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September 23 2014

Commentary by Eoin Treacy

China economic restructuring cuts demand for iron ore

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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September 19 2014

Commentary by Eoin Treacy

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

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

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

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

Eoin Treacy's view -

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



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September 16 2014

Commentary by Eoin Treacy

Copper Soars Most in 13 Months as Trading Stops on China

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

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

Eoin Treacy's view -

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



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September 15 2014

Commentary by Eoin Treacy

Sugar Has Longest Slump This Year Amid Expanding Global Glut

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 12 2014

Commentary by Eoin Treacy

India's love affair with gold may be over

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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September 09 2014

Commentary by Eoin Treacy

Email of the day on uranium mining investment vehicles

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

Eoin Treacy's view -

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

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

 



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September 05 2014

Commentary by Eoin Treacy

Back to school, miners league table

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

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

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

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

Eoin Treacy's view -

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

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



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September 03 2014

Commentary by Eoin Treacy

Uranium poised to enter bull market

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

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

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

Eoin Treacy's view -

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



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August 29 2014

Commentary by Eoin Treacy

PGMs: Rhodium The Come Back Kid

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

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

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

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

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

Eoin Treacy's view -

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

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



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August 28 2014

Commentary by Eoin Treacy

Zinc, nickel prices to move dramatically higher

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

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

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

 

Eoin Treacy's view -

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



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August 28 2014

Commentary by Eoin Treacy

Pretium Resources Inc.

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

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

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

 

Eoin Treacy's view -

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

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



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August 22 2014

Commentary by Eoin Treacy

Email of the day on uranium funds

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

Eoin Treacy's view -

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



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August 21 2014

Commentary by Eoin Treacy

Hormel pork margins to dip, as hog prices plunge

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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August 19 2014

Commentary by Eoin Treacy

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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August 18 2014

Commentary by Eoin Treacy

Email of the day on gold and silver

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

Eoin Treacy's view -

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



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August 15 2014

Commentary by Eoin Treacy

Ibovespa Rises as Investors Weigh Presidential Election Outlook

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

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

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

Eoin Treacy's view -

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



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August 08 2014

Commentary by Eoin Treacy

Bull market in cattle 'to last for years'

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

 

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

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

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

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

Eoin Treacy's view -

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

 

 

 



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August 01 2014

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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



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July 31 2014

Commentary by Eoin Treacy

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

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

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

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

Eoin Treacy's view -

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



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July 29 2014

Commentary by Eoin Treacy

Part II - The Tide Is Rolling In

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

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

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

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

 

Eoin Treacy's view -

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

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

 

 



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July 24 2014

Commentary by Eoin Treacy

Caterpillar Sees No Sign of Mining Upturn as Outlook Misses

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

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

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

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

 

Eoin Treacy's view -

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

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

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

 

 



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July 21 2014

Commentary by Eoin Treacy

Indonesia ends 6-month ban of metal concentrate exports

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 18 2014

Commentary by Eoin Treacy

Petrobras Said to Seek Contract Extensions at Biggest Fields

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 14 2014

Commentary by Eoin Treacy

Brazilian Real Climbs on Speculation Rousseff Will Lose Election

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

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

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

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

 

Eoin Treacy's view -

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

 



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July 11 2014

Commentary by Eoin Treacy

Crop Forecast Sends Corn Prices to Near Taxpayer Subsidy Trigger

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

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

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

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

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

Eoin Treacy's view -

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



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July 10 2014

Commentary by Eoin Treacy

Comments posted on central bank balance sheet charts

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

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

And

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

Eoin Treacy's view -

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

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

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



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July 08 2014

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 08 2014

Commentary by Eoin Treacy

Minerals & Energy Commodities Update

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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



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July 04 2014

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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July 02 2014

Commentary by Eoin Treacy

The China Mini Stimulus Starts To Work

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

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

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

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

 

