Investment Themes - Precious Metals / Commodities

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November 22 2017

Commentary by Eoin Treacy

Global Gold Outlook

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

A closer look at the assumptions of the theory
The obvious conclusion for gold investors would be to celebrate the coming era of skyrocketing gold prices, as supply dwindles, and the greatest gold rush of all time ensues in the markets. Such a scenario sounds very enticing. However, instead of taking the news at face value, it is worth examining the matter in more detail and understanding what the decline in production actually means for gold in the mid- and long-term. 

One of the main problems with most peak gold analyses and projections is that they are based on estimates of known mineable reserves of gold.  However, the number of known reserves increases over time as new discoveries are made thanks to technological and scientific advances. Even as the currently operational mines might be slowly exhausting their reserves, new projects and potential discoveries remain untapped.

In this context, “peak gold” can be seen as the gradual depletion of the current, relatively easily accessible deposits. Once these are completely mined, the industry would be forced to move on to new locations that are currently not preferred, because they either involve higher production costs or present other challenges. Nevertheless, higher gold prices would motivate miners to seek out and explore new discoveries and deposits, as well as invest in research and new technologies.

Furthermore, one must bear in mind that the gold market is extensive and quite complex. Currently, the precious metal is being mined in every continent except Antarctica. However, as gold traditionally holds its value and does not corrode, it also has a strong recycling industry, refining and re-smelting the metal, which accounts for 1/3 of the total supply on average.

Therefore, “peak gold” can be viewed as a temporary supply restriction, which would trigger gold price increases in the mid-term. But it also has a much more important aspect to it: over the long term, the depletion of mines currently in operation translates to a “gap-up” of the gold price, as the production costs for new discoveries are drastically lifted. In other words, “peak gold” might not mean the end of our gold supply, but it could introduce a whole new average price range and “price floor” for gold.

Eoin Treacy's view -

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

The price of any commodity tends to fluctuate mostly above the marginal cost of production. Oil experienced a step up in production costs over the last decade with the $40 area representing a new floor whereas it had previously been a ceiling. The big question for gold is where the marginal cost of production now rests 



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November 22 2017

Commentary by Eoin Treacy

November 20 2017

Commentary by Eoin Treacy

The Chart Seminar

Eoin Treacy's view -

It is always a pleasure to meet subscribers but doubly so when we get to spend two days together discussing the outlook for psychological makeup of the market, where we are in the big cycles and which sectors are leading and which are showing relative strength. I had three big takeaways from last week’s seminar in London.

As anyone who has attended the seminar will know, I do not have examples but offer delegates the opportunity to dictate the direction of the conversation. That ensures the subject matter is relevant to what they are interested in and also highlights the fact that subject matter is applicable to all markets where an imbalance between supply and demand exists. The second benefit of allowing delegates to pick the subject matter is that it is offers a window into what is popular in markets right now and what might be getting overlooked. 



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November 15 2017

Commentary by Eoin Treacy

Gold makes some recovery on fresh demand, global events

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

Globally, gold prices rose for a third day, helped by a weaker dollar and falling US bond yields ahead of inflation data later that could influence how quickly the Federal Reserve will raise interest rates.

Eoin Treacy's view -

Palladium continues to outperform in the precious metals sector because of its relationship to the gasoline market and continued ambivalence towards diesel engines. However, gold, silver and platinum have been much quieter as they waited for a catalyst to reignite interest. Some consolidation on stock markets may be signalling a flip to risk-off trading which should be positive for a safe haven like gold. 



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November 09 2017

Commentary by Eoin Treacy

Rio Tinto joins race for stake in world's largest lithium miner

Rio Tinto joins race for stake in world’s largest lithium miner – This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here is a section: 

 

El Mostrador suggested Tinto Rio had already made a bid, potentially trumping Chinese companies Sinochem, Tianqi and GSR Capital, all of which had also expressed interest in SQM.

The news came on the heels of PotashCorp and Agrium announcing Tuesday that China’s ministry of commerce had approved the merger, but required the sale of PotashCorp’s minority holdings in Arab Potash Company and SQM within 18 months of closing, and Israel Chemicals Ltd. within nine months.

SQM, which has a market value at just over $15 billion, produced roughly 44 million tonnes of lithium carbonate last year and is developing new projects in Chile and Australia.

Rio's current incursion in the lithium market is mostly limited to its 100%-owned lithium and borates mineral project in Jadar, Serbia, which is still in the early stages of development.

Eoin Treacy's view -

Rio Tinto generates 68% of its revenue from iron-ore and aluminium. Diamonds and minerals, copper and energy make up the balance of its operations in that order. Despite enthusiasm about lithium SQM generate about 26.5% of its revenue from the metal, with plant nutrition (32.2%) and potassium (20.8%) also representing major businesses for the company. 



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November 08 2017

Commentary by Eoin Treacy

Iron Ore Imports Collapse as China's Great Cleanup Kicks In

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

Purchases dropped to 79.49 million tons in October, according to customs data on Wednesday. That’s down from September’s 102.8 million tons, and is the lowest amount since February 2016. Over the first 10 months, imports by the world’s top buyer still expanded 6.3 percent to 896 million tons.

Iron ore users and investors have been tracking China’s bid to rein in pollution this winter by imposing restrictions on mills’ production, in addition to curbs on other industrial activity. The drive has buttressed prices of higher-quality ores that are more efficient, while spurring speculation about a demand roller-coaster, with weaker consumption seen near term before a possible snapback in spring. At the same time, miners in Brazil and Australia have added supply.

The decline in China’s iron imports was the standout item amid a broader weakening of purchases, Daniel Hynes, a senior commodity strategist at Australia & New Zealand Banking Group Ltd., said in a note. “The closures of steel mills due to environmental concerns were behind the fall,” he said. Demand for raw materials imports is likely to rebound, according to the bank.

 

Eoin Treacy's view -

China’s pollution problem is a political liability. That fact highlights the evolution of a middle class, but it also reflects the transition underway as the consumer takes over as the engine for growth. China is gradually moving away from highly polluting industries while at the same time focusing on continued urbanisation and more value-added products. 



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November 08 2017

Commentary by Eoin Treacy

Interesting charts November 8th 2017

Eoin Treacy's view -

Palladium rallied successfully through $1000 today for the first time since 2001. The last time it traded at this level was following a massive rally spurred by a supply shortage. On this occasion the move might be somewhat overbought relative to the trend mean but is looks better supported. A break in the progression of higher reaction lows, currently near $950, would be required to question medium-term scope for additional upside. 



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November 01 2017

Commentary by Eoin Treacy

Nickel Rallies Most in Five Years on Promise of Electric Cars

This article by Yuliya Fedorinova and Martin Ritchie for Bloomberg may be of interest to subscribers. Here it is in full:

The nickel market has caught fire, with prices posting the biggest two-day advance in five years.

Nickel rose as much as 6 percent to $13,030 a metric ton on the London Metal Exchange, the highest since June 2015. That added to Tuesday’s 5.3 percent gain after Trafigura Group Pte joined Glencore Plc in unveiling bullish usage forecasts. In Shanghai, prices climbed by the daily limit.

"Such breakthrough has been cooking long, backed by relative value and EVs," Richard Fu, head of Asia Pacific at Amalgamated Metal Trading Ltd., said by email.

Nickel sulphate, a key ingredient in lithium-ion batteries, will see demand increase by half to 3 million tons by 2030, Saad Rahim, chief economist at Trafigura, said in an interview. That echoes bullish views from miner and trader Glencore. Batteries are likely to use more nickel and less cobalt in future, Rahim said.

Nickel is now up 28 percent for 2017, vying with aluminum for the title of top base metal of the year.

Chinese investors piled into Shanghai futures at the start of morning session, and prices were locked up by the limit just short of 100,000 yuan a ton, the highest intraday level since November.

MMC Norilsk Nickel PJSC, which competes with Vale SA as the world’s top nickel producer, has warned that the market may have become too bullish too quickly. The company sees this year’s nickel demand from batteries at about 65,000 tons, compared with total usage of 2 million tons, according to Anton Berlin, head of analysis and market development. It will take a few years for EVs to become a significant consumer, he said.

 

Eoin Treacy's view -

The London Metals Index has been on a recovery trajectory for more than a year with five of the six constituents rallying impressively in 2016 and again more recently. Nickel has been something of a wallflower in that time because it was plagued by oversupply and lacked a clear bullish catalyst for demand dominance. 



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November 01 2017

Commentary by Eoin Treacy

October 24 2017

Commentary by Eoin Treacy

Xi's China a boon for mining

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

And Xi's enormous power also means his pet projects should receive the full backing of the state.

The One Belt One Road initiative to recreate the Old Silk Road connecting Asia with Europe was mentioned five times during the speech. (Mao Zedong and Deng Xiaoping received four mentions each)

Another mega-undertaking, Beijing-Tianjin-Hebei integration, which includes the Xiongan New Area, Xi mentioned twice.
And even if the party's priorities are shifting away from market-orientated reforms, Beijing's transformation of its heavy industries coupled with programs to fight pollution has already benefitted mining.

For instance, eliminating overcapacity has boosted profitability in the domestic steel industry and in the process steelmaking raw material prices have been dragged higher. At the end of last year consensus forecast for the iron ore price was $57 a tonne during 2017. Year-to-date it's averaging $71.

 

Eoin Treacy's view -

Building new cities is nothing new for China but the Xiongan New Area will move the administrative hub from central Beijing to a new city which will remove a substantial number of people in one fell swoop. This also means that the new city will need to be both architecturally secure and technologically capable enough to house one of the world’s largest and most ambitious bureaucracies. 



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October 23 2017

Commentary by Eoin Treacy

Venezuela's Behind on Its Debt and Facing Two Huge Bond Payments

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

Venezuela could still also make the payments on time. While $10 billion in foreign reserves isn’t much for a country that now owes some $140 billion to foreign creditors, it’s still enough to pay the bills for a while.

And the Maduro government has surprised the bond market before, making payments the past couple years that many traders had anticipated would be missed. Some of those now betting that these next two payments will also be made actually point to the $350 million currently overdue on the other notes as an encouraging sign. Those arrears indicate, they contend, that officials are prioritizing the payment of bonds with no grace period at the expense of those they can put off without penalty.

Even if Venezuela can make the payments due this year, investors say that, unless oil prices stage some sort of miraculous comeback, they still see default as an inevitable outcome. Credit-default swaps show they’re pricing in a 75 percent chance of a PDVSA default in the next 12 months and 99 percent in the next five years.

 

Eoin Treacy's view -

Venezuela represents a problem for bond investors because it could either be a one-off default or be the thin end of the wedge for distressed energy producers. The fact PDVSA sinkable bonds are now trading at a spread of 526 basis points, versus 200 last week, suggests investors are increasingly skeptical the government is going to be able to make principal payments when they mature on November 2nd. 



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October 20 2017

Commentary by Eoin Treacy

Electric Vehicle Revolution and Implications for the Nickel Market

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

 

Electric vehicles will usher in a new age for nickel

A more balanced nickel consumption profile between stainless and non-stainless applications

Batteries need high purity nickel sulphate, cannot readily use Class II such as nickel pig iron or ferronickel units – today, only ~50% of global production is suitable

Nickel industry needs to grow significantly in suitable units to meet demand for battery manufacture

Growing in suitable nickel units is expensive

Eoin Treacy's view -

A link to the full presentation is available in the Subscriber's Area.

The message from this report is very clear. The global economy is going to need a lot more nickel and Vale is going to need to raise quite a lot capital if it is to have any chance of meeting demand. 



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October 19 2017

Commentary by Eoin Treacy

Why We Don't Trust Government Inflation Statistics...

Thanks to a subscriber for this interesting report from Oppenheimer which may be appreciated by the Collective. Here is a section:

We all know that nominal interest rates are a function of real interest rates and inflation expectations. The nub of our argument is that the consumer price index (CPI) as measured by the Bureau of Labor Statistics (BLS) sharply understates what bond investors should incorporate into their inflation expectations. 

The first component of our three-part argument is that CPI measures inflation where the people are, not where the money is. That is an appropriate stance for BLS since CPI is used to set government benefit levels, but consider that the top 20%, who effectively own all the bonds, generate as much consumer spending as the lower 62%. The basket of goods that 20% buys likely differs significantly from the basket of the average person. 

Second, we look at the healthcare anomaly. Healthcare accounts for 17.7% of GDP and 14.5% of the S&P 500 but only 8.5% of CPI. Most private sources estimate healthcare costs have been increasing by ~6%+ in recent years, but BLS puts the number at 2.8%. A recent study found that the average health insurance plan now costs ~$19K (with ~$6K from the employee), but healthcare insurance is just 1.004% of CPI.

Third, in looking at how CPI is calculated, we suspect there is a "streetlight effect," where one searches where the light is good rather than where the sought object is likely to be. In the case of CPI, we suspect they measure what is easily quantified. There is incredible granularity on the cost of apples, bananas and peanut butter but only big sweeping categories for healthcare and housing. 

The bottom line is that we think CPI substantially understates the inflation expectations that investors should incorporate into the pricing of bonds and that long-term rates should increase. One does not have to believe this to own bank stocks as they remain cheap in any case at a 66% relative P/E, but if we are correct about CPI, the upside should be even better.

 

Eoin Treacy's view -

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

Anyone who lives in the real world and pays their own bills, mortgage and taxes knows inflation is understated. Additionally, since government spending is integrally tied to official statistics, politicians have an interest in the understatement persisting not least because fiscal deficits are already wide. However, it is reasonable to conclude that we have had such an uptick in reactionism against the status quo is because consumers have direct experience of inflation which the statistics refuse to acknowledge. 



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October 16 2017

Commentary by Eoin Treacy

Email of the day on investing in Africa

Thank you for a very informative big picture on Friday. Do you know of any fund managers that are investing in Africa with good track records for us to consider investing with?

Eoin Treacy's view -

Thank you for this question which I’m sure will be of interest to subscribers. Investing in Africa is not a simple matter. The entire continent has 1649 listed companies with major markets like South Africa, Nigeria and Egypt representing significant weightings.  



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October 12 2017

Commentary by Eoin Treacy

Australia Doesn't Have the Answers

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

Finally, the system may well fail in its primary objective -- that is, to minimize the need for the government to finance retirement. The typical accumulated balance at retirement age is around A$200,000 for men and around A$110,000 for women. The averages are artificially increased by a small pool of people with large balances, yet they're still well below the A$600,000 to A$700,000 estimated to be necessary for homeowning and debt-free couples to finance their retirements, which may last 20 or more years.

The Australian government will need to cover the shortfall for a large proportion of the population. In fact, it will lose doubly, having already suffered a loss of revenue from the generous tax breaks provided for the schemes (estimated at A$30 billion annually and increasing), which have been used, especially by wealthy individuals, as a way to reduce their tax burden.

Future generations will also be affected adversely, having to finance payments to older generations through higher taxes or additional government debt, reduced wealth transfers from parents, and lower benefits than those awarded to their predecessors.

 

Eoin Treacy's view -

Australia has gone decades without a recession not least because it has benefitted from the evolution of commodity demand from China, the growth associated with inward migration of a highly educated workforce and the evolution of the services sector. That has allowed it to retain the mantle of a AAA rated credit while much larger economies like the USA and UK have been downgraded. 



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October 10 2017

Commentary by Eoin Treacy

Commodities report

Thanks to a subscriber for this report from MacQuarie which may be of interest. Here is a section on precious metals: 

In the PGMs, we have again reduced our platinum price expectations. The rally we had been calling for from July did happen, but when it came it was so unconvincing, mainly based on a higher gold price, it might have been better if it had not happened at all. When gold lost steam it was exposed for what it was. A number of bullish factors we had cited – such as strong Chinese imports – have faded, and our expectations of a stabilisation of the European diesel share look to be premature. We continue to believe – absent a sharp decline in the rand – that platinum’s worst days are behind it, and our gold and FX forecasts imply decent gains in 2018/2019. A better world economy should help platinum jewellery demand, while the Chinese diesel sector offers some respite from the European negativity. But platinum simply isn’t in short supply at present. 

Whereas palladium is. We still can’t quite believe it should be worth more than platinum, and we don’t think it will be for long. But the internal forces that would bring this about are currently quite weak – gasoline engines continue to gain market share vs diesel, and substitution of platinum, while now making more sense than the reverse, is not an immediate thing. So while palladium is still set to fall back over 2018, that will be largely on external factors – weaker US and Chinese car sales – and that process has been delayed by the stronger-for-longer world economy we now see. Adding to this, investor sales have dried up. This matters as the market is in deficit, and we had expected investors, scared by the prospect of EVs, to fund it. That EVs haven’t scared them is perhaps understandable given limited volumes so far, but the deficit still needs funding, and a higher price for longer is the result. 

 

Eoin Treacy's view -

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

Palladium has been outperforming the other precious metals and indeed the industrial metals all year but it has paused in the region of $1000 and some consolidation has been underway for the last couple of months. Nevertheless, a sustained move below the trend mean would be required to question medium-term scope for additional upside. 



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September 28 2017

Commentary by Eoin Treacy

The World Is Creeping Toward De-Dollarization

Thanks to a subscriber for this article by Ronald-Peter Stöferle for the Mises Institute. Here is a section:

A clear signal that something is afoot would be the abolition of the Saudi riyal's peg to the US dollar. As recently as April of this year economist Nasser Saeedi advised Middle Eastern countries to prepare for a “new normal” — and specifically to review the dollar pegs of their currencies: “By 2025 it is clear that the center of global economic geography is very much in Asia. What we’ve been living in over the past two decades is a very big shift in the political, economic, and financial geography.”

While the role of oil-producing countries (and particularly Saudi Arabia) shouldn't be underestimated, at present the driving forces with regard to de-dollarization are primarily Moscow and Beijing. We want to take a closer look at this process.

There exist numerous political statements in this context which leave no room for doubt. The Russians and Chinese are quite open about their views regarding the role of gold in the current phase of the transition. Thus, Russian prime minister Dimitri Medvedev, at the time president of Russia, held a gold coin up to a camera on occasion of the 2008 G8 meeting in Aquila in Italy. Medvedev said that debates over the reserve currency question had become a permanent fixture of the meetings of government leaders.

Almost ten years later, the topic of currencies and gold is on the Sino-Russian agenda again. In March, Russia's central bank opened its first office in Beijing. Russia is preparing to place its first renminbi-denominated government bond. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. Gold is considered important by both countries.

 

Eoin Treacy's view -

Oil and its derivative products are used in every country in the world so it is logical that the acquiescence of major suppliers to a Dollar standard is a necessary condition of the USA’s international currency hegemony. However, it is not the only consideration. 



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September 27 2017

Commentary by Eoin Treacy

2017 at the Three Quarter Pole

Thanks to a subscriber for securing an invitation for me to attend Jeff Gundlach’s presentation yesterday which as always was an educative experience. 

Eoin Treacy's view -

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

There were a number of interesting points raised but I believe the most relevant for subscribers’ centre on what he said about shrinking the Fed’s balance sheet, the outlook for the Dollar, commodity markets, the relative attractiveness of emerging markets and his best guess for when to expect the next recession.



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September 26 2017

Commentary by Eoin Treacy

BHP, world's largest miner, says 2017 is 'tipping point' for electric cars

This article by Clara Ferreira-Marques and Gavin Maguire for Reuters may be of interest to subscribers. Here is a section: 

Balhuizen said he expected the electric vehicle boom would be felt - for producers - first in copper, where supply will struggle to match increased demand. The world’s top mines are aging and there have been no major discoveries in two decades.

The market, he said, may have underestimated the impact on the red metal: fully electric vehicles require four times as much copper as cars that run on combustion engines.

BHP, Balhuizen said, is well-placed, with assets like Escondida and Spence in Chile, and Olympic Dam in Australia. BHP said last month it was spending $2.5 billion to extend the life of the Spence mine in northern Chile by more than 50 years.

 

Eoin Treacy's view -

Copper is currently in contango suggesting a short-term supply deficit is not what has driven prices higher over the last couple of months. The outage at Escondido which restricted supply was a consideration that contributed to the gain but was not enough to push the futures curve into backwardation. Enthusiasm about the demand vector electric vehicles represents for metals like copper, nickel, lithium and cobalt could be a better explanation despite the fact these represent medium rather than short-term considerations. 



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September 18 2017

Commentary by Eoin Treacy

Gold in correction mode

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

Precious metals: Gold has dropped to a 2½-week low of $1,315 per troy ounce this morning amid increased risk appetite among market participants. Gold in euro terms is trading at only around €1,100 per troy ounce. The Dow Jones Industrial Average and S&P 500 indices in the US had both climbed to new record highs on Friday. The rise in stock markets is continuing in the Asian region today. What is more, bond yields in the US have increased significantly of late, which makes gold less attractive as an alternative investment.

Presumably this is also why Friday saw the second consecutive daily outflow from gold ETFs. Portugal’s credit rating was upgraded on Friday evening by the ratings agency S&P, achieving an investment grade rating again for the first time since January 2012. Ireland was also upgraded, this time by the ratings agency Moody’s. Wednesday could see further volatility on the gold market, as this is when the US Federal Reserve meeting will take place.

If the market’s currently low rate hike expectations increase as a result of the meeting, this is likely to weigh on the gold price. According to the CFTC’s statistics, speculative financial investors further expanded their net long positions in gold in the week to 12 September, putting them at 253,500 contracts now. This was already the ninth weekly increase in a row.
The price rise to a 13-month high of just shy of $1,360 was thus driven largely by speculation. Given that the gold price is now trading considerably lower, positions have presumably been squared in the meantime

 

Eoin Treacy's view -

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

We are in a period of synchronised global economic expansion where central banks are only just beginning to turn the corner towards tightening; with the USA’s Federal Reserve in the lead. Commodities no longer share the trending commonality evident at the dawn of the commodity boom in the early 2000s. Industrial resources including palladium are recovering while energy and agricultural prices have been subject to a great deal of volatility. 



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September 11 2017

Commentary by Eoin Treacy

Dollar Advances From 2015 Low Before UN Meeting on North Korea

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

“Markets seem to have headed into the weekend priced for the worst -- a North Korean missile test and maximum financial damage from Irma,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “The dollar seems overdue for a bounce. The dollar should return to 109 to 110 yen early in the week.”

The dollar is also supported by “decent” U.S. economic data momentum and a deal between President Donald Trump and the Democrats suspending the debt ceiling to December, Callow said.

Still, traders said some short-term accounts took long-yen positions after the state-run Korean Central News Agency said Monday morning that the U.S. will pay a "due price" if harsher sanctions were imposed on North Korea at an expected United Nations Security Council meeting.

 

Eoin Treacy's view -

The Dollar has a widening interest rate differential with its largest trading partners, an economy that is expanding, a hot technology sector, full employment and the prospect of reduced supply as the Fed begins to tinker with the size of its balance sheet. 



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September 06 2017

Commentary by Eoin Treacy

Investment Gurus Counsel Catching Reform Tailwinds in Latin America

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

“The broad outperformance in Latin America -- particularly Argentina, Mexico, and Brazil -- speaks to the broad reform programs we have seen in each of these countries and the stable backdrop these reforms have provided,” said Kofi Bentsi, a money manager focused on emerging-market corporate bonds at Pimco, the second-largest U.S. fixed-income management firm. He says Argentina and Brazil are likely to continue to outperform. 

Jim Barrineau, the co-head of emerging-markets debt at Schroders in New York, said the region has benefited from a combination of the highest yields among emerging markets and improving economies, especially in Argentina and Brazil, which overcame deep recessions. This backdrop, he says, tends to favor corporate bonds over government securities.

“They are more responsive to changes in economic growth,” said Barrineau, who helps oversee Schroders’ $520 billion in assets. His emerging-market bond fund has outperformed 81 percent of peers this year.

Eoin Treacy's view -

The LME Metals Index has been on a recovery trajectory since January 2016 and has rallied to break a lengthy medium-term downtrend.
The CRB Index, which is skewed by energy prices, has been ranging below 200 since late 2015 but is currently bouncing, having found support in June. 



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September 01 2017

Commentary by Eoin Treacy

Email of the day on cobalt

Nickel is an important metal in itself for battery technology, but 2/3 of nickel goes into stainless steel, so from this perspective nickel isn't a very highly leveraged play on battery advances. Whilst Cobalt is a by-product of nickel mining, it is my understanding that this is mainly the case from lateritic nickel deposits, and there is a much lower % of cobalt by-product from deep mines. 

Eoin Treacy's view -

Thank you for this educative email, from a subscriber who literally wrote the book on mining economics. I agree that not every nickel company produces cobalt which is why the three large miners I mentioned all specifically state they do produce it. 



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August 31 2017

Commentary by Eoin Treacy

Gasoline Surges as Harvey Traps Gasoline in the South

This article by Jessica Summers for Bloomberg may be of interest to subscribes. Here is a section: 

 

Gasoline extended its longest rally since 2013 as traders assess how quickly key Gulf Coast refineries and pipelines are able to return to service following Harvey.

Motor-fuel prices jumped as much as 15 percent in New York. Harvey has shuttered about 23 percent of U.S. refining capacity since its first landfall as a Category 4 hurricane on Friday. While refineries in the Port Arthur, Beaumont and Houston areas remain off line, some plants in the Corpus Christi area -- where Harvey first hit -- are working to restart and the Strategic Petroleum Reserve on Thursday approved the release of 1 million barrels of crude to a Gulf Coast refinery.

Colonial said its Lines 1 and 2 are operating east of Lake Charles and it will be able to bypass any shuttered terminals near Port Arthur, Texas when it resumes shipments Sunday from Houston-area origin points.

The focus is on how long refineries will take to get back online, according to Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors LLC, in a telephone interview. “This is more of an unleaded gasoline story. The impact on the whole Texas area--the story is still developing.”

Eoin Treacy's view -

Today was the last day of trading for the September gasoline contract. Anyone who needed to take delivery and waited till the last minute was forced to pay whatever the market offered today and the contract surged higher. However, with southwest Texas refineries already starting back up and Harvey being downgraded to a tropical storm, the October contract does not have quite the same time pressure as the September. 



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August 31 2017

Commentary by Eoin Treacy

Gordhan Expects Charges as South African Succession Battle Rages

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

The National Prosecuting Authority has been probing the unit in an investigation that Gordhan, opposion parties and civil-society groups say is politically motivated. The former finance minister described the latest moves as an attempt to discredit politicians who oppose Zuma and are fighting against the plunder of state resources in Africa’s most-industrialized economy.

Scandals have shadowed Zuma, 75, during his eight-year presidency, including a finding by the nation’s top court that he broke his oath of office by refusing to repay taxpayer funds spent on his private home.

‘State Capture’

The nation’s graft ombudsman accused him of allowing members of the Gupta family, who are in business with his son, to influence cabinet appointments and the award of state contracts, referred to as “state capture.” Zuma and the Guptas deny wrongdoing.

On Aug. 8 more than two dozen of the ruling African National Congress’s lawmakers backed an opposition motion of no confidence in Zuma in a secret ballot in parliament. While he survived, the party fired Makhosi Khoza as chairwoman of a portfolio committee and wrote to Derek Hanekom, the head of its disciplinary committee, rebuking him for his Twitter postings calling for the president’s removal.

Zuma is due to step down as the ANC’s leader in December, with his ex-wife, Nkosazana Dlamini-Zuma, and Deputy President Cyril Ramaphosa seen as the leading contenders to replace him.

“It’s a massive tussle -- it’s about the future of the ANC as we’ve known it,” Gordhan said. “Either you follow the capture of the ANC,” or change the party’s character and “recapture the state, which has now gotten into the wrong hands. People like ourselves are backing Mr. Ramaphosa, because we believe he has the integrity, to put it bluntly. And secondly, he has the modernity to innovate, to allow new ideas to emerge, understands the economy. ”

Eoin Treacy's view -

In much the same way Winnie Mandela took a dominant position in the ANC, Zuma’ ex-wife is likely to be a formidable opponent not least because of the support she will receive from Jakob Zuma’s tenure.  However, despite the continued deterioration of standards of governance under Zuma the existence of opposition both within and outside the ANC is positive as is the freedom of south Africa’s judiciary. 



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August 30 2017

Commentary by Eoin Treacy

Musings from the Oil Patch August 29th 2017

Thanks to a subscriber for this edition of Allen Brook’s ever interesting report for PPHB. Here is a section on lithium and cobalt:

We don’t know the details behind the Morgan Stanley electric vehicle forecast, but we know there are both more and less aggressive forecasts.  We wonder if those forecasters have considered the potential constraints from lithium carbonate supply.  There is a greater issue with cobalt, which accounts for 58% of a battery by weight, more than the lithium in a battery, and consumes 42% of all cobalt output.  The problem is that cobalt supplies are smaller and about 60% comes from the Democratic Republic of Congo, which is controlled by war lords and relies on child labor for mining the ore.  The governments we will have to deal with to meet the demand for rare minerals to meet electric vehicle forecasts present many moral and financial question marks.  In fact, when we were in Tibet earlier this summer, we followed Chinese trucks hauling bags of lithium carbonate from mines to shipping depots.  That supply is likely committed to the Chinese electric vehicle industry, which needs it to meet its anticipated growth outlook.   

As a result of the growing demand for lithium and other rare minerals, their prices are climbing, and in some cases at alarming rates.  Since 2015, lithium prices have quadrupled, while cobalt prices have doubled.  What will rising prices and limited availability mean for the forecasts of ever cheaper batteries?   

 

Eoin Treacy's view -

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

Forecasts for where lithium and cobalt demand is going to be in 2025 are being used to drive investment in new supply today, but it takes years to bring new supply to market. In that window between when demand increases and supply responds there is room for prices to increase meaningfully; in a rerun of the Supply Inelasticity Meets Rising Demand dynamic that animated the commodity bull market from the early 2000s. 



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August 24 2017

Commentary by Eoin Treacy

Harvey Likely to Be First Hurricane to Strike Texas Since 2008

This article by Brian K Sullivan and Melissa Cheok for Bloomberg may be of interest to subscribers. Here is a section: 

“It could intensify right up to landfall on Friday,” said Jeff Masters, co-founder of Weather Underground in Ann Arbor, Michigan. “I expect a Category 1 hurricane at landfall, but I cannot rule out a Category 2.”

Harvey is expected to bring multiple hazards including heavy rainfall, storm surge and possible hurricane conditions to parts of the Texas coast on Friday. Heavy rainfall is expected to spread across portions of south, central and eastern Texas and the lower Mississippi Valley from Friday through early next week and could cause life-threatening flooding, according to the advisory.

The Gulf Coast from Corpus Christi, Texas, to Lake Charles, Louisiana, is home to nearly 30 refineries -- making up about 7 million barrels a day of refining capacity, or one-third of the U.S. total. It’s in the path of expected heavy rainfall. Flooding poses risks to operations and may cause power failures.

 

Eoin Treacy's view -

The last few years have been particularly quiet hurricane seasons and even though Harvey will struggle to exceed category one its location ensures there will be plenty of precipitation falling in the Corpus Christ through Louisiana areas which will disrupt businesses. 



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August 23 2017

Commentary by Eoin Treacy

It's Hard to Keep Up With All That Lithium Demand

This article by Laura Millan Lombrana and Jonathan Gilbert for Bloomberg may be of interest to subscribers. Here is a section:

Producers everywhere have struggled to keep up with demand as electric cars went from almost no sales a decade ago to more than half a million vehicles last year. The battery in a Model S from Musk’s Tesla Inc. uses about 45 kilograms (100 pounds) of lithium carbonate. More mines are planned, but difficulties at Olaroz -- the first new South American lithium mine in two decades -- are limiting funding for new ventures in Argentina, home to the world’s third-largest reserves.

“The uncertainty on the supply side is driving prices up and making investors nervous,” said Daniela Desormeaux, CEO of Santiago-based lithium consulting firm SignumBOX. “We need a new project entering the market every year to satisfy growing demand. If that doesn’t happen, the market will be tight.”

 

Eoin Treacy's view -

Tesla gigafactory might be the first large-scale lithium battery plant for vehicles and powerplants but it is just the beginning of what is a significant build out in production capacity as progressively more auto manufacturers roll out plans for electric vehicles. Against that background miners are scrambling to keep up with supply. This is about as close as a throwback to the heady days of the commodity boom as one might wish for and is a fresh example of the supply inelasticity meets rising demand model. 



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August 23 2017

Commentary by Eoin Treacy

Copper rally lifts Antofagasta's profits, up 88% in first half of 2017

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

Chile-focused copper miner Antofagasta Plc. (LON:ANTO) posted Tuesday an impressive 88% jump in earnings during the six months to June 30, thanks to a sustained rally in prices for the metal, which has surged 19% so far this year, as well as cost savings.

The miner, one of the oldest companies listed in London, said earnings before interest, tax, depreciation and amortization, or Ebitda, increased to $1.1 billion in the period, as revenues grew by 42% to $2 billion.

Chief executive Iván Arriagada, who has been at the helm for less than a year and a half, said the improved performance will allow the company to pay an interim dividend of 10.3 US cents a share, up from 3.1 a year ago. This is in line with Antofagasta’s policy of paying out a minimum of 35% of underlying net earnings to investors, he said.

 

Eoin Treacy's view -

During the expansion phase associated with the commodity boom, miners ploughed their earnings into investment rather than paying dividends. That meant they underperformed the rises in metal prices, particularly in the gold mining sector and left them with no cushion of support when commodity prices peaked. 



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August 21 2017

Commentary by Eoin Treacy

Fortescue Sees Dividend Bonanza as Miners Reward Investors

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

Fortescue Metals Group Ltd., the fourth- biggest iron ore exporter, tripled its full-year dividend and may lift returns further as top miners reward investors with higher payouts amid a price revival.

The Perth-based producer declared a total annual dividend of 45 Australian cents a share, compared with 15 cents a year earlier, topping the average 39 cent forecast among 19 analysts surveyed by Bloomberg. Fortescue expects to pay between 50 percent to 80 percent of net profit after tax in dividends in the current fiscal year, the company said Monday when reporting full-year earnings.

Rio Tinto Group aims to pay a $2 billion interim dividend and increased its share buyback by $1 billion this year on stronger materials prices, while Anglo American Plc last month announced plans to resume dividend payments about six months ahead of schedule. BHP Billiton Ltd. is forecast to raise its full-year payout almost to 88 cents a share when it reports earnings Tuesday, according to the average of 15 analysts’ forecasts.

“They are making hay while the sun shines, and it’s been a while coming,” said James Wilson, a Perth-based analyst at Argonaut Securities Ltd. “Hard times have driven a lot of innovation, and the miners are now very lean and extremely efficient -- when prices come back, they pop in a big way, and make a lot of money.”

Iron ore, the top earning material for Fortescue, BHP and Rio, has rebounded since mid-June on strong steel demand in China and weaker-than-expected gains in low-cost supply.

Fortescue, which cut cash operating costs 17 percent in fiscal 2017, plans to hold annual shipments at the current rate of 170 million tons, the producer said last month. 

 

Eoin Treacy's view -

Iron-ore prices posted a truly impressive rally in 2016 and an equally stunning setback at the beginning of this year which challenged the recovery hypothesis. The price found support in region of the upper side of the underlying base formation, near $60 in June and continues to rebound. 



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August 16 2017

Commentary by Eoin Treacy

Zinc Breaks Through $3,000 Barrier as Metals Rally Gathers Pace

This article by Mark Burton and Winnie Zhu for Bloomberg may be of interest to subscribers. Here is a section: 

Zinc surged above $3,000 a metric ton amid persistent global deficits, and aluminum climbed as China reined in illegal capacity, adding fresh impetus to the rally even as some investors expressed concerns.

Zinc jumped as much as 2.6 percent to $3,037 a ton on the London Metal Exchange, the highest level since 2007, and traded at $3,029 at 1:20 p.m. in London. Aluminum gained as much as 1.3 percent to $2,075.50 a ton, the highest since November 2014, while nickel, copper and lead all traded higher.

An index of base metals rallied to a two-year high last week amid better-than-expected demand in China and a weakening dollar. The Chinese government is stepping up moves to shut illegal aluminum and steel plants this year, both to cut excess capacity and help to protect the environment. 

Efforts to promote economic growth in China ahead of a leadership reshuffle scheduled for later this year are also boosting metals usage in manufacturing and industrial sectors, according to Bernard Dahdah, a metals analyst at Natixis SA in London.

“Earlier this year, a lot of the rally was supply related, but recently we’ve seen demand starting to support as well,” Dahdah said by phone.

 

Eoin Treacy's view -

Synchronised global economic expansion, evident for the first time since the financial crisis, tends to boost demand for basic commodities. This is particularly evident in the industrial resources sector because it went through such a painful rationalization where expansion plans were cancelled, administrative staff fired and expenditures cut to the bone. That has resulted in an industry less inclined to increase supply in response to high prices. 



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August 16 2017

Commentary by Eoin Treacy

Email of the day on cyclicals

Thank you for another exceptionally interesting Long-Term Commentary. Once again, you have referred to "cyclicals" and given mining as an example. Which other sectors would you include in this category?

Eoin Treacy's view -

Thank you for your kinds words and this question which other subscribers may have an interest in. Generally speaking, miners, shipping, banking and technology are considered cyclical sectors. 



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August 16 2017

Commentary by Eoin Treacy

Email of the day on inflation-adjusted charts

Can you enlighten me on the following? (1) If I want to see the inflation-adjusted price of gold, or any other commodity when priced in USD, what inflation index is most suitable to use? (I occasionally use "US CPI Urban Consumers, Non-Seasonally-Adjusted”, with Bloomberg symbol "CPURNSA: IND".) (2) is your suggested inflation index in the chart library? (3) if the price of the commodity is not in USD, is another inflation index more suitable?

Eoin Treacy's view -

Thank you for some interesting questions which may be of interest to the Collective. The Index I have always used for inflation adjusted calculations is the US CPI Urban Consumers SA Index with back history to at least 1948. The SA stands for seasonally adjusted and I believe that is the better way of looking at the data because the adjustment smoothens out the chart. 



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August 15 2017

Commentary by Eoin Treacy

August 14 2017

Commentary by Eoin Treacy

Trump trade investigation will 'poison' relations with China, media warns

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

“Given Trump’s transactional approach to foreign affairs, it is impossible to look at the matter without taking into account his increasing disappointment at what he deems as China’s failure to bring into line [North] Korea,” the English-language paper said.

“But instead of advancing the United States’ interests, politicising trade will only exacerbate the country’s economic woes, and poison the overall China-US relationship.”

An administration official said diplomacy over North Korea and the potential trade probe were “totally unrelated”, saying the trade action was not a pressure tactic.

The China Daily said it was unfair for Trump to put the burden on China for dissuading Pyongyang from its actions.
“By trying to incriminate Beijing as an accomplice in [North Korea’s] nuclear adventure and blame it for a failure that is essentially a failure of all stakeholders, Trump risks making the serious mistake of splitting up the international coalition that is the means to resolve the issue peacefully,” it said.

 

Eoin Treacy's view -

The US Administration might be backing away from confrontational rhetoric regarding North Korea, but the question of China’s trade practices is now moving centre stage. China’s practice of insisting on technology transfer, which is then used to promote domestic manufacturing in direct opposition to the original foreign firm’s interests is predatory. It’s hard to imagine that a government investigation won’t be able to find evidence of unfair trade practices if it wants to. 



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August 10 2017

Commentary by Eoin Treacy

Glencore Slashes Debt as It Positions for M&A in Commodities

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

"These results indicate the strong position Glencore has built in the recent past and we expect the momentum to continue," said Heath Jansen, a mining analyst at Citigroup Inc. Glencore shares slipped 1.8 percent to 333.55 pence as of 8:56 a.m. in London.

Glasenberg, 60, said in February that the "time is right" to reward shareholders after difficult years in 2015 and 2016, when the company suspended dividends and sold shares to raise cash.

Glasenberg, the pugnacious South African CEO, now appears to be strengthening Glencore’s balance sheet first, a sign the company is looking at deals, rather than immediately returning more money to shareholders.

Eoin Treacy's view -

Glencore held their dividend and a couple of weeks ago Rio Tinto raised theirs but not as much as investors had been hoping. Appetite for M&A has been floated as a reason for these decisions to conserve cash and that argument has merit. 



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August 10 2017

Commentary by Eoin Treacy

August 09 2017

Commentary by Eoin Treacy

Ten-years from global financial crisis: a decade in charts

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

Ten years ago on Wednesday marked the start for many observers of the global financial crisis - a series of rolling credit shocks and bank crashes that led to the deepest world recession for a generation and a decade of slow growth and painful repair.

On Aug. 9, 2007, the European Central Bank flooded its money markets with billions of euros of emergency cash to prevent a seizure in the European banking system after France's BNP Paribas became the latest to shut down investment funds hobbled by a collapse of U.S. mortgage and asset-backed bond markets.

Serial bank collapses in Britain, the United States, Germany and elsewhere were to follow over the following 18 months. These culminated in U.S. investment bank Lehman Brothers being allowed to go bankrupt in September 2008, triggering a world financial panic, deep recession and eventual rescue package by the U.S. government, Federal Reserve and the rest of the G20 economic powers.

Eoin Treacy's view -

The number of articles pointing out this historical milestone has proliferated over the last week. It’s not particularly positive for sentiment because it reminds investors that everything comes to an end and often in a manner deleterious to one’s financial health. 



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August 09 2017

Commentary by Eoin Treacy

Elon Musk Inspires World's Top Miner to Target Electric Vehicle Boom

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

“As we delved in to understand more about the lithium-ion battery market, it became clear that demand from EVs was accelerating,” Haegel said Wednesday in an interview. “It also became clear that we had competitive advantages.”

As a result, BHP approved a $43 million project to begin production at its refinery from April 2019 of nickel sulfate, a product needed for lithium-ion batteries. The move will make BHP the top exporter of the material, Haegel said in Kalgoorlie, Western Australia.

Global nickel demand could more than double by 2050, fueled in part by rising electric-vehicle sales, Bloomberg Intelligence analyst Eily Ong wrote in a June report. Demand for nickel from lithium-ion batteries may rise to more than 190,000 metric tons a year by 2030 from about 5,200 tons in 2016, Bloomberg New Energy Finance analyst Julia Attwood forecast in April.

Eoin Treacy's view -

Lithium, nickel and cobalt are the primary metals used in the manufacture of lithium batteries. With demand for large batteries from the transportation and utility sectors growing the mining and refining sectors are scrambling to keep up.

 



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August 08 2017

Commentary by Eoin Treacy

Email of the day on diet and South African politics:

On diet. I have followed the recent discussions on diet with great interest. Having been in the veterinary profession for the last 50 years my own experience may be of interest. Two dictums I have always followed. You are what you eat and moderation in everything. For the last few million years or so humans have been omnivores and have a gut designed with that in mind, so a diet of vegetables, nuts, berries, meat and fish is ideal. 

When I joined a small animal practice on the North Yorkshire border so long ago I was given a tip by my then boss who incidentally was a great friend of James Herriott and was featured in his books. He had observed the huge beneficial effects that certain formulations of the antioxidant Vitamin E had on elderly canines prone to mini strokes and heart problems. Some forty years ago I decided to take a daily dose myself. At any rate, I have reached the age of 76 (David's vintage) Mild blood pressure, normal cholesterol and in possession of all my original joints in good working order. I now have a pretty stress-free life spent for the most part in South Africa and the only thing now that tends to affect my blood pressure is the politics of the place!

Eoin Treacy's view -

Thank you for the valuable feedback from a lifetime of healthy living which I’m sure will be appreciated by the Collective. I notice that your list of what is healthy in moderation conspicuously avoids carbohydrates and other processed sugars. In the meantime, the politics of your adopted home were on full show today. 



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August 02 2017

Commentary by Eoin Treacy

StanChart Plunges as Troubled Outlook Overshadows Revenue Gain

This article by Stephen Morris and Sofia Horta e Costa for Bloomberg may be of interest to subscribers. Here is a section:

Bill Winters’ overhaul of Standard Chartered Plc has stalled. The emerging-market-focused lender fell the most in almost nine months after the chief executive officer sounded caution about growth prospects and blamed “extraordinary uncertainty” around regulations for a decision not to reinstate the dividend.

The comments overshadowed a second quarter of revenue gains and pretax profit that doubled. “The absence of a dividend is a negative surprise,” said Ian Gordon, an analyst at Investec Bank Plc. “Revenues remain weak, improving only by $6 million quarter on quarter. The run- rate is far too low to generate the scale and pace of recovery” investors expect, he said, noting the “sheer scale” of the $5 billion decline in income between 2012 and 2016.

Winters, 55, is in his third year of trying to rebuild Standard Chartered’s reputation and balance sheet after an expansion into risky emerging-market lending led to billions of dollars of writedowns and misconduct fines. He’s led efforts to clean up the culture, while reducing risk and pulling back from underperforming businesses, such as an internal private-equity arm that lost $650 million last year.

“The external environment is still weighing on our full potential. Some of our markets are beginning to recover nicely, others are still in the doldrums,” Winters said on a call with reporters Wednesday. The bank has “a clear need to improve earnings,” with income rising at “a relatively modest pace.”

 

Eoin Treacy's view -

Standard Chartered might be emerging market focused but that is not what got the bank into difficulties. It was its aggressive lending practices to commodity businesses, based on the assumption Chinese demand growth was interminable, that resulted in the share collapsing as the commodity bull reversed. 



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August 01 2017

Commentary by Eoin Treacy

July 26 2017

Commentary by Eoin Treacy

Copper Posts Two-Year High, Miners Surge as China Brightens

This article by Mark Burton and Susanne Barton for Bloomberg may be of interest to subscribers. Here it is in full:

Copper posted its highest close in more than two years and shares in producers of the metal rallied amid a weaker dollar and expectations demand will increase in China, the world’s top user of industrial metals.

Copper surged as much as 4.2 percent, leading gains on the London Metal Exchange. Freeport-McMoRan Inc. paced gains by mining stocks as Jefferies LLC recommended buying the biggest publicly traded producer. Caterpillar Inc. is strengthening its forecast for a first annual sales increase in five years after construction demand surged last quarter in China.

Base metals have rallied in the past month as a gauge of the dollar trades around a one-year low, making materials priced in greenbacks more attractive. In addition, economists have become more upbeat about China’s economy and concerns about a tightening of liquidity in the nation have eased.

All main industrial metals climbed Tuesday, while steel and iron ore contracts also advanced as the People’s Bank of China said it will pursue stable monetary policies. The announcement came after economists raised their forecasts for China’s economic output after first-half growth beat estimates.
“The weaker dollar has had quite a positive effect on base metals markets, but we’re seeing some sector-specific elements helping too,” Casper Burgering, senior sector economist at ABN Amro Bank NV, said by phone from Amsterdam. Freer credit availability in China should boost demand in key end-use industries like construction, he said.

Copper for three-month delivery rose 3.3 percent to settle at $6,225 a metric ton by 6:15 p.m. on the LME. That’s the highest since May 2015. Lead, nickel and zinc all gained more than 1.7 percent.

A rebound in China’s construction sector will be particularly beneficial for zinc, which is used to galvanize steel, while nickel has also benefited from signs of a rebound in stainless-steel demand, Burgering said.

Nickel reached the highest in three months after Philippine President Rodrigo Duterte on Monday threatened to impose higher taxes on mining firms unless they take steps to protect the environment, renewing concerns about supply from the world’s top producer of mined nickel.

 

Eoin Treacy's view -

The commodity complex when through a painful process of rationalisation from the 2011 peak and by the beginning of 2016 a lot of the excess capacity in the sector has been eroded. With economic growth picking up the potential for prices to rally remains intact because so many miners have been scarred by the experience of the crash and will be slow to invest in boosting supply. 



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July 20 2017

Commentary by Eoin Treacy

Email of the day on genetically modified foods

Hope you’re hale and hearty.

You will recall we had a brief chat on GMO foods at lunch during the recent Chart Seminar in Singapore. 

I recall you disagreed with my views on GMO science.

Here is a video on the subject. It is very much science based. Hope you can spare some time off your busy schedule to watch it. I think you will appreciate it.

 

Eoin Treacy's view -

Thank you for this email and I have been ruminating on that conversation since April. Few topics get people more riled up than politics, religion, abortion, climate change and genetically modified foods. There are strong beliefs held by protagonists on both sides of the argument and I reached out to David Brown who I thought might have a scientist’s perspective on the question: 



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July 18 2017

Commentary by Eoin Treacy

Copper price jumps on gangbusters China growth

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

Copper futures trading on the Comex market in New York jumped on Monday on renewed optimism about economic strength in top commodity consumer China.

Copper for delivery in September jumped to a high of 2.7375 a pound (just over $6,000 a tonne) in lunchtime trade, up 1.7% on the day to the highest level since end-March. LME copper's 2017 year to date gains in percentage terms are now within shouting distance of 10%.

Commodity-intensive sectors continue to expand at a faster rate than the broader measure of industrial production

The economy of China, responsible for nearly half the world's consumption of copper, expanded at an annual rate of 6.9% in the second quarter against expectations of a slight decline and at a quicker pace than Beijing's own target of 6.5% growth for 2017.

In seasonally-adjusted quarter on quarter terms, growth was even more significant, picking up from 1.3% to 1.7%. If the trend continues, this year would be the first time since 2010 that the Chinese economy grew faster than the year before.

Industrial production data for June released today also pointed to a significant improvement. Growth in industrial output picked up from 6.5% year on year to 7.6% led by greater electricity and steel production. Bloomberg consensus forecasts pointed to no acceleration for Chinese industrial output.

 

Eoin Treacy's view -

China has a major political transition coming up in September or October. Xi Jinping has not yet anointed a new successor probably because so many positions are opening up in the Standing Committee and the Politburo, and he has a vested interest in stacking them with his own appointees. 
The ousting of Sun Zhengcai, a current Politburo member, from Chongqing over the weekend supports the view Xi is angling towards the kind of control Zhang Zemin had over the political apparatus which persisted long after he was in the top position. 

Talk of containing “grey rhinos” or in Donald Rumsfeld speak “known knowns” can also be viewed as an attempt to ensure Xi’s legacy. Here is a section from an article discussing the issue from Bloomberg: 

"The message from the leadership last weekend was very clear -- financial stability is now regarded as an important element of national security," said Raymond Yeung, the Hong Kong-based chief economist at Australia & New Zealand Banking Group Ltd.

An editorial in the Communist Party’s People Daily newspaper on Monday pointed to the seriousness of the campaign, warning of potential "grey rhinos" -- a variation on the black swan events popularized during the global financial crisis, with the difference that the danger from a charging rhino is more immediate and the animals are less rare.

 



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July 17 2017

Commentary by Eoin Treacy

Sweeping Wildfires Burn Canada's Timber as Lumber Prices Surge

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

Sweeping wildfires across Canada’s British Columbia are threatening timber supplies and sending lumber prices surging.

More than 375 fires have swept across the province, burning forests and forcing sawmills to shut down or evacuate. While the impact on supplies is minimal so far, there are concerns that the blazes will continue to spread amid hot, dry conditions, according to Paul Quinn, an analyst at RBC Capital Markets in Vancouver. Lumber futures on Monday jumped by the exchange limit in Chicago to the highest in more than two months.

“Forests are getting burnt, so that has a supply impact,” Quinn said by telephone. “The worry is they’ll continue to grow and get bigger,” he said, referring to the fires.

Last week, West Fraser Timber Co. suspended operations at three lumber mills that represent annual production capacity of 800 million board feet of lumber and 270 million square feet of plywood. Norbord Inc., the largest North American producer of oriented strand board used in residential construction, has also suspended production at its mill in 100 Mile House in central B.C.

On the Chicago Mercantile Exchange, lumber futures for September delivery rose by the $10 trading limit to $387.30 per 1,000 board feet at 11:37 a.m. local time. That’s the highest price for a most-active contract since May 9. Aggregate trading for this time is 44 percent above the 100-day average, according to data compiled by Bloomberg.

Cash prices for some grades of lumber rose 7 percent last week, Quinn of RBC said. “We’re at the seasonal peak in construction activity, so anything that reduces supply will create some pricing tension,” Mark Wilde, an analyst at BMO Capital Markets in New York, said in an email.

 

Eoin Treacy's view -

According to this article British Columbia has spent about $80 million in the first few weeks of the fire season compared with $100 million in all of last year. That gives us an idea of how large the issue is and firefighters expect to be fighting conflagrations for the next few months. 



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July 13 2017

Commentary by Eoin Treacy

Email of the day on rare earth metals

Rare earths are in increasing demand in several fields of high tech.  Lynas Corporation, the world’s biggest rare earths producer outside China, has had a chequered life but under new management appears poised to benefit substantially.  It may be of interest.  A copy of its Quarterly Activities Report taken from the company’s web site ( https://www.lynascorp.com ) is attached.

Needless to say, I am long this stock.

 

Eoin Treacy's view -

Back in 2010 China made sure everyone knew it is in command of the global rare earth metals market, when it restricted supply to Japan, in particular, but also to a number of other importers. The result was a surge in metal prices as supply was constrained and considerable investment in additional supply outside China. 

Lynas was one of the companies that IPOED to secure capital to bring Australian supply to market. It is also one of the few that survived when the market crashed as China reversed course and flooded the market with supply. 

 



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July 11 2017

Commentary by Eoin Treacy

Canadian Home Buyers Losing Steam, and Cash, as Rate Hike Looms

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

The chain of events began in October when the federal government tightened mortgage insurance requirements, and continued into April when the province imposed a 15 percent tax on foreign purchasers. Home sales fell 37 percent in June from a year earlier and prices rose the least since January 2015. Then last week the regulator said it’s considering requiring lenders to stress test uninsured mortgages, which is expected to cool things further.

On top of all this, Governor Stephen Poloz will lift the benchmark overnight rate on Wednesday to 0.75 percent from 0.5 percent, according to 22 of 31 economists in a Bloomberg survey while the rest see no change. The rate could rise to or past 1 percent in a year, a separate survey shows. In anticipation, Canada’s biggest banks are also tightening. Royal Bank of Canada raised its fixed rates for 2-,3-, and 5-year term mortgages by 20 basis points.

An increase of 75 basis points to 100 basis points in the Bank of Canada’s key rate by the end of 2018 would remove 6 percent to 8 percent of buyers from the country’s real estate market if banks fully price it into their loans, according to Will Dunning, chief economist at industry group Mortgage Professionals Canada. A slowdown in property deals may pose a risk to Canada’s growth -- the fastest among Group of Seven countries -- just as the economy seems to be overcoming a slump triggered by a drop in global oil prices.

“Right now people are staying away from buying," Dunning said by phone. "If they stay away over a longer period of time, that could become dangerous, that could become deflationary."

 

Eoin Treacy's view -

Canada avoided the worst ravages of the credit crisis because its banks were not exposed to subprime loans, its domestic housing market was not as overbought in 2007 as the USA’s and commodity prices staged an impressive rebound. The near bankruptcy of Home Capital, only avoided by a last-minute investment by Warren Buffett, was a warning shot for the financial system that is now dealing with elevated real estate pricing in both Vancouver and Toronto. 



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July 11 2017

Commentary by Eoin Treacy

Lithium-rich countries risk missing the boat on electric batteries boom

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

As Tesla Motors begins to build the world’s largest lithium-ion battery in Australia and other vehicle makers such as Volvo get on board the electric vehicles train, concerns are rising over the environmental footprint of mining that and other materials used in car batteries, as well as their eventual disposal.

According to analysts at UBS, by 2025 the market will need 12 times the battery capacity currently available. At the same time, only 5% of lithium-ion batteries get recycled, versus more than 90% of those used in conventional vehicles, reports Financial Times:

“One of the challenges of making battery recycling economically viable is the quantity of battery material that is needed to keep utilisation rates of recycling facilities sufficiently high,” say analysts at Morgan Stanley. “The risk, therefore, is there may not be the necessary infrastructure in place in time for the first significant wave of EV batteries to reach end of life.”

Demand for the commodity has been rising as of late, which in turn has caused prices to more than double in the past 18 months.

The need for the metal is expected to triple by 2025, but not all the countries rich in lithium are taking advantage of the boom. At the same time, new actors are emerging worldwide.

 

Eoin Treacy's view -

This article carries a number of interesting graphics on which countries have the largest lithium reserves and which are the largest producers. With demand for the metal expected to multiply over the next decade a supply inelasticity meets rising demand growth model is in place at least until the necessary infrastructure to produce and recycle the metal has been built which could take another few years. 



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July 07 2017

Commentary by Eoin Treacy

The Silver Flash Crash: What Might Have Been at Work

This article by Matthew Ashley for investing.com highlights the surprise at today’s intraday volatility in silver. Here is a section:

One slightly more plausible suggestion has been a sudden liquidity drain that sparked a bout of panic selling. Indeed, markets have been fairly thin over the 4th of July holiday period which could have compounded fears that silver was becoming illiquid in the wake of JP Morgan’s recent acquisitions. This being said, the extent to which JP Morgan has ‘rigged’ silver markets is constantly challenged and courts seem to be unable to agree on if the institution is breaking antitrust legislation.

Stop loss orders have also been fingered as a cause for the sudden rout for all the usual reasons. Specifically, the hitting of numerous stop loss orders in rapid succession could have easily amplified the effects of a sell-off – even if they probably didn’t trigger the downtrend in the first place. Moreover, given that many traders may have been out of action due to the holiday’s in the US, it’s quite reasonable to expect more ‘set and forget’ trades to have been placed than is typical. This would have left the metal more exposed to this type of risk than we would usually expect.

 

Eoin Treacy's view -

Silver is prone to volatility not least because it is a substantially thinner market than gold which is why we so often refer to it as “high beta gold”. The price fell by almost $2 around midnight UK time when markets are thin before rebounding to almost unchanged. It then traded laterally in an inert manner until an hour before the US open when it traded down from $16 to $15.50 before stabilizing again. That represents substantial volatility but the question is what now?



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July 04 2017

Commentary by Eoin Treacy

Australia Defies Hawkish Talk as Lowe Frets Over Household Debt

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

Lowe again pointed to the mixed nature of the nation’s labor market -- a key indicator. While the last three monthly reports have shown strong hiring gains and unemployment has dropped to 5.5 percent from 5.9 percent, under-employment remains high. There’s still plenty of slack in the labor market and this is the epicenter of any turnaround on wages -- which are increasing at the slowest pace on record.

The central bank said wage growth is likely to remain low for a while yet. Core inflation remains below the central bank’s 2 percent to 3 percent target and is only forecast to “increase gradually” as the economy strengthens. As an aside, the RBA dropped its reference to an economic growth forecast of 3 percent and said the recent slowing in gross domestic product partly reflected temporary factors, like weather, but not all of it.

“The RBA has explicitly chosen not to adopt a more hawkish tone,” said Sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. “Ultimately, a more hawkish central bank requires the distribution of risks around both growth and inflation to have improved, such that the current setting of financial conditions is no longer appropriate. Our sense is that this is not yet the case in Australia.”

 

Eoin Treacy's view -

The Australian Dollar has been ranging mostly below 77¢ since early 2016 and pulled back against today to confirm near-term resistance at that level. Household debt is more than a minor issue for the RBA and with commodity prices still relatively low they are going to be cautious about raising interest rates in a country where floating rate mortgages predominate. 



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July 03 2017

Commentary by Eoin Treacy

Floods Slow Ivory Coast Cocoa Harvest Amid Worries About Rot

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

Heavy rains in Ivory Coast’s cocoa-growing areas are slowing the harvesting and sales of beans and farmers say they’re worried about black-pod disease rotting their crops.

Roads to plantations in the southwestern area of Meagui have been cut off after rivers overflowed and farmers can’t access their crops, which means they don’t know how the flowers and pods on the trees are developing, according to local grower Dongo Koffi.

“Everything is stopped at the moment,” he said by phone. “The sales have slowed down because we can’t harvest. Some farmers have some stocks of beans with them but they can’t sell them, because the roads aren’t accessible.”

While it’s still unclear whether Ivory Coast output will be materially affected, any losses due to the heavier-than-usual rainy season in the world’s top cocoa producer may help ease some pressure on prices, which have dropped by more than a third in the past 12 months amid expectations for a global surplus. The country, which is currently harvesting the smaller of two annual crops, is expected to produce a record amount this year.

 

Eoin Treacy's view -

Cocoa is trading in contango throughout the futures curve but doesn’t change the reality that cocoa needs both abundant rain in the growing season and dry weather once harvested to allow the pods to dry. That kind of variability in growing and maturing conditions is why cocoa is only grown in a relatively small number of equatorial countries with well-defined wet and dry seasons. 



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June 30 2017

Commentary by Eoin Treacy

China Is About to Bury Elon Musk in Batteries

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

Roughly 55 percent of global lithium-ion battery production is already based in China, compared with 10 percent in the U.S. By 2021, China’s share is forecast to grow to 65 percent, according to Bloomberg New Energy Finance.

“This is about industrial policy. The Chinese government sees lithium-ion batteries as a hugely important industry in the 2020s and beyond,” Bloomberg New Energy Finance analyst Colin McKerracher said.

In all, global battery-making capacity is forecast to more than double by 2021 to 273 gigawatt-hours, up from about 103 gigawatt-hours today. That’s a huge opportunity, and China doesn’t want to miss it.

“The Gigafactory announced three years ago sparked a global battery arms race,” said Simon Moores, a managing director at Benchmark Mineral Intelligence. “China is making a big push.” 
But don’t count Tesla out. The company, based in Palo Alto, California, plans to announce locations for up to four new factories by the end of 2017. (It’s exploring at least one site in Shanghai.) And there are few, if any, individual Chinese battery companies that can match the scale of Tesla’s production toe to toe.   

 

Eoin Treacy's view -

China went from pretty much nowhere to become the dominant force in solar cell manufacturing in a relatively short time because of unwavering government support and could easily achieve the same feat in batteries. That is quite apart from similar objectives being pursued in South Korea and Japan. 



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June 27 2017

Commentary by Eoin Treacy

Muppet drops gold price to 6-week low

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

This bears the hallmarks of a fat finger 'muppet' – a trade of 18,149 ounces would be a very typical trade, but a trade of 18,149 lots of a futures contract (which is 100 times bigger) would not be… it leaves us wondering if a junior had got confused between "ounces" and "lots"… or maybe an incorrectly programmed algo ahead of options expiry on COMEX … we just don't know.

The gold price had recovered much of the lost ground in afternoon trade in New York, exchanging hands for $1,243.60 an ounce.

Norman points out that if the trade, which may also have been carried out by a central bank or a large-scale speculator opening a short position, was indeed an error the gold price bear who made the move is nursing a $36 million loss at this point.

 

Eoin Treacy's view -

The gold price experienced a $20 pull back yesterday morning. Two contrasting points are worth mentioning. The first is that despite the high volume the pullback was only $20. The second is that the price did not snap back up immediately afterward, suggesting that while the market was able to absorb the volume there was no surfeit of orders to reassert demand dominance. 



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June 23 2017

Commentary by Eoin Treacy

Narrowing Arabica-Robusta Coffee Spread to Lure Buyers

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

Lowest premium in nine years will spur arabica demand, Julio Sera, risk- management consultant at INTL FCStone in Miami, says in telephone interview.

* “Who’s going to buy robusta if you can get cheaper arabica?”

* Recent sell-off is overdone and gives roasters and other end- users a chance to lock in supplies in coming months, while speculators unwind some bearish bets

* Prices will probably swing widely before end of month, 2Q

* On Thursday, futures spread between arabica in N.Y. and robusta in London narrowed to 24.4c/lb, lowest since Jan. 14, 2008, when Bloomberg data starts; on Friday, premium rose as much as 17% to 28.5c; average in 2016 was 58c

* On Friday, arabica coffee for Sept. delivery jumps 5.4% to $1.2275/lb

* On Thursday, price slumped as much as 5.4% to $1.155, lowest since March 3, 2016

 

Eoin Treacy's view -

There is a key difference between the CRB Index and the CCI Index or as they are often referred to as the CRB and the Old CRB. The CRB is liquidity weighted so it is heavily influenced by oil. The CCI (Continuous Commodity Index) is unweighted to it should give us a better reflection of investor interest in the commodity sector. 



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June 23 2017

Commentary by Eoin Treacy

June 23 2017

Commentary by Eoin Treacy

Canada Ponders an Unusual Drug Problem: a Shortage of Marijuana

This article by Josh Wingrove  and Jen Skerritt for Bloomberg may be of interest to subscribers. Here is a section:

“Ultimately the biggest problem that appears after today’s discussion is one of supply,” Sousa said in an interview this week. Finance ministers were told demand is “quite high” for marijuana already in Canada, he said. “So we want to make certain that, when we do proceed, there is sufficient supply to accommodate the activity because what we’re trying to do is curb the illicit use and organized crime that now exists around it.”

Trudeau’s framework for legalization, unveiled in April, will rely on Canada’s provinces to set up sale and distribution regimes, while at minimum selling recreational pot by mail beginning some time before July 2018. Key details including taxation remain up in the air. Federal Finance Minister Bill Morneau has said he favors a tax rate that will starve out the black market, one of the government’s key objectives. “That as a conclusion would lead us to say taxation rates have to be low,” Morneau told reporters after the June 19 meeting, where he said they discussed the need for a “coordinated” approach.

Initial Shortage
Canada’s burgeoning marijuana industry has ballooned in value amid optimism over Trudeau’s plan for recreational sales, which Canaccord Genuity Group Inc. said in November could reach C$6 billion ($4.5 billion) annually by 2021. Combined demand for recreational and medical marijuana may reach 575,000 kilograms by 2021, according to the report.

The government says a key aim is to shrink or altogether kill the black market, and any shortage of legal weed would hinder that effort. Trudeau’s plans also allow people to grow up to four plants in a home.

 

Eoin Treacy's view -

November 4th was a mixed blessing for the cannabis sector. On the one hand an increasing number of US states, including California, adopted recreational cannabis laws which in many cases go into effect on January 1st 2018. The flip side was that President Trump has made no secret of his ambivalence towards the sector which has decreased the potential of the Federal ban to be lifted during his tenure. 



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June 15 2017

Commentary by Eoin Treacy

Miners Drop as South Africa Escalates Black Ownership Rules

This article by Paul Burkhardt and Kevin Crowley for Bloomberg may be of interest to subscribers. Here is a section: 

South African regulators unveiled a new mining charter to force companies to give more ownership to black shareholders, sparking a selloff across the industry.

Anglo American Plc and Sibanye Gold Ltd. shares tumbled after the Department of Mineral Resources introduced requirements that local companies must ensure 30 percent of their shareholders are black, up from a previous level of 26 percent. Several of South Africa’s biggest mining companies may have to sell new stakes, raising the risk of dilution for existing owners.

The new rules “could pull the rug right from under the industry’s feet,” said Andy Pfaff, chief investment officer of Vanguard Derivatives, a South Africa-based broker. “It’s certainly not going to help with attracting foreign investment into South Africa.”

 

Eoin Treacy's view -

Jacob Zuma’s government has been under pressure with a slew of corruption allegations and the firing of his finance minister. Introducing another mining charter which gives greater ownership rights to the people who vote is a populist move no doubt aimed at shoring up support. 



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June 14 2017

Commentary by Eoin Treacy

Fed Outlines Balance Sheet Unwind With $10b Reinvestment Cap

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

Federal Reserve said it intends to initially cap its Treasury reinvestments at $6b/month and MBS at $4b/month and increase both at three-month intervals over a 12-month period, according to statement.

Fed said it will begin balance sheet normalization this year if the economy evolves as the central bank anticipates

Cap on UST reinvestments will increase by $6b increments until reaching $30b/month; MBS cap will increase by $4b increments until it reaches $20b/month

FOMC anticipates caps will remain in place once they reach their maximums so the Fed’s holdings will “continue to decline in a gradual and predictable manner” until the committee decides that the Fed is “holding no more securities than necessary” to implement monetary policy

FOMC anticipates level of reserves will decrease to a level “appreciably below that seen in recent years but larger than before the financial crisis” 

While the fed funds rate will remain primary monetary policy tool, FOMC said it will be prepared to resume reinvestments “if a material deterioration in the economic outlook” were to warrant a sizable reduction in rates.

 

Eoin Treacy's view -

A great deal of debt needs to be refinanced between 2018 and 2021 so slow pace of balance sheet run off is positive news for the treasury market because it ensures the Fed will still be reinvesting at least some of its expiring debt in new issues. 



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June 14 2017

Commentary by Eoin Treacy

Copper demand from electric vehicles to be nine times higher by 2027

This piece from the International Copper Association may be of interest to subscribers. Here is a section:

Electric vehicles use a substantial amount of copper in their batteries, and in the windings and copper rotors used in electric motors. A single car can have up to six kilometers of copper wiring. The metal is also required for busbars, used to connect modules and cells in battery packs, and in charging infrastructure.

Whilst most cars use internal combustion engines that require up to 23 kg of copper, the IDTechEX research found that a hybrid electric vehicle uses 40 kg of copper, a plug-in hybrid electric vehicle uses 60 kg, a battery electric vehicle 83 kg, and a hybrid electric bus 89 kg. A battery-powered electric bus can use 224–369 kg of copper, depending on the size of battery used.

“Copper has the highest conductivity of any non-precious metal, and plays an important role in all energy production, but it is particularly important for future sustainable technology applications such as electric vehicles,” said Colin Bennett, Market Analysis and Outreach, ICA. “Copper increases the efficiency and reliability of these vehicles and is itself a sustainable material, as it is 100% recyclable without loss of properties.”

 

Eoin Treacy's view -

The automotive sector is betting big on electric vehicles while also attempting to figure out how autonomy will function and what that means for ownership and miles driven assumptions. With battery technology improving all the time and with considerable investment flowing into the sector the potential for the electric vehicle market to grow from its current relatively modest footprint is considerable. 



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June 07 2017

Commentary by Eoin Treacy

Pulses, Indian Beef. Bullish Corn

Thanks to a subscriber for this report by Ned Schmidt which may be of interest. Here is a section:

Ten years ago India was not a topic of a lot of interest. This month we find ourselves again talking about India twice, on pulses and beef. And when we look at corn we have some optimism to offer up.

Pulses are basically dry beans, lentils, and peas. Few of us ever thought about them being grown in North America. U.S. and Canada have become major growers, exporting to India and other nations from the Middle East to India. Bottom graph is of U.S. acreage planted in pulses. While expansion has been irregular, roughly 1.5 million acres have been added in last fifteen years. Canada is a major source of pulses. Roughly 65% of world’s lentils are grown in that nation. Acreage dedicated to these crops is probably approaching 10 million acres. Apparently Canada is an ideal place to grow them, and then send them to India, et al

India is becoming a major customer for world’s food system. Second, world will grow what customers want. Farmers are looking to produce alternative crops in search for profits. The “corn vs. soybean” farmer, while essential, may increasingly become “outdated”.

Eoin Treacy's view -

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

India is one of the fastest growing economies in the world which is lifting millions of people out of abject poverty. The first thing people do when they go from $1 to $2 a day is eat more food and buy soap. That helps them to continue earning more money and puts many people and their children on the road to a more secure standard of living. It is reasonable to expect India’s demand for food will continue to increase as it progresses economically. 



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June 05 2017

Commentary by Eoin Treacy

In gold we trust

Thanks to a subscriber for the 11th annual edition of Ronald-Peter Stöferle and Mark J. Valek’s trademark report on the gold market for Incrementum. Here is a section:

Moreover, the ratio of real assets to financial assets is currently the lowest since 1925.5 In a study worth reading, Michael Hartnett, chief strategist at Bank of America Merrill Lynch, recommends to “get real”, i.e. to reallocate investments from financial assets into real assets.

"Today the humiliation is very clearly commodities, while the hubris resides in fixed-income markets" as Hartnett explains. Gold, diamonds, and farmland show the highest positive correlation with rising inflation, whereas equities and bonds are negatively correlated with increasing prices, a finding that we have pointed out repeatedly. The political trend towards more protectionism and stepped-up fiscal stimuli will also structurally drive price inflation.6

In the past years, rate cuts and other monetary stimuli have affected mainly asset price inflation. Last year, we wrote: “Sooner or later, the reflation measures will take hold, and asset price inflation will spill over into consumer prices. Given that consumer price inflation cannot be fine-tuned by the central banks at their discretion, a prolonged cycle of price inflation may now be looming ahead.” 2016 might have been the year when price inflation turned the corner. However, the hopes of an economic upswing due to Trumponomics and the strong US dollar have caused inflation pressure to decrease for the time being. Upcoming recession fears resulting in a U-turn by the Fed, and the consequential depreciation of the US dollar would probably finalise the entry into a new age of inflation. This will be the moment in which gold will begin to shine again.

Low interest rates combined with the pressure to invest and FOMO, have nurtured a treacherous sense of carelessness within many market participants. Scenarios such as significantly higher inflation or a recession are currently treated like black swans, although history shows that these events do occur at regular intervals.

Many signals suggest that we are about to face a big shift within the financial and monetary system. Nobody can foresee what it will look like. But an early look at such scenarios creates a good opportunity to come out stronger at the other side of this transition. As Roland Baader brilliantly summed it up: “In the middle of the boisterous summer party, the sensitive ones start feeling the chills.”7 To some degree, we find ourselves in this quote.

Eoin Treacy's view -

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

2-year yields at a shade under 1.3% signal bond investors are unwilling to anticipate Fed action beyond the next quarter. They’ve probably been punished too much for making that mistake over the last few years when the Fed has overpromised and under delivered on rate hikes. 



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June 02 2017

Commentary by Eoin Treacy

Gold remains expensive insurance

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

Expensive by any number of measures…
At the current spot price of USD1,260 – 1,265/oz, gold screens as expensive against almost all other metrics. The average of nine metrics suggests that the fair value for gold is USD1,015/oz. At the bottom end of the range G7 per capita income (gold’s affordability) would suggest a fair value of USD735 – 740/oz. At the upper end of the range and the only measure whereby gold looks cheap is treating gold as a reserve currency. Here the size of the big four central bank balance sheets (ECB, BoJ, PBoC and Fed) would suggest a fair value of USD1,650/oz. As a blunt gauge of relative value, this approach is okay, but the spread is too wide to be of any real use as a serious forecasting tool. Instead, we prefer to synthesize the main price drivers into a four factor regression model.

The current gold price suggests that heightened risk perceptions persist
Although the correlation coefficient on our model is 87%, there are very discrete periods when gold trades above the model forecast as well as below. Our interpretation is that when gold trades above, the market is going through a period of heightened risk perceptions, be it the expectation of a collapse in the global financial system or rampant inflation. Over the past 10 years, we have had an extended “bull market” period lasting 3 and half years and an equivalent “bear market” of 3 and a half years. Our model suggests that gold should be trading at USD1,185/oz, 6% below the current spot price. The current “premium” period for gold started in February 2016. We expect this environment to continue into 2018. Nevertheless, we retain our cautious to neutral view on gold with the Deutsche Bank house view on the model inputs pointing to a year end price of USD1,150/oz even when factoring in further political and financial uncertainty. Our Q4 price forecast is USD1,230/oz, which already incorporates a risk premium.

A short term insurance policy for those who want it
Although gold screens as expensive, there is a short term scenario (3 month) which would justify gold trading higher, in our view. In the near term, our US rates economist Dominic Konstam sees scope for the US 10-year bond yield to fall to 2% (before rising to 2.75% by year-end), as falling excess liquidity points to softer US growth momentum ahead. If we apply a US 10 year bond yield of 2%, a USD 2% weaker from current levels (not our FX strategist view) and the S&P500 down 5% from current levels, our fair value model points to a gold price of USD1,320/oz.

 

Eoin Treacy's view -

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

Many fundamental investors think gold is a barbaric relic because it is impossible to value on a dividend discount model metric. So are zero coupon bonds and yet the market has found a way to value those. That highlights what might be considered a blind spot for an asset that has been considered a store of value of millennia. 



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May 31 2017

Commentary by Eoin Treacy

The End of Cheap Chocolate? Cocoa Futures Surge Most on Record

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

Ivory Coast growers have sold 950,000 tons of cocoa beans from the 2017-18 main crop as of May 27, according to a person familiar with the matter. The main crop, which starts Oct. 1, is the larger of the country’s two annual harvests.

“That’s a pretty big upfront sale, and it’s probably the reason why prices are rallying,” Jack Scoville, vice president for Price Futures Group in Chicago, said in a telephone interview.

Some growing regions in Ivory Coast and Ghana, the second-largest producer, have been dry and need moisture to aid early crop growth, according to Gaithersburg, Maryland-based MDA Weather Services. Trees are also stressed from a lack of moisture in Indonesia’s Sulawesi region.

Eoin Treacy's view -

There has been a great deal of diversity in the performance of individual commodities but weakness in the agricultural sector has been a primary contributor to the underperformance of the Continuous Commodity Index. The abrupt decline in energy prices has been a more recent factor. Nevertheless there is now some diversity coming into the agricultural sector which suggests they need to be treated on their individual merits. 



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May 30 2017

Commentary by Eoin Treacy

We'll Live to 100 How Can We Afford It?

Thanks to a subscriber for this report from the World Economic Forum. Here is a section:

In Japan, which has one of the world’s most rapidly ageing populations, retirement can begin at 60. This could result in a retirement of over 45 years for those who will live to the current life expectancy of 1071 (see Figure 2). What is the impact of a population that will spend 20%-25% more time in retirement than they did in the workforce? How do we rethink our retirement systems that were designed to support a retirement of 10-15 years to prepare for this seismic shift? 

One obvious implication of living longer is that we are going to have to spend longer working. The expectation that retirement will start early- to mid-60s is likely to be a thing of the past, or a privilege of the very wealthy.  

Absent any change to retirement ages, or expected birth rates, the global dependency ratio (the ratio of those in the workforce to those in retirement) will plummet from 8:1 today to 4:1 by 2050. The global economy simply can't bear this burden. Inevitably retirement ages will rise, but by how much and how quickly demands urgent consideration from policy-makers. 

Given the rise in longevity and the declining dependency ratio, policy-makers must immediately consider how to foster a functioning labour market for older workers to extend working careers as much as possible. Employers also have a key role to play in helping workers reskill and adapt their work styles to support a longer working career. 

This paper focuses on the sustainability and affordability of our current retirement systems. To protect against poverty in old age, we believe that retirement systems should be designed to provide a level playing field and equal opportunity for all individuals. A well-designed system needs to be affordable for today’s workers and sustainable for future generations to ensure that all financial promises are met. 

Healthy pension systems contribute positively towards creating a stable and prosperous economy. Ensuring that the public has confidence in the system, and that promised benefits will be met, allows individuals to continue to consume and spend through their working and retired years. If this hard-earned confidence is lost, there is a significant risk that retirees will moderate their spending habits and consumption patterns. Such moderation would have a negative impact on the overall economy, particularly in countries where the size of the retired population continues to grow. 

Action is needed to realign our existing systems with the challenges of an ageing population. Those who take proactive steps will be better equipped in the years ahead.

Eoin Treacy's view -

Here is a link to the full report.

I’m 40 so according to this report I have a 50% chance of living to 94. The Chart Seminar is in its 48th year in 2017 so you never know I might manage to get it to the century because we are all going to be working a lot longer. It’s a good thing I’m doing something I enjoy and perhaps that is the best advice. You are going to be working for an awfully long time so be prepared to change jobs, adapt and enjoy what you do. 



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May 26 2017

Commentary by Eoin Treacy

Kik App Debuts Digital Currency Amid Bitcoin Boom

This article by Gerrit De Vynck for Bloomberg may be of interest to subscribers. Here is a section:

Kik, based in Waterloo, Canada, unveiled plans for an “initial coin offering,” a process by which it sells tokens that can be used to buy services on its platform. The idea is that as more and more people use Kik, the value of those tokens, called “Kin”, will rise in value.

Interest in coin offerings is high, thanks to surging prices of bitcoin and other virtual currencies. Called ICOs, they give a wide range of people the chance to invest in a company or any other endeavor early on. While unregulated, they have proved popular, with investors spending around $330 million on tokens over the past year, according to data compiled by cryptