34% of 2013 sales to the construction industry) as the potential winner in our global, large-cap, Capital Goods coverage.

Eoin Treacy's view -

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

The reduction in capital expenditure by global mining companies; presented with deteriorating demand growth forecasts, has been perhaps the most notable development in the assessment of how money is spent by corporations over the last year. However, it is also notable that as the Eurozone stabilises and cement companies begin to recover that the outlook for global property development is becoming progressively more optimistic. This article from GizMag highlighting the proposed development of 230 office and residential towers in London is a case in point.



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April 08 2014

Commentary by Eoin Treacy

Holcim-Lafarge Seek Disposals for $40 Billion Merger Backing

This article by Patrick Winters and Francois de Beaupuy for Bloomberg may be of interest to subscribers. Here is a section: 

Holcim Ltd. and Lafarge SA (LG) agreed to form the world?¡¥s largest cement maker as they prepare to sell assets with 5 billion euros ($6.9 billion) in revenue to win regulatory approval for the biggest European deal this year. 

About two-thirds of the divestments will come from Europe, according to Lafarge Chief Executive Officer Bruno Lafont, who will lead the merged company. The new entity, with $40 billion in annual revenue, may also sell assets in Canada, the U.S., Brazil, India and China, he said on a conference call today. 

Combining Jona, Switzerland-based Holcim and Paris-based Lafarge will let the cement producers unite operations after the global recession eroded demand for building materials and pushed some of the industry's kilns to run at a loss. More consolidation may follow, said Christopher Kummer, president of the Institute of Mergers, Acquisitions and Alliances in Vienna.

 

Eoin Treacy's view -

The last decade has seen a large number of companies pay record prices to acquire access to resources or to take over their competitors. This has seldom been of benefit for the shareholders of these companies and has succeeded in exposing a buy-high-sell-low tendency which is far from encouraging. The timing of the proposed merger between Lafarge and Holcim is therefore notable. The cement sector has been forming a base for more than two years. Prices are no longer at elevated levels and the rationalisation of excess Chinese supply should be net positive for the global sector. (Also see Comment of the Day on February 19th



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March 28 2014

Commentary by Eoin Treacy

March 26 2014

Commentary by Eoin Treacy

Obama Deplores Russian Brute Force in Ukraine

This article by Michael D. Shear and Peter Baker may be of interest to subscribers. Here is a section: 

The speech came as Mr. Obama moved to deploy additional military forces to Eastern Europe to guard against Russian aggression. The president met with Anders Fogh Rasmussen, the secretary general of NATO, to discuss ways of reassuring Poland and the Baltic states, fellow alliance members that remain acutely nervous about Russia’s actions in the region. The United States has already sent additional planes to patrol the Baltic region and an aviation detachment to Poland.

Mr. Obama vowed to live up to NATO obligations to defend alliance members. “We have to make sure that we have put together very real contingency plans for every one of these members, including those who came in out of Central and Eastern Europe,” he said at a news conference before his speech. “And over the last several years we have worked up a number of these contingency plans.” He said alliance ministers next month would discuss doing more to ensure a “regular NATO presence among some of these states that feel vulnerable.”

 

Eoin Treacy's view -

40,000 troops amassed on the eastern border of Ukraine and pro-Russian statements coming from sections of the Moldovan polity suggest EU and US leaders have little choice but to take the potential for an additional land grab seriously.

The impetus for greater economic, political and military cooperation between the USA and Europe has not been so compelling since the 1980s. Sanctions that can be racketed up in the event of additional transgressions are a start. Encouraging European leaders to abandon ideology and get serious about energy independence from Russia is a potentially more important development. 



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March 25 2014

Commentary by Eoin Treacy

Copper Advances Most Since December on Chilean Supply Concerns

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

Anglo American Plc is evaluating losses at its biggest copper mine in Chile after protests yesterday caused damage at the site amid a dispute with contract workers. China will accelerate public spending and loosen regulations on private investment to aid growth, Li Daokui, former adviser to the People’s Bank of China, said in Bloomberg Television interview.

Metals are rebounding “as China displays increased determination to maintain growth rates and as Chilean copper production is plagued by labor unrest,” Michael Turek, a senior director at Newedge USA LLC in New York, wrote in an e-mail.

“We should continue to see further, if gradual, signs of consolidation and resultant price recovery.”

 

Eoin Treacy's view -

Labour unrest in Chile and the so far unresolved dispute between Mongolia and Rio Tinto at the Oyo Tolgoi mine represent potentially bullish factors for the copper prices. However the question remains as to whether this will be enough to re-establish medium-term demand dominance. 
 

 



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March 25 2014

Commentary by Eoin Treacy

Email of the day on platinum

“What is your opinion on platinum? if you can use palladium as well as platinum in a catalyst why on the basis of commonality is platinum not going up?”

Eoin Treacy's view -

Thank you for this question which others may have an interest in. This article from palladiumcoin.com highlights the differences between diesel and gasoline catalytic converters. Here is a section:

Diesel engines operate at lower temperatures than gasoline engines and, to date, platinum is better suited as a catalyst in converting CO, NOx and hydrocarbons to harmless emissions at the lower temperatures. However, when it comes to reducing or eliminating DPM, which is essentially carbon, temperatures must be increased in order for the carbon to be oxidized before being exhausted. At the higher temperatures palladium may be important, as it not only reacts well at higher temperatures, but it can tolerate higher temperatures better than platinum. 

This would suggest that platinum is a better catalyst for diesel with some substitution opportunities for palladium when higher temperatures are required.  Gasoline probably offers more opportunities for palladium. 



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March 24 2014

Commentary by Eoin Treacy

Palladium ETPS See Surging Inflows On Concerns Of Russia Export Restrictions

Thanks to a subscriber for this interesting report from ETF Securities. Here is a section

ETFS Physical Palladium (PHPD) receives the biggest inflows in almost a year, totalling US$68mn, on supply restriction fears. Russia is the world’s biggest producer of palladium, with 42% of supply coming from the country. Any restrictions on Russian palladium exports would exacerbate what is already expected to be a large palladium deficit in 2014. At the same time, South African strikes are entering their 9th week and no industrywide resolution has been found yet. While Amplats signed an agreement with the National Union of Metalworkers of South Africa (NUMSA) on Thursday, the Association of Mineworkers and Construction Union (AMCU), by far the largest union at Amplats' operations, is still on strike. South Africa is the 2nd biggest producer of palladium with 37% of global production and the largest producer of platinum.

Eoin Treacy's view -

An additional bullish catalyst for palladium is reflected in the release of two physically backed palladium ETFs in South Africa which will further remove supply from what is already a tight market.



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March 21 2014

Commentary by Eoin Treacy

Palladium Reaches Highest Since 2011 on Russia Supply

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

The U.S. and the European Union have extended the list of prominent Russians subject to sanctions as President Vladimir Putin completed its annexation of Crimea. The supply threat comes as miners haven’t backed back down from a strike that started in January in South Africa, the second-biggest palladium producer. The nations accounted for almost 80 percent of global output last year, London-based Johnson Matthey Plc estimates.

The political restrictions and labor unrest are adding to a tightening supply outlook as demand is set to top production by 783,000 ounces this year, according to Barclays Plc. Concerns that the hostility in Crimea will disrupt raw-materials shipments have boosted prices of commodities from corn to crude oil. Palladium has rallied almost 10 percent this year, the best start to a year since 2010.

“Economic sanctions will cripple supplies, and people are getting very concerned about that,” Mike Dragosits, a senior commodity strategist at TD Securities in Toronto, said in a telephone interview. “The sanctions may only intensify since Putin shows no signs of stepping down.” TD sees the deficit at 1.29 million ounces this year, he said.

 

Eoin Treacy's view -

Russia’s voluntary restrictions on palladium supplies in the late 1990s sent prices soaring to levels which have yet to be surpassed. The country’s dominance of the global market has been in place since and any threat to supplies as a result of sanctions will necessarily result in higher prices. The fact that South Africa’s mining sector remains locked in labour disputes suggests it may have difficulty responding in the event of Russian supplies being curtailed. 
 

 



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March 19 2014

Commentary by Eoin Treacy

Taking a Closer Look at the Impact of PEDV

This article by Steve Meyer for NationalHogFarmer.com may be of interest to subscribers. Here is a section: 

Finally, it appears from many discussions from producers that my total impact figure of 2.5 pigs per infected sow is too low.  It looks like 2.7 pigs per sow appear to be better and may still be conservative.

Allowing for more small farms in the accession data in January and February, and for a one-month delay in part of the pig losses to account for some lingering challenges, I estimate total losses through February stand at roughly 6.08 million pigs.  Using the NAHLN monthly data for suckling pig accessions (see Figure 2) to determine the time distribution of pig losses leads to a loss of 1.684 million pigs in February, just over one-third higher than in January.

Table 2 also shows my computations and adjustments for impacts on future slaughter. Note that I made one change relative to two weeks ago in that I added 2.5% to 2013 slaughter totals to allow for normal death loss and thus estimate the number of weaned pigs that were originally destined for slaughter in that given month.  It give us an apples-to-apples comparison to the pig loss figures.

The bottom line is that August slaughter will be impacted even more than July.  Allowing for 4% higher weights, pork production in August could be 13% lower than one year earlier.  As I pointed out two weeks ago, I’m not at all comfortable with a year-on-year change of that magnitude but the data say it is so and the feedback I have received from knowledgeable industry participants indicates that, if anything, my loss estimates are conservative. That is unbelievable.

Eoin Treacy's view -

The evolution of the Porcine Epidemic Diarrhoea Virus has resulted in a sharp run-up in lean hogs prices which were already at historically high levels. The futures curve is in backwardation between June 2014, which is the most active contract, and April 2015; suggesting tight supplies for the foreseeable future. As the above article highlights, we do not yet have conclusive evidence that the infection rate has peaked.

 



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March 18 2014

Commentary by Eoin Treacy

We see Similarities with the 2005 to 2008 rally

Thanks to a subscriber for this report by Stephen Walker and Jonathan Guys for RBC dated March 12th. Here is a section

The imposition of two Government regulations in 2013 aimed at addressing the country’s current account balance, namely : (1) a 10% import duty that has grown from 2% nearly 2 years ago, and (2) the 80:20 rule, requiring 20% of imports to be re-exported before further imports are permitted, have depressed official gold import figures. However, a concurrent spike in imports in surrounding regions suggests heightened smuggling activity into India. With a marked improvement in the current account balance as well as political sentiment ahead of elections in April-May, that may well result in reducing/repealing the 80-20 rule as well as the 10% import duty, a re-emergence of Indian consumer demand in-line with levels observed in the 2010-12 period cannot be ruled out. Spot-premiums in excess of $150/oz observed during 2013 bear testament to the resiliency of underlying demand in the region.

Between 2005 and 2007, we estimate official Indian gold demand averaged between 1.2% and 1.4% of annual GDP and constituted 5% to 8% of annual household savings. 2008-13 however, has seen demand increase, averaging 2.1% of GDP and 9% of household savings (Exhibit 1). Furthermore, Personal Disposable Income has grown at a CAGR of nearly 11% from 2005 through 2012; should this trend continue in broadly similar fashion, the increase in the potential fund-flow that could be directed toward investment in gold is substantial. 

Short term trends also appear favourable: the spike in Gold in June 2013 was due to the sharp sell-off in the Rupee/USD exchange rate and there was no significant destocking of gold. The Rupee has strengthened significantly since its September lows and the Rupee denominated gold price has pulled back ~15% from the September price spike, making this a more attractive entry level for Indian buyers.

 

Eoin Treacy's view -

A confluence of negative factors contributed to gold’s steep decline last year but the ranging environment that has prevailed for the last six months indicates supply and demand came back into at least temporary equilibrium. ETF demand moving back into positive territory removes a significant headwind from prices while the potential for a relaxation of India tariffs on gold imports could represent a fresh catalyst to spur demand. 

 



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March 18 2014

Commentary by Eoin Treacy

Beta is back

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

The result of the improvement in the gold sector’s operating performance and the higher sensitivity of earnings and cash flows to the gold price has been an increase in the beta of the gold company share prices to a rising gold price.

As the title of this newsletter indicates: the beta is back. This can be seen in the charts opposite with the beta of gold equities to the gold price rising from 0.9 in 2011, to nearly two in the last three months (to end February 2014).
 

Eoin Treacy's view -

Over the last year, gold miners have been forced to reform profligate spending practices by cancelling expansion, firing non-core personnel and refocusing on their all-in costs. These moves have been made in response to investor dissatisfaction with the gold mining sector that had deserted it in favour of ETFs. 
 

 



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March 17 2014

Commentary by Eoin Treacy

Homebuilder Confidence in U.S. Lower Than Forecast in March

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

Confidence among U.S. homebuilders rose less than forecast in March, a sign the industry may take time to pick up after inclement weather damped activity earlier in the year.

The National Association of Home Builders/Wells Fargo index of builder confidence climbed to 47 from 46 in February, a report from the Washington-based group showed today. The median forecast in a Bloomberg survey of 47 economists was 50. Readings below 50 mean more survey respondents reported poor market conditions than good.

This month’s reading follows a drop in February that was the biggest on record amid snowstorms that restrained prospective buyers from going out to shop for homes and kept builders from starting work. Recent gains in borrowing costs and higher property values also are limiting affordability, while an improving job market will help to underpin demand.

“Builders continued to be affected by poor weather and difficulties in finding lots and labor,” NAHB Chairman Kevin Kelly, a homebuilder and developer from Wilmington, Delaware, said in a statement.

Eoin Treacy's view -

The NAHB Home Builders Market Index rebounded impressively from its 2009 level, as the pace of foreclosures moderated and demand for new homes improved. However as prices rose, without a meaningful easing of lending standards, the affordability of homes has dropped back from highly attractive levels. It is now accurate to describe the US housing market as having returned to being priced on the individual merits of respective locations.


The slowing pace of new housing starts, not least due to weather conditions, has acted as a headwind to lumber prices which have fallen aggressively over the last week. Lumber prices have been prone to occasional bouts of volatility over the last decade. Despite the short-term oversold condition, a sustained move above $350 will be required to question current scope for further weakness.



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March 13 2014

Commentary by Eoin Treacy

Potash demand looking up as suppliers short on MOP supply

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

“The potash market has a much more positive tone now than the prior 12 months, Sid Himmel, the CEO of IC Potash, told analysts Wednesday.

“Most suppliers are short on granular MOP [Muriate of Potash] supply,” he observed. “Demand is coming back from China. Prices are starting to turn up.”

“This is likely a confirmation that current prices are considered low by agricultural buyers, and there is clarity that a lot of the extra supply that was thought to be coming on stream will not be built due to high capital costs,” Himmel advised

Eoin Treacy's view -

Bloomberg no longer updates the Vancouver price for potash we previously had in the Chart Library so we have replaced it with a US price that updates weekly and one that updated monthly but has more back history. 



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March 12 2014

Commentary by Eoin Treacy

Platinum wage talks take turn for the worse as negotiator spat grows

This article by Geoff Candy may be of interest to subscribers. Here is a section: 

Last week, the CCMA announced that talks had been suspended indefinitely after all parties involved failed to reach an agreement, to the detriment of the miners that have not earned a salary in close to seven weeks.

The latest utterances are likely to jeopardise the wage negotiations that are already under strain as all the parties involved have pointed fingers at one another, accusing each of negotiating in bad faith.

Workers in the platinum belt have lost close to R4 billion in wages while the companies have lost R12 billion.

The workers are demanding a R12,500 minimum basic wage for entry level underground workers while the companies have only offered increases ranging from 7 to 9%

Laura Mseme, a spokeswoman at the CCMA has called on the Chamber of Mines to either retract comments by its chief negotiator about the handling of the current platinum strike – or face the consequences.

She said Strydom “unjustly accuses the CCMA of misconduct and incompetence”. In addition, she said: “It surely cannot assist the crisis in the industry, and we regard it as an undesirable strategy during such a fragile and complex process…We specifically wish to put on record that at no stage have any such concerns been raised with the CCMA, and we consider it alarming that an organisation such as the Chamber of Mines could utilize a public forum to express its opinion without having at any point raised these issues with the CCMA”

 

Eoin Treacy's view -

The South African labour dispute has weighed on the platinum mining sector over the last year. While a small number companies have reached agreement with their workers, the issue remains a front page story that is debilitating to investor confidence. Despite tensions, the labour dispute has had relatively little effect on platinum prices. Platinum remains rangebound and is currently rallying towards the upper boundary. A sustained move below $1450 would be required to question current scope for continued higher to lateral ranging.  



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March 11 2014

Commentary by Eoin Treacy

The need for nickel investment now

This interview appeared in today’s Mineweb and may be of interest to subscribers. Here is a section: 

The situation with Indonesia is that I don’t think that anybody saw that Indonesia was going to ban all exports in totality. The general thinking was that there would be allowances for those that were looking to build smelters within Indonesia to continue ore exports beyond January 12 and the ban. Clearly what didn’t happen, they completely banned all exports as of January 12 and that seems to be holding. That means that everybody has been caught slightly on the hop and it does change the dynamics of the nickel industry completely in that we’ve gone from a situation of potentially being oversupplied for the next five or six years in terms of nickel supply because of the growth in nickel pig iron production, to a situation where at some point in time potentially taking out at least 300,000 tons of nickel production, that brings a whole new dynamic to the nickel industry and in terms of the supply requirements going forward. In terms of the ban itself… is it going to hold? There is still some uncertainty around the fact, there are elections coming up and there’s a certain thinking that maybe the change in government, there may be a change of heart and that the export ban will be rescinded. Our view right now is that won’t be the case and the ban will stay in place and it’s now a new era for nickel… having seen nickel pig iron come to fruition back in 2005, now we have a big sea change of actually taking nickel pig iron out again by virtue of this ban. So, it’s going to be an interesting dilemma going forward.

Eoin Treacy's view -

Over the last decade we have seen a number of instances where high prices encourage previously uneconomic ventures to blossom. China’s development of the nickel pig iron sector is one such instance, where a previously ignored segment of the market grew to become the marginal producer; hitting a capacity of as much as 8 million tonnes last year. Surging supply from this sector then helped to overwhelm demand and prices collapsed.

Smelting is generally a dirty business but the low tech methods employed by large numbers of Chinese operations, not just in nickel but in a range of other metal fabrications, are major contributors to the nation’s pollution. When the administration speaks of rationalising heavy polluting sectors, the smelting sector is close to the top of their list. This would suggest that inefficient producers will be forced to either innovate or close which is likely to remove supply from the market. 



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March 11 2014

Commentary by Eoin Treacy

Copper Slumps to Lowest Since July 2010 on China Demand Concerns

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

China’s imports of unwrought copper and copper products fell to 380,000 metric tons in February from a record 536,483 tons a month earlier, customs data show.

Stockpiles tracked by the Shanghai Futures Exchange have climbed for eight straight weeks, the longest advance since February 2012. Combined inventories tracked by the exchange and in bonded warehouses are up 42 percent since the start of the year, Morgan Stanley said today.

On the London Metal Exchange, copper for delivery in three months fell 2.5 percent to $6,480.50 a ton ($2.94 a pound). Prices touched $6,469.75, the lowest since July 2010.

Eoin Treacy's view -

The divergence in the performance of the respective industrial metals illustrates that the market has returned to pricing them on their individual merits. Previously investors assumed the ambitious demand growth forecasts on which expansion plans relied would be a tide that lifts all boats. Copper held the majority of its bull market advance but has seen a great deal of supply reach the market in the last year which is pressuring prices.



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March 05 2014

Commentary by Eoin Treacy

Brazil Soybean, Corn Crops Seen Smaller Than Forecast by Informa

This update on expectations for soybean yields by Jeff Wilson for Bloomberg may be of interest to subscribers. Here it is in full:

Brazil’s soybean production will be 88.8 mln mt, below the 89.7 mln forecast last month, Memphis, Tennessee-based agricultural researcher Informa Economics Inc. said today in a report to clients.

The USDA forecast in Feb. that production would rise to 90m mt from 82 mln last yr

Informa said Brazil’s corn harvest will be 65.45 mln mt, compared with a Feb. 4 forecast of 66.55 mln

Last month, the USDA forecast Brazil output at 70 mln mt, down from 81 mln last yr

NOTE: The USDA will update its forecasts on March 10.

Argentina may harvest 54 mln mt of soybeans, compared with from 57 mln estimated last month The USDA forecast a crop of 54 mln, up from 49.3 mln last yr

Argentina corn output was forecast at 22.6 mln mt, unchanged from last month and below the 24 mln estimated by the USDA.

Eoin Treacy's view -

Weather conditions were generally favourable for the last few years but 2014 is proving to be an exception with droughts, hard frosts, storms and occasional floods all having an impact on yields.

The deterioration in grain and bean prices between 2009 and 2013 was probably a contributory factor in the upset that took place in the global potash cartel since competition for market share intensified. As prices recover we can reasonably expect demand for fertilisers to improve.  



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March 05 2014

Commentary by Eoin Treacy

Australian Growth Beats Estimates as Rebalancing Begins

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

“The Coalition’s plan to reduce regulation and abolish taxes will help smooth the transition in the economy away from resource investment and toward growth in the non-mining sectors,” Treasurer Joe Hockey said in a statement today.

“That will be key to boosting annual growth to more than 3 percent, which is what’s needed to bring unemployment down.”

The nation’s unemployment rate climbed to a 10-year high of 6 percent in January. February jobs data is due on March 13.

“Some indicators of business conditions and confidence have shown improvement and exports are rising,” central bank Governor Glenn Stevens said in a statement accompanying yesterday’s decision to leave rates unchanged. “At the same time, resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative.”

Eoin Treacy's view -

The RBA has made its intentions clear by reducing short-term rates to historic lows and repeatedly earmarking the currency for additional declines. This has had the twin effects of boosting the allure of Australia’s high yielding shares and enhancing the export sector’s competitiveness.

While a great deal of commentary has focused on the slowing pace of investment in the resources sector, the equity markets have already priced in the fact that massive write-downs have already been announced and that miners are now running much more cost-efficient operations. 



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March 03 2014

Commentary by Eoin Treacy

Terrorists changing tactics to create panic among civilians, analysts say in wake of Kunming attack

This article by Zhang Hong for the South China Morning Post may be of interest to subscribers. Here is a section:

The Kunming attack came just days before the opening meetings of the Chinese People's Political Consultative Conference today and the National People's Congress on Wednesday.

Last October, three people died carrying out what Beijing described as a terrorist suicide attack in Tiananmen Square that killed two others and left dozens injured.

Officials blamed the East Turkestan Islamic Movement for the incident, which occurred 10 days before a crucial Communist Party meeting.

"Terrorists are using all means to create widespread social panic … across China," said Pan Zhiping, an expert on terrorism at Xinjiang Social Science Academy. "The timing of the Kunming attack implies the terrorists want to create the biggest impact possible.

"Security is tight in Beijing and Xinjiang and in their surrounding provinces, but Kunming, a city thousands of kilometres away … is less defended. Nobody could have predicted an attack would be staged there."

Eoin Treacy's view -

Events unfolding in Ukraine have stolen headlines, but the mass murder that shook China over the weekend represents an escalation of the terror campaign that many associate with Xinjiang separatists.

The Communist Party’s claim to legitimacy rests on its ability to deliver social stability and improving standards of living. It is reasonable to expect that anyone who wishes to damage the Party would look on the weekend before the opening of the annual congress as an opportune moment to act.

 



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February 28 2014

Commentary by Eoin Treacy

Diamonds

 

 

Eoin Treacy's view -

We have had prices for 1 carat flawless diamonds in the Chart Library for some time but a subscriber recently asked if we could add prices for rough diamonds, since these represent the bulk of global trade in the stones. Bloomberg recently added rough diamond prices from polishedprices.com so I have added the data series to the Chart Library.

Average 1-carat flawless diamond prices have lost downward momentum over the last year and have rallied to test the region of the 200-day MA over the last month. A sustained move above the trend mean will be required to suggest a return to demand dominance beyond the short term.

Pricing for rough diamonds was spotty before 2010 so there are some gaps in the data but they also hit an important peak in 2011 and have stabilised over the last year above $200. A sustained move below $225 would be required to question medium-term scope for additional higher to lateral ranging. 



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February 28 2014

Commentary by Eoin Treacy

EU Sugar Plans Pit Growers Against Food Makers After Prices Fall

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

While stockpiles are at a “reasonable level,” consumption could grow faster than expected and imports may not meet the forecast, the sugar users group said. Inventories should not drop below 2.4 million tons, it said in the statement. Reserves on Sept. 30 were 2.5 million tons and are forecast to be 2.3 million tons by Sept. 30, 2014, commission data showed.

“Allowing a shortage on the market runs contrary to the clear need to develop a sustainable transition to the EU sugar supply chain,” Muriel Korter, secretary general of the sugar users, said by e-mail today. “It would annul all recent efforts of the European Commission to stabilize supply on the EU sugar market since 2010.”

The EU shrank its output after 2006 as the World Trade Organization ruled the bloc was dumping subsidized sugar on world markets. Under current regulations, local producers can only sell a limited amount in the bloc, leaving part of the demand to be met by imports from countries that have agreements to ship tariff-free sugar to the EU. Shortages emerged as imports from preferential nations fell below the EU’s forecast.

 

Eoin Treacy's view -

The EU’s decision to stop supporting its domestic sugar growers was a causal factor in the bull market for the commodity that took place between 2003 and 2011 which saw While Sugar prices quadruple. The subsequent supply response saw prices give up almost the entire bull market gains with the market returning to equilibrium at the upper side of the long-term base from late January. Just how high prices move in the current phase is unclear but decisions made by the EU will play an important role. 

In the course of the two-year downtrend, white sugar has pushed above the 200-day MA on a number of occasions. It will need to sustain the breakout in order to demonstrate a return to demand dominance beyond the short term. 

 



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February 27 2014

Commentary by Eoin Treacy

Kazakhmys to Shrink by Two-Thirds as It Casts Off Weak Mines

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

In comparison, the “game-changing restructuring proposal ”suggests a net present value of 587 pence a share if successful, Fraser Jamieson, a JPMorgan Securities Plc analyst, wrote in a note to investors today as he raised Kazakhmys to overweight.

Copper grades mined by the reorganized Kazakhmys would rise to about 2.4 percent from 0.99 percent last year and costs per pound of output would drop to 130 to 150 cents from 328 cents in 2013, Novachuk said. Production would be 80,000 to 90,000 tons a year, from 294,000 tons, and staff would be 12,000, from 56,000, under plans that will go to shareholders after board approval.

The company will keep the Bozshakol and Aktogay sites that will each bring in about 100,000 tons of copper annually by 2017, Novachuk said. Bozshakol will start up next year, he said.

It also agreed to buy Kazakhstan’s Koksay copper project with an estimated 80,000 tons of output a year for $260 million, Novachuk said. Kazakhmys plans to be a “highly-efficient” producer of 350,000 tons of copper a year after its expansions.

For last year, it reported earnings before interest, taxes, depreciation and amortization fell to $1.15 billion from $1.36 billion. It targets output of 285,000 to 295,000 tons this year.

 

Eoin Treacy's view -

There has been a great deal of attention paid to the plight of gold miners and the measures they have taken to improve their situation which are now beginning to pay off. The industrial metal mining sector has been faced with similar issues. Companies such as BHP Billiton and Rio Tinto have cancelled a number of projects but the adjustment announced by Kazakhyms represents a more extreme development which, if successful, could prove beneficial for investors.  



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February 21 2014

Commentary by Eoin Treacy

Uranium shares

Eoin Treacy's view -

A number of subscribers have written in asking about the uranium market over the last month, not least because of increasing interest in the resources sector generally. The outlook for the sector has improved somewhat of late with Japan drawing closer to restarting some of its reactors. (Also see David’s post yesterday). 

In the Chart Library many subscribers have uranium in their Favourites. The most common ticker is the Metal Buttletin price (MBURNXRE) but they no longer supply Bloomberg with this data. Therefore we would suggest replacing it with the uranium future which has the code UXA3. 

I thought it may be instructive to take a look at some of the more notable shares. 

 



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February 21 2014

Commentary by Eoin Treacy

Chinese group considers South Africa platinum bids amid strikes

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

China’s Long March Capital Ltd., which partners with Citic Group Corp., is considering buying South African platinum assets after their value was depressed by strikes, the company’s Managing Partner Clement Kwong said.

The company is now reviewing a decision to hold off on purchasing South African platinum assets because of the labor issues, Kwong said in a Feb. 19 interview in Johannesburg. Long March last year partnered with Citic unit Baiyin Non-Ferrous Metal Group Co. Ltd. and China-Africa Development Fund to complete their buy-out of Perth-based Gold One International Ltd. and indirectly acquired a stake in Westonaria, South Africa-based Sibanye Gold Ltd..

“If the industry survives and makes a profit then that would be a good signal to look at investing,” said Kwong, who founded Long March Capital with a partner in 2008. “This last round has repriced these assets down so I think it would be as cheap as it gets.”

 

Eoin Treacy's view -

China has been highly successful in acquiring mining assets at bargain basement prices by following a buy low approach which should be the envy of boardrooms across the mining sector. 

The recent expression of interest in platinum assets highlights the fact that China is now the world’s largest car market and suggests it may also be interested in lead and other industrial metal assets. 

 

 



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February 20 2014

Commentary by Eoin Treacy

Zinc and lead: beauty in the eye of the beholder

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

Still at least we can all agree, probably, that both markets are somewhere along the path from chronic oversupply to supply shortfall.

They are on the same journey for the same reason, namely the depletion of some of the world's largest zinc mines, a lack of replacement supply and problems with the few new mines that are coming on stream.

China's MMG is the prime example of this phenomenon. Technical problems have led it to defer its Dugald River mine, which was intended to be a partial offset against the closure of the giant Century mine next year.

But it's not the only player facing such issues.

This week problems have arisen at another important new mine, Perkoa in Burkino Faso. Glencore-Xstrata, which owns 62.7 percent of Perkoa and needs it to help compensate for zinc mine closures in Canada, has challenged minority shareholder and operator Blackthorn Resources over the mine's economics.

Blackthorn has already ceased open-pit operations at Perkoa and is now considering a number of "schedule, cost and capital scenarios". One scenario is to place the whole mine on care and maintenance until the zinc price improves further.

Since the sister metals are normally found in the ground together, every zinc mine that closes takes out a bit of lead supply as well.

It's just a case of which market will be first to see mine supply constraints translate into a metal shortage.

 

Eoin Treacy's view -

In 2002 David coined the phrase Supply Inelasticity Meets Rising Demand to explain the inability of miners to respond to greater demand from the emerging markets because they had failed to invest when prices were low. A great deal of investment poured into the sector from 2003 but evaporated during the credit crisis. The subsequent declines in metal prices and effects this has had on miners’ expansion plans have resulted in supply and demand coming back into balance following a more than three-year process of rationalisation. 
 

 



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February 20 2014

Commentary by Eoin Treacy

Souped-up Sibanye delivers cash, dividend

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

This led, the group said, to a 19% hike in operating profit over the six months to US$399m. And, perhaps more importantly, Net cash generated for the period, before net loan repayments and dividends, was US$170 million. And this all despite receiving a 7% lower average Rand gold price of R420 423/kg (US$1 301/oz) over the period.

Sibanye was also quick to point out that, the cash generated is "equivalent to approximately 40% of Sibanye Gold’s market capitalisation as at 31 December 2013."

During the 2013 year, the group said it also made debt repayments of US$231 million, which reduced its gross debt to US$193 million and net debt to US$48 million at year end. 

Importantly, given its goal of becoming a leader in the dividend space, Sibanye also approved a maiden final dividend of 75 cents per share (ZAR) for the six months ended 31 December 2013, resulting in a total dividend of 112 cents per share (ZAR) in 2013.

This, Sibanye said, "is equivalent to a dividend yield of 5.5% at Sibanye Gold’s closing share price of R20.40 on 18 February 2014 and 9.1% at the closing share price on 31 December 2013."

"The cash flow statement really reflects the power of the company," CFO, Charl Keyter said during the presentation of the results in Johannesburg.

 

Eoin Treacy's view -

A subscriber brought Sibanye Gold to my attention a year ago saying it could become an instrument not seen in decades; a high yield South African gold miner. (Also see Comment of the Day on April 13th 2013)

 

 



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February 19 2014

Commentary by Eoin Treacy

China Cement, Sweet spot in the super cycle

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

Supply growth for cement has reached an inflection point The supply outlook looks particularly attractive with net supply growth of 1.9% and -4.0% for FY14/15E, as the cement sector faces the toughest measures in its history to rein in overcapacity. The State Council has issued guidelines under Document 41 to ban new supply approvals, control land and credit availability and to remove 32.5 grade (low quality) cement. The Clean Air Action Plan and new cement emission standards provide a catalyst for obsolete capacity removal and consolidation. We also see a more rational supply response being driven by 1) CNBM’s diminishing potential in M&A, and 2) economic returns for new plants that look low, notwithstanding our view of the cycle.

Moderate demand growth to absorb excess capacity
Cement demand should moderate to c.5% CAGR in the next five years, declining from a high of 9.6% in 2013. Urbanization should continue to drive cement demand particularly in Western China. While investors are concerned about China’s high cement consumption per capita, our study of developed countries shows that urbanization rates correlated strongly with cement consumption per capita until urbanization rates reached c.70-80%. China’s urbanization rate will not reach this level for 10-15 years.

Structurally higher margins in the long run
Most would view 2011 as the peak of the cycle with industry margins at unit GP of RMB87/t and bellwether Conch achieving GP of RMB123/t. However, we believe there is room to exceed this in the next few years given the structurally better supply-demand. This is helped by structurally lower coal prices, now 40% below the 2011 peak. With more aggressive consolidation ahead, this should provide support for higher margins. 

Eoin Treacy's view -

The full report is posted in the Subscriber's Area.

At the Singapore venue for The Chart Seminar last week, we discussed the outlook for cement companies and other materials companies based on the fact that expectations are low and chart patterns generally supportive of a recovery hypothesis.

Anhui Conch is trading in the region of the upper side of a two-year range and will need to continue to hold above the 200-day MA if medium-term potential for additional upside is to continue to be given the benefit of the doubt.

China Resources Cement Holdings found support in the region of the 200-day MA from January and broke out to new 18-month highs two weeks ago. A sustained move below HK$5.25 would be required to question medium-term scope for additional upside.

Taiwan Cement Corp has a broadly similar pattern to the TAIEX and most recently found support in the region of 200-day MA from early February. A sustained move below TW$42 would be required to question medium-term potential for additional upside.

While not covered in the above report, German listed Heidelberg Cement is forming first step above its base while Irish and UK listed CRH has held a progression higher reaction lows since late 2011. 



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February 19 2014

Commentary by Eoin Treacy

Finally back at 1,000 but no rush Deconstructing the TSX-V surge

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

Unfortunately, for juniors, the volume spikes look like an aberration. They owe much to the impact of surging trade in a handful of oil stocks, most recently, and before that extensive selling (and, relatively speaking, a little buying) in stocks worth just a few (or less) pennies and, importantly, that were not on the rise. Furthermore, much of this selling, as John Kaiser, of Kaiser Research, pointed out to me last Friday, came from two related sources: Pinetree Capital - a junior that owns an extensive portfolio of junior stock - and its Chairman and CEO Sheldon Inwentash, a well known stock promoter in Canada.

Doing a quick count of Inwentash and Pinetree volume from SEDI insider reports (SEDI is Canada's regulatory repository of insider information) shows that during the last few trading days of January and first few trading days of February, Pinetree and Inwentash accounted for at least 50 million in Venture volume. On January 31 - when Venture volume hit 351 million - Inwentash and Pinetree traded in two equities, among numerous others, accounting for 20 million of that day's volume at least.

This was a sell off of Bear Lake Gold and Nortec positions. More broadly, according to SEDI, Inwentash either directly, or through a related party, ceased to be, or be associated with, a 10-percent-plus stock holding as an insider in 30 junior companies in 2014.

Now as for the oil connection: In recent weeks the Venture, grossly speaking, has topped 200 million on a number of occasions. The volume surge is, importantly, also evident on the more widely referenced S&P/TSX Venture Composite Index, a selection of junior stock on the Venture: It has posted volumes near 100 million, which were rare in 2013-14.

Eoin Treacy's view -

This article caught my attention because it highlights the fact that while the miners have recently attracted investor interest, commentators are still talking about investors liquidating positions in highly illiquid shares. They would appear to be missing the bigger picture.
 

 



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February 19 2014

Commentary by Eoin Treacy

February 18 2014

Commentary by Eoin Treacy

After 18 months of cost-cutting lock step, BHP and Rio start to differ

This article from Reuters appeared in the today’s Mineweb and may be of interest to subscribers. Here is a section: 

For the past 18 months BHP Billiton and Rio Tinto have appeared like identical twins, singing the same tune on cutting back spending, controlling costs and returning more to shareholders.

The latest financial results show the world's two biggest diversified miners are finally hitting the right notes with investors, but are diverging in style.

BHP Billiton on Tuesday posted a 31 percent rise in first-half profit to $7.76 billion, beating the median analysts' forecast of $6.93 billion.

This was achieved on the back of annualised cost savings of $4.9 billion, lower capital expenditure and higher profits from expanding iron ore output.

It was a similar story for Rio Tinto, which on Feb. 13 reported a 45 percent jump in second-half profit to $5.99 billion, exceeding the median forecast of $5.49 billion.

As with BHP, much of the boost came from cuts to capex and operating costs, with the standout performer being iron ore, which provides about 90 percent of the company's profits.

So far the story is pretty much the same. Both companies are delivering on undertakings first made in mid-2012 to slash capital spending, curtail new projects, and focus on operating costs at existing assets.

Eoin Treacy's view -

The write downs announced by the mining sector have been a major headwind to improving investor sentiment since they highlighted just how out of control spending had been.

A great deal has changed in the last two years but perhaps the most notable is that the amount to be spent on expansion has been slashed. The optimistic demand growth forecasts used to justify spending have been ditched and evidence of increased demand will now be required before additional spending is likely to be approved.

The evolution of expectations is likely to be positive for company’s free cash flow which has been a bugbear for many commentators. This should also help open the way for some of the larger companies to increase their dividends and potentially buy back shares. At current valuations the latter option may appear particularly attractive.



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February 17 2014

Commentary by Eoin Treacy

Gold ETF Holdings rise

Thanks to a subscriber for this interesting note from ETF Securities confirming the return of net inflows to gold ETFs. Here is a section: 

Long gold ETPs see US$9.1mn of inflows as price breaks through US$1,300oz and its 200 day moving average on weak Dollar. Soft economic data from the US, coupled with re-affirmed continued stimulus from the Fed, weighed on the US dollar last week, in turn  pushing the gold price higher. Investors appear to have been reassured the Fed will maintain stimulus for a “considerable time” as the “labour market is far from complete”,  according to new Fed Chairman Yellen’s testimony to the Congress. The last time gold traded around these levels was in November 2013, before the Fed started tapering.  Meanwhile, Kazakhstan joined Argentina in devaluing its currency last week, as emerging market currency contagion hit the country, spurring investors’ demand for safe havens. Long silver ETPs also saw net inflows of US$5.7mn, on EM woes and hopes of continued stimulus from the Fed. 

Eoin Treacy's view -

Veteran subscribers will be familiar with this chart of the Total ETF Holdings of Gold which trended persistently lower for all of last year. The net result was that institutional selling outweighed physical buying and gold prices experienced their first annual decline in more than a decade. This took a particularly heavy toll on gold miners which were forced to write down their investments in new assets and saw their value return to test the 2001 nadir relative to the metal’s price.


However what became evident towards the end of last week was that gold ETFs had registered their first net inflows in more than a year suggesting that the loss of downward momentum on the chart of holdings is translating into a return of investor interest albeit modestly to date..



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February 17 2014

Commentary by Eoin Treacy

China Stocks Erase Losses YTD as New Credit Increases

This article from Bloomberg News highlights the recent rebound for Chinese shares. Here is a section: 

New local-currency lending was 1.32 trillion yuan, the highest level since 2010. M2, the broadest measure of money supply, increased 13.2 percent from a year earlier last month, according to the central bank. That matched the median economist estimate and compared with 13.6 percent in December.

Record new credit will help the economy to maintain momentum while underscoring challenges for officials trying to limit the risk of financial turbulence from defaults and bad loans.

Eoin Treacy's view -

Uncertainty as to how China is likely to tackle its credit bubble remains a considerable headwind to sentiment improving from the perspective of many foreign investors. However, as we have seen in the cases of the USA and Europe, an issue with credit expansion can go on for much longer than many people expect once it has been identified. 

The nature of China’s credit system is that demand for credit tends to be highest in January so we will not know to what extent credit growth is sustainable until after the first quarter. The administration apparently wishes to tackle the situation but it is taking a long-term perspective; suggesting the muddle through approach taken to date is likely to continue. We will probably have more visibility on this issue once the party Congress concludes next month. 
 

 



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January 29 2014

Commentary by Eoin Treacy

JPMorgan Said Near Decision on $2 Billion Commodities Unit Sale

This article by Jodi Xu, Hugh Son and Andy Hoffman for Bloomberg highlights some important developments in the commodities markets. Here is a section: 

Blackstone, the world's largest private-equity firm, sees commodities as another way to diversify its lines of business, one person said. The firm has grown fee-paying assets and tapped streams of revenue that are less dependent on the market cycles that drive private-equity profits.

Mercuria would gain oil infrastructure assets in North America and a global chain of warehouses for its metals trading business. Registered in Cyprus with headquarters and major trading operations in Geneva, Mercuria is the fourth-largest independent commodities trader. The company posted a profit of $343 million in 2012 on revenue of $98 billion.

Macquarie, which has an existing trading business in oil and gas, power and coal, has been expanding that business in the past years, buying a stake in British metals-warehousing company Scale Distribution last year. It is the fourth-largest trader in natural gas in North America, according to its website. Macquarie competed with JPMorgan for assets from RBS Sempra Commodities, a venture between Royal Bank of Scotland Group Plc and Sempra Energy, in 2010.

While JPMorgan's commodities unit also drew interest from Grupo BTG Pactual, the Brazilian investment bank, the bank ended its pursuit, people said this month.

KKR, which teamed up with U.S.-based energy trader Castleton Commodities International LLC, is no longer involved in the process, according to a person familiar with the situation. A spokeswoman at KKR declined to comment on its interest, while a representative for Castleton didn¡¯t respond to a request for comment via e-mail.

 

Eoin Treacy's view -

The CFTC is currently being lobbied by commodity consumers such as utilities, steel and chemical companies to increase restrictions on position sizing in the futures markets. Over the last decade investment banks have been able, through a roundabout mechanism, to build up substantial positions in commodity contracts well beyond what was envisaged when regulations were initially formulated. 

 



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January 28 2014

Commentary by Eoin Treacy

Sugar in India Tumbles to 22-Month Low on Export Subsidy Concern

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

Refined sugar futures in Mumbai decline a 2nd day on speculation govt subsidy for raw sweetener exports will be less than sought by industry, says Indranil Mukherjee, an analyst at Religare Commodities.

February-delivery contract tumbles to intraday low of 2,65 rupees per 100 kg on National Commodity & Derivatives Exchange, lowest for most-active futures since March 2012

 “Mills won’t be able to liquidate stocks. Amount of subsidy won’t help exports as international sugar prices are also going down”: Mukherjee

NOTE: Raw sugar reaches 43-mo. low in New York

“If there is no parity it will be very difficult to find buyers. Surplus in the domestic market will not reduce:” Mukherjee

Eoin Treacy's view -

Declining prices across commodity exchanges not only in the USA and UK but also in China suggest sugar’s oversupply remains a considerable factor for the global market. However, if India’s export subsidy acts as a disincentive to increase global supply, that may be as a bullish catalyst for international prices to bounce.

An additional medium-term consideration is that farmers will seek to plant the crop they are likely to make the most money from. Less sugar will be planted this year. This will eventually have an effect on the excess inventory situation which will be complemented by low prices encouraging consumption.



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January 28 2014

Commentary by Eoin Treacy

Sentiment Shift Global Shipping Markets Back In Focus In 2014

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

Dry bulk rates have scraped along the bottom of their historical ranges for much of the past three years, but appear poised for a sustained improvement as supply growth is set to moderate further in 2014 and beyond. Global fleet growth in deadweight tons (DWT) is set to decelerate through 2016 as ship owners were not as eager to place orders for newbuildings during the challenging market of the past few years. Dry bulk demand is expected to be driven in large part by growth in iron ore and coking coal cargoes as new capacity for iron ore production is poised to come online, providing support for our estimates.

Skeptical Of Crude Tanker Rate Sustainability; Product Market Improving
While we are currently projecting limited crude tanker fleet growth (on a DWT basis) of only 1.2% y/y in 2014, followed by 0.5% y/y growth in 2015 and 2016, fleet utilization is projected to only modestly improve near-term. However, rates are up significantly in Q1 2014 due in part to weather factors which have created port delays. Compared to crude, our view of the product tanker market is relatively positive given that utilization is expected to remain north of 90% in our forecasted periods after a roughly 91.5% utilization year in 2013. Product exports out of the U.S. have benefited from a build-up of crude oil which must be refined before it is allowed to be exported due to the U.S. ban on crude exports and new refining capacity in emerging markets has created longer ton miles for petroleum products.

Eoin Treacy's view -

The full report quoted above is posted in the Subscriber's Area.

The credit crisis squeezed just about every commodity business so that shipping companies saw demand for their services deteriorate. On the supply side, 2008 also saw a substantial increase in the size of the global fleet. The result was that the Baltic Dry Shipping Index collapsed from a high above 8000 to a 2008 low of just over 400. It has been ranging above its lows since; reflecting a relative equilibrium. The longer this situation persists the more likely dry shipping companies are to cancel expansion plans so that when demand eventually picks up, prices should sustain a rise.

 



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January 24 2014

Commentary by Eoin Treacy

Six ratios say this market is very overbought

Thanks to a subscriber for this timely article by Mark Hulbert for MarketWatch, highlighting a number of points we have discussed over the last months relating to valuations. Here is a section: 

2. Cyclically adjusted P/E ratio. This is the version of the P/E championed by Yale University Professor Robert Shiller, the recent Nobel laureate in economics. It is calculated by dividing a company’s stock price by the average of its inflation-adjusted earnings of the preceding decade. For the S&P 500, this ratio currently stands at 25.6, which is higher than what prevailed at 29 of the 35 tops since 1900.

3. Dividend yield. This is the percentage of a company’s stock price that is represented by its total annual dividends. Since this yield tends to fall as prices rise, and vice versa, the market should register some of its lowest readings near its tops. The S&P 500’s yield currently stands at 2.0%, which is lower than the comparable yields that prevailed at all but five of the bull-market tops since 1900.

4. Price/sales ratio. This is calculated by dividing a company’s stock price by its per-share sales. Though it is lesser known, it still is championed by many investors because it is based on data that are less susceptible to manipulation than earnings. For the S&P 500, the price/sales ratio currently stands at 1.6, which is higher than the comparable readings that prevailed at all but two of the bull market tops since 1955, which is how far back data are available.

5. Price/book ratio. This is another lesser-known valuation indicator, calculated by dividing a company’s stock price by its per-share book value¡ªan accounting measure of net worth. For the S&P 500, this ratio currently stands at 2.7, which is higher than all but five of the 28 bull-market tops since the mid-1920s, which is how far back data are available.

6. Q-ratio. This indicator is based on research conducted by the late James Tobin, the 1981 Nobel laureate in economics. It is similar to the price/book ratio, except that book value is substituted by the replacement cost of assets.

Eoin Treacy's view -

We have described the cyclical  bull market as liquid fuelled since at least 2009. This was in recognition of the fact that central banks were making unprecedented quantities of liquidity available and this was having the desired effect of inflating asset prices, not least stock markets.

Corporations took advantage of this situation to optimise their weighted average cost of capital and issued new debt to redeem older issues, buy back shares and increase dividends; all of which act as a tailwind for the stock market. As perceptions of economic recovery potential evolve and central banks change course to normalise policy we can logically expect some adjustment in investor behaviour.

Let’s looks at some other indicators of investor appetite for risk assets.



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January 23 2014

Commentary by Eoin Treacy

Argentinean Peso Plunges as Central Bank Scales Back Suppor

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

President Cristina Fernandez de Kirchner, who said May 6 that the government wouldn’t devalue the peso, is struggling to hold onto dollar reserves which have fallen 31 percent to $29.4 billion. Reserves are the government’s only source to pay foreign creditors. Since changing her economy minister, cabinet chief and the head of the central bank on Nov. 18, the peso has fallen 25 percent, the most in the world, according to data compiled by Bloomberg.

“They’re running out of cash and they’re sitting in the corner at the moment,” Phillip Blackwood, who oversees $3.5 billion in emerging market assets as a managing partner at EM Quest Capital LLP, said in a phone interview from London. “There’s a feeling in the market that they’re not going to intervene any more.”

 

Eoin Treacy's view -

The decline in commodity prices over the last few years has put pressure on the economies of related countries, which had become reliant on the income generated from the sector while prices had been higher. Despite the fact that the Continuous Commodity Index has found at least near-term support near 500, continues to extend its bounce and may be forming a medium-term base, the price of industrial resources in particular remains below levels producing countries had budgeted for.

In yesterday’s piece discussing Sterling cross rates with commodity currencies I highlighted the fact that a significant number of commodity related markets find themselves in the position that they need to devalue their currencies in order to foster their competitive edge in other parts of their economies.

The Argentine Peso is an exaggerated example of the requirement to devalue a currency and is more reflective of a deficit in standards of governance than any other single factor. Nevertheless, the currency’s parabolic acceleration is a trend ending signal of undetermined duration as taught at The Chart Seminar. Once it ends, the country’s competitiveness will have been restored at least until the next devaluation.

The Latin America Dollar Index has returned to test the 2003 and 2008 lows and a clear upward dynamic will be required to suggest the return of demand dominance in this area. The Brazilian Real and Mexican Peso both occupy 33% weightings in the Index.

The US Dollar has been consolidating in the BRL2.4 area for much of the last six months and a clear downward dynamic would be required to question current scope for additional upside.

The US Dollar has also been ranging below the MXN13.5 since late June and has firmed of late. Mexico represents an interesting case at this level. Standards of governance are improving and attempts are now being made to foster investment in energy infrastructure. The country has a dynamic manufacturing sector and a land border with the USA. As a result, the Peso is unlikely to come under the same pressures are other commodity currencies and any additional weakness can be viewed as fostering the country’s competitive advantage in manufacturing.

The US Dollar has base formation characteristics against both the Chilean Peso and the Colombian Peso. It is now testing the upper side of these congestion areas and clear downward dynamics would be required to question potential for successful breakouts. 



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January 13 2014

Commentary by Eoin Treacy

Indonesia Eases Mineral Ore Ban as Freeport Keeps Copper Exports

This article by Yoga Rusmana and Agus Suhana for Bloomberg highlights some important developments in the industrial metals sector. Here is a section:

Indonesia's President Susilo Bambang Yudhoyono signed a regulation for the ore ban, Energy and Mineral Resources Minister Jero Wacik told reporters, after an 11th-hour meeting of government ministers in Cikeas, West Java, yesterday. The rule, which goes into effect today, permits exports of minerals that are processed or refined in the country.

The decision will ease concerns about disruptions to copper shipments and is a compromise that reduces the impact of the ban on the country's mining industry. Indonesia accounts for 3 percent of the global copper supply, 18 percent to 20 percent of nickel and 9 percent to 10 percent of aluminum from bauxite, according to Goldman Sachs Group Inc. estimates.

"The essence of the government regulation is to uphold the 2009 Mining Law that means starting midnight on Jan. 12, exports of mineral ore will be banned," said Hatta Rajasa, the Coordinating Minister for the Economy. "That means all must be processed or refined."

 

Eoin Treacy's view -

As a major producer of industrial metals Indonesia has a vested interest in attempting to reap the greatest possible benefit from its production. Insisting that the ore is processed domestically before export is one such attempt. Fostering additional development of the domestic manufacturing sector would be a logical next step in that policy. This initiative is likely to be bullish for nickel and tin and may represent a medium-term bullish catalyst to reignite investor interest. 

 



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January 07 2014

Commentary by David Fuller

Frigid Air Threatens Coldest U.S. Weather in Two Decades

Here is the opening from last night’s report from Bloomberg:

The coldest air in almost 20 years is sweeping over the central U.S. toward the East Coast, threatening to topple temperature records, ignite energy demand and damage Great Plains winter wheat.

Wind chills plunged past 60 degrees below zero Fahrenheit (minus 51 Celsius) in parts of the upper Midwest. Chicago’s high today won’t reach zero and may just hit that tomorrow, according to the National Weather Service. New York City, which had a pre-dawn reading of 54, will drop to 6 by tomorrow, while the temperature at Dallas Love Field was 16 at 7 a.m. local time.

Winter storms and frigid air add volatility to commodities trading and spot power markets. Natural gas futures in New York have surged more than 20 percent since Nov. 1 as the coldest start to the U.S. heating season in 13 years boosted fuel demand. Last week, as snow and cold gripped the nation, spot power for New York City jumped more than 11-fold in one hour, while wheat climbed the most since mid-October. This week, cities from Minneapolis to Pittsburgh may have record-low highs.

David Fuller's view -

Climatic extremes are becoming more frequent occurrences.  Australia is currently experiencing record heat, while during the same week the US is facing what will be the coldest winter in at least twenty years.  The Philippines is struggling to recover from record floods. Inevitably, these events are at least short-term blows to GDP growth in the countries most affected.      

 This item continues in the Subscriber’s Area.



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January 02 2014

Commentary by Eoin Treacy

Gold shares

Eoin Treacy's view -

While the vast majority of stock market sectors finished 2013 in positive territory, gold mining stocks were significant outliers. In fact they were the worst performing sector on the S&P500 losing 48% in 12 months. It is therefore notable that on the first day of trading in 2014, gold shares were the best performing sector, rallying over 4%.

 



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December 30 2013

Commentary by Eoin Treacy

Email of the day on generation IV nuclear reactors

"Last year I forwarded some information about nuclear molten salt reactors. I thought I would provide a brief update and have attached an article from Reuters on China's push for future nuclear technologies, in particular thorium and the molten salt reactor design. The article, in my opinion, places too much emphasis on thorium, as I believe the reactor design is the crucial factor. The article highlights considerable efforts being made by China, while one wonders what goes around in the heads of US Government that seems to be taking a back seat in the push for our nuclear future! I find that amazing when one thinks about the technological capacity of the US, and one may speculate about the incumbent nuclear industry's lobbying efforts to protect the status quo.¡±

"Best regards for 2014"

Here is a section from the article: 

"Beijing's long-term goal: commercialize the technology by 2040, after building a series of increasingly bigger reactors. The Shanghai Institute of Applied Physics is recruiting nuclear physicists, engineers, project managers and support staff, according to a regular stream of job advertisements it publishes online. Its team is expected to expand to 750 by 2015 and eventually include 1,000 researchers.

"A director at the Shanghai Institute, Li Qingnuan, and other senior researchers are wooing top young talent across China to join the project. After lecturing on molten-salt reactor technology at Sichuan University in April, Li invited students from the audience to apply for positions at the institute, according to a report on the university's website.

"China's sprawling network of nuclear-research and industrial companies are gearing up to assist. In early June, the China National Nuclear Corporation, the body overseeing all Chinese civilian and military nuclear programs, announced that state-owned China North Nuclear Fuel Company had signed an agreement with the Shanghai Institute to research and supply thorium and molten salts for the experimental reactors.

"The push into thorium is part of a broader national energy strategy. The government wants to reduce its dependence on coal-fired power plants, which account for about 80 percent of the nation's electricity but have darkened its skies. Nuclear energy is a big part of the plan: China aims to have 58 gigawatts of nuclear power on the grid by 2020, an almost five-fold increase from 12.57 gigawatts today.

"Thorium is a hedge on that nuclear bet. China has 15 conventional nuclear reactors online and 30 under construction. But energy authorities are also investing in a range of different technologies for the future, including advanced pressurized water reactors, fast-breeder reactors and pebble-bed reactors. China has little uranium but massive reserves of thorium. So, the prospect of cheaper nuclear power with secure supplies of fuel is a powerful attraction.

"At last year's Shanghai thorium conference, Jiang described how clean nuclear power would allow China to make a "revolutionary" move towards a greener economy.

"The bet on unconventional nukes, he said, explains "why China is the first one to eat a crab" - citing an old Chinese proverb about the individual who dares to make a discovery important to civilization."

 

 

 

Eoin Treacy's view -

The USA is an energy superpower. China is not. This simple fact helps to explain the emphasis China has put on securing energy assets overseas, purchasing the technology required to begin exploiting its unconventional oil and gas resources and developing a multi-strand nuclear policy. China aspires to provide a first world standard of living for its citizens and this will require energy production to expand by multiples over the next few decades. It has no choice but to explore every possible avenue if it is to achieve that goal not least if air quality is to improve. 



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December 24 2013

Commentary by Eoin Treacy

Metals Seen Rallying With Crops After Record Tumble

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

It's a good time to come into commodities,¡± said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $340 billion of assets. "This is the first time in the recovery that we've had simultaneous positive and accelerating growth in the U.S., Europe, Japan and the emerging world all at the same time. That's a pretty big demand change. But until people kind of pick up on the fact that commodities can come back, you'll still see some people sticking a little more to stocks."

Eoin Treacy's view -

A great deal of new supply has come on line in the commodity sector over the last few years which has contributed to weakness in pricing across the complex. However, a number of base formations are evident in the industrial metals sector and soft commodities such as sugar and coffee have at least paused in their declines. This type of action suggests supply and demand have returned to equilibrium for at least part of the sector.

 



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December 17 2013

Commentary by David Fuller

A number of interesting charts

Price charts are your eyes on the markets.

December 05 2013

Commentary by David Fuller

Cutting Research on Warren Buffett

Here is the opening for this informative article from Bloomberg:

Warren Buffett isn¡¯t just a great investor. He¡¯s the best investor, an economic study has found

An index measuring returns adjusted by price fluctuations shows the billionaire chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A) has done better than every long-lived U.S. stock and mutual fund.

The ratio is also larger than all 196 U.S. mutual funds that have been around for 30 years. The median Sharpe ratio for them is 0.37.

The review of Buffett¡¯s investments concluded he has been rewarded for his use of leverage, coupled with a focus on cheap, safe, quality shares.

The study said Buffett is willing to take on borrowing to finance investment, then picks stocks that have low volatility, are cheap -- with low price-to-book ratios -- and are high quality, meaning they are profitable and have high payouts.

By breaking down Berkshire Hathaway¡¯s portfolio into ownership of publicly traded stocks versus wholly owned private companies, the authors also found the tradable equities performed best. That suggested to them that Buffett¡¯s returns are due more to stock selection than to the pressure he puts on companies he has stakes in to improve their management.
¡°Buffett¡¯s performance appears not to be luck, but an expression that value and quality investing can be implemented,¡± said Andrea Frazzini and David Kabiller of AQR Capital Management LLC and Lasse H. Pedersen of Copenhagen Business School. ¡°If you travel back in time and pick one stock in 1976, Berkshire would be your pick.¡±

David Fuller's view -

Informative article on Warren Buffett



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December 02 2013

Commentary by David Fuller

Rio Tinto to Halve Capital Spending by 2015 in Focus on Cash

Here is the opening for this cyclically informative story from Bloomberg

Rio Tinto Group (RIO), the world’s second-biggest mining company, will cut capital spending to about $8 billion in 2015, less than half its outlay last year, as mineral producers conserve cash after prices fell.

“Our capex is reducing, and will come down further,” Sam Walsh, chief executive officer of London-based Rio, said today in a statement. “From where I stand, we continue to see market fragility and volatility.”

Rio’s cutback underlines efforts by the world’s largest mining companies to rein in spending as a decade-long boom in metal prices wanes. Vale SA (VALE5), the biggest iron ore producer, yesterday slashed its investment budget for a third straight year to $14.8 billion, the lowest since 2010.

“It’s quite a substantial drop and it does suggest that right now Sam Walsh is concentrated very, very hard on affordability,” Evan Lucas, a Melbourne-based markets strategist at IG Ltd., said by phone.

“Over the longer term, I remain optimistic about demand for our products,” Walsh said according to the statement. “China’s urbanization will continue and the development of other economies as they continue to grow at pace, such as India, Vietnam, Indonesia, the Philippines, the Middle East, the former Soviet Union, South America and Africa, will also contribute to ongoing demand.”

David Fuller's view -

This is the way the highly cyclical industrial mining sector plays out.  When prices are high, as we last saw in 2007 and early 2008, miners pay too much for undeveloped greenfield sites and produce too much from their developed brownfield properties.  This eventually creates oversupply relative to demand.  In recessions, demand declines further and metal prices slump.  Miners eventually curtail expansion to reduce supply and high-cost mines are closed.  When demand eventually picks up miners are initially reluctant or unable to increase supply which drives metal prices higher.  This eventually reduces demand at a time when supply is actually increasing.  The cycle repeats itself over a number of years.



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November 28 2013

Commentary by Eoin Treacy

Gold Gains in London Trading on Weaker Dollar, Physical Demand

This article by Maria Kolesnikova for Bloomberg summarises some of the main issues currently facing the gold market. Here is a section:

"Physical demand for gold is still improving," Walter de Wet, head of commodities research at Standard Bank Group Ltd., wrote in a report today. "Volumes don't seem big enough to stem the slide in the gold price. Should demand reach levels seen in
June and July, it may start forcing short-covering in the futures market."

Eoin Treacy's view -

Powerful cross currents continue to affect the gold market in what has been a troubling year for investors. This marks a significant change from the environment that prevailed for much of the previous decade, when bullish factors coalesced to churn out consecutive positive annual returns. While Chinese imports of gold from Hong Kong continue to trend higher, the trend of ETF holdings of gold remains on a downward trajectory. 



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November 27 2013

Commentary by David Fuller

Today's interesting charts

Price charts show you where the money is going.

David Fuller's view -

Germany's DAX Index has risen for nine consecutive weeks and eleven out of the last thirteen weeks. It is also more overextended relative to its 200-day moving average than at any time since this bull market commenced with a weekly upside key reversal in March 2009. The next downward dynamic (see examples following previous overextensions to the upside) will indicate the onset of a corrective phase.



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November 27 2013

Commentary by Eoin Treacy

Sugar Rises on Speculation Bearish Bets to Drop; Coffee Gains

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

Robusta was supported as roaster supplies tightened amid slow farmer selling from Vietnam, the top producer of the variety, said Carsten Fritsch, an analyst at Commerzbank AG in Frankfurt. The country's exports were estimated at 80,000 tons in November, down 34 percent from the same time last year, the General Statistics Office said yesterday. Vietnam will harvest 28 million bags in 2013-14, matching the record, according to Olam International Ltd.

Eoin Treacy's view -

Robusta coffee continues to rebound following an accelerated decline in October and is closing its overextension relative to the 200-day MA. A break in the short-term progression of higher reaction lows, currently near $1550, would be required to question potential for additional upside. (Also see Comment of the Day on November 5th).



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November 25 2013

Commentary by David Fuller

"Gold No Slam-Dunk Sell in China as Aunties Buy Bullion"

Here is the opening from this informative article from Bloomberg:

Yang Cuiyan, a 41-year-old housekeeper from Anhui province, is one reason China is poised to topple India as the world's top consumer of gold even as investors desert the metal.

"I don't know anything about the stock market and I don't have enough money to buy property, so I figured gold is the safest choice," she said. "I can put it on when I go back home to show everyone that I'm doing well."

Yang, who made the 650-mile (1,000-kilometer) journey to the capital from her rural home to visit relatives and shop, is one of the legions of middle-aged Chinese women, respectfully referred to as aunties, who bought coins and jewelry this year, bringing support to a market shunned by many professional investors who began doubting the metal as a store of value.

Bullion consumption in the world's second-largest economy will surge 29 percent to a record 1,000 metric tons in 2013, according to the median of 13 estimates from analysts, traders and gold producers in China surveyed by Bloomberg News. Demand that may ease 2.4 percent in 2014 from this peak still points to purchases greater than any other nation and more than the U.S., Europe and the Middle East combined.

China's demand for jewelry, bars and coins rose 30 percent to 996.3 tons in the 12 months to September, while usage in India gained 24 percent to 977.6 tons, according to the London-based World Gold Council. India was No. 1 for calendar 2012.

David Fuller's view -

Gold remains in an overall downward trend; Goldman Sachs it talking it lower and western investors and traders are still drifting away from the Total Known ETF Holdings of Gold. However, it is also oversold in the short term and near prior support from the late June low.



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November 25 2013

Commentary by Eoin Treacy

Email of the day

on commodity tracking ETFs:

“Just flicking through the charts this weekend and noticed the Leveraged Nickel ETF versus standard Nickel ETF - I think it would be interesting for you to explain why standard Nickel halved in value from a 2011 peak and how leveraged Nickel has fallen from 16 to almost 2 - It would also be interesting to me if you were to explore this one - If standard Nickel was to rise from current levels, say 15000 back to 30000, would leveraged Nickel rise from 2 to 16. 

“I am asking this question mainly because I think it is a subject not covered anywhere else on the internet and also that I suppose the answer will prevent those looking at leveraged ETF's will avoid them. I got burnt once in the early days with a small holding and that's why I now avoid them but curiosity only means I do observe them from time to time. 

“Thanks in advance.”

Eoin Treacy's view -

Thank you for this question which comes up from time, with relation to ETFs attempting to track the performance of futures markets. Most people tend to think of ETFs as relatively passive baskets that simply mirror a well-defined Index such as the S&P 500. However, when this methodology is applied to instruments such as futures a number of additional considerations and costs have to be taken into account.



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November 21 2013

Commentary by David Fuller

Today's interesting charts

The best way to keep up with market action is by viewing price charts.

November 13 2013

Commentary by Eoin Treacy

Mutant Crops Drive BASF Sales Where Monsanto Denied: Commodities

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

The NAS and other science groups have urged the U.S. to adopt a system more like Canada, where novel food traits are examined for safety regardless of the method used to create them. In the U.S., where only GMOs are required to pass through an approval process, the Department of Agriculture issued a memo this year verifying crops created through mutagenesis as acceptable even for organic farming.

Mutant Crops Drive BASF Sales Where Monsanto Denied: Commodities- This article by Jack Kaskey for Bloomberg is directly relevant to the discussion on the benefits on genetically modified foods that appeared in yesterday’s Comment of the Day. Here is a section:

“Any GMO on the market today is safer than anything that hasn’t gone through that safety regulatory step,” McHughen, a member of the National Academies who helped write the 2004 report, said by phone.

Despite that view, Monsanto -- the world’s largest maker of genetically altered crops -- faces not just regulation of its GMOs and bans in some countries, but also political hurdles that can delay product introductions for years, sometimes indefinitely.
In July, it withdrew applications for planting its seeds in the EU, which has approved only one application in two decades.
BASF last year decided to move its plant-science division, which works on engineered crops, to the U.S. from Germany. Given the situation in the EU, breeders have little choice except to switch to mutation breeding, Lagoda said.

“The current regulations are a huge incentive to go back and do things the old way,” including mutagenesis, Wayne Parrott, professor of crop science at University of Georgia at Athens, said by phone. “Simply because, even though you may bring in a bunch of unknown genes and a lot of unknown changes, it’s not regulated.”

Eoin Treacy's view -

When I was a travelling account rep for Bloomberg back in the early 2000s, I remember chatting with a genetically modified (GM) foods lobbyist in Brussels. She was representing a large chemicals company in its attempts to alter EU policy on GM foods and was expressing a great deal of frustration with the reception she was receiving from officials. Not much has changed in the intervening decade. Europe remains a market which is deeply suspicious of GM foods. The blind spot it has for mutagenesis probably results from the fact that altering the characteristics of plants with radiation may predate the era of regulation for GM crops. The result of this market altering activity is that if companies cannot achieve their goals using one avenue they will necessarily follow another.



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November 13 2013

Commentary by Eoin Treacy

Libya, Iran, Brent & the Other Side of the Equation

Thanks to a subscriber for this informative report focusing on Libya’s energy sector. The full report is posted in the Subscriber's Area but here is a section

Turnaround season in US refining has caused a major oversupply of US crude, but international markets have been roiled by a surprise re-outage in Libya. In this note we focus on the Libya issue. We also address the countervailing improvement in US-Iranian relations and the upcoming decision on Chinese-Iranian oil imports sanctions exemption. We very briefly show Iraqi, other OPEC, and Saudi production. Notably, the 550kb/d fall in Iraqi production from 2012 highs to September 2013 lows was under-appreciated by the market, obscured as it was by Syria, Egypt, Libya, and Iran. Note: IEA non-OPEC supply forecasts of 1.8mb/d marginal growth for 2014 are for an all-time high.

Things can’t get worse in Libya
The 1mb/d+ outages that have characterized oil markets since the 2008 peak price have been due to Libya and Iran. To be clear, these are enormous outages that have clearly driven global (Brent) oil prices higher. For thirty years Libya, for all its international controversy, steadily supplied world oil markets with around 1.3mb/d of light sweet oil. Consensus was that the relatively small population of Libya, at around 6m, made it politically stable. Until it wasn’t. Now the country is in disarray, with factions independently taking control and interrupting oil exports. There is no single movement here, as we show in this note. However we do take the view that the situation in Libya cannot now get materially worse, with possibly less than 90kb/d of exports of light sweet crude, there is little left to lose, and plenty to gain. The country is working on a new constitution, and we think there is reason to believe that it is this process that is causing the upsurge in disruption by local interests.

A huge shift in Iran
’s newly-elected President Hassan Rouhani has ushered in a seismic shift in global geopolitics that has reverberated across the oil world, notably to the consternation of the Saudis and other Sunni Gulf oil states. With the all-important blessing of Iran’s Supreme Leader Ayatollah Ali Khamenei, as well as the country’s Parliament, Rouhani quickly reached out to US President Obama directly, and subsequently has moved Iran into nuclear talks over enrichment that had all but died under the leadership of previous President Ahmadinejad. Although nuclear talks in Geneva have ended, there is agreement to meet again as soon as November 20. Rouhani openly hopes for a deal to sanctions that have been the primary cause for the precipitous drop in Iranian oil production and exports. Intelligence suggests that the Obama regime is pushing Congress to soften its stance on sanctions while negotiations are underway, with a notable upcoming decision on the potential for an exemption for China to import Iranian oil, that needs a decision by December 2.

Eoin Treacy's view -

The Brent Crude – West Texas Intermediate spread remains a useful illustration of just how much the global oil market has changed. For decades Brent traded at a discount to WTI, this situation began to change from the early 2000s when the relationship became much more volatile. On the chart we can see that the last three years are distinctly different. As with any spread it is worth considering influences on both constituents.



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