Eoin Treacy's view -

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

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



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July 01 2014

Commentary by Eoin Treacy

Gold investors pile into equities

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

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

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

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

Eoin Treacy's view -

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

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



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July 01 2014

Commentary by Eoin Treacy

Daily iron ore mine closures in China mean Citigroup is bullish

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

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

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

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

Eoin Treacy's view -

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

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



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June 30 2014

Commentary by Eoin Treacy

Zinc Prices Surge as Supplies Shrink

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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June 30 2014

Commentary by Eoin Treacy

Corn Heads for Biggest Decline in Year on Climbing Inventories

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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



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June 27 2014

Commentary by Eoin Treacy

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

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

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

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

Eoin Treacy's view -

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



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June 26 2014

Commentary by Eoin Treacy

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

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

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

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

And 

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

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

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

 

Eoin Treacy's view -

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

 

 



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June 25 2014

Commentary by Eoin Treacy

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

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

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

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

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

Eoin Treacy's view -

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



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June 25 2014

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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June 20 2014

Commentary by Eoin Treacy

Brazil Highs and Lows

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

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

Eoin Treacy's view -

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



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June 19 2014

Commentary by Eoin Treacy

Gold miners

Eoin Treacy's view -

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

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



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June 18 2014

Commentary by Eoin Treacy

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

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

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

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

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

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

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

Eoin Treacy's view -

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



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June 17 2014

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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June 16 2014

Commentary by Eoin Treacy

Email of the day hypothentication of industrial metals in China

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

Eoin Treacy's view -

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



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June 12 2014

Commentary by Eoin Treacy

Platinum Tumbles With Palladium on South Africa Mining Accord

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

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

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

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

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

 

Eoin Treacy's view -

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



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June 05 2014

Commentary by Eoin Treacy

ANZ Gold Market Report

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

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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May 30 2014

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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May 29 2014

Commentary by Eoin Treacy

Cocoa Shortage Looms as Growers Opt to Farm Rubber

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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May 27 2014

Commentary by Eoin Treacy

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

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

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

Eoin Treacy's view -

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

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



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May 23 2014

Commentary by Eoin Treacy

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

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

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

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

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

 

Eoin Treacy's view -

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

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

 



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May 22 2014

Commentary by Eoin Treacy

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

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

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

Eoin Treacy's view -

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

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

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

 



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May 21 2014

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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

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





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May 21 2014

Commentary by Eoin Treacy

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

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

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

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

 

Eoin Treacy's view -

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

 

 



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May 19 2014

Commentary by Eoin Treacy

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

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

Eoin Treacy's view -

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



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May 16 2014

Commentary by Eoin Treacy

Centamin profit falls 58% as production shrinks

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

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

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

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

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

 

Eoin Treacy's view -

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



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May 15 2014

Commentary by Eoin Treacy

GFMS Platinum & Palladium Survey 2014

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

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

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

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

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

Eoin Treacy's view -

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

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



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May 14 2014

Commentary by Eoin Treacy

Big miners get some media shine

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

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

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

Eoin Treacy's view -

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



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May 13 2014

Commentary by Eoin Treacy

Port Hedland facing $100m a day strike threat

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

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

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

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

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

Eoin Treacy's view -

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



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May 08 2014

Commentary by Eoin Treacy

Latin America Dollar Index

Eoin Treacy's view -

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



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May 07 2014

Commentary by Eoin Treacy

BlackRock World Mining boosts income

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

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

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

 

Eoin Treacy's view -

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

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

 



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May 06 2014

Commentary by Eoin Treacy

Steel

Eoin Treacy's view -

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

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



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May 06 2014

Commentary by Eoin Treacy

Copper miners

Eoin Treacy's view -

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



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May 02 2014

Commentary by Eoin Treacy

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

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

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

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

Eoin Treacy's view -

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

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



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April 30 2014

Commentary by Eoin Treacy

Japan approves energy plan reinstating nuclear power

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

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

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

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

 

Eoin Treacy's view -

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

 

 



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April 30 2014

Commentary by Eoin Treacy

Supreme Court upholds EPA rule limiting cross-state pollution

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

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

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

 

Eoin Treacy's view -

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



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April 17 2014

Commentary by Eoin Treacy

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

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

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

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

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

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

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

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

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

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

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

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

Eoin Treacy's view -

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

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



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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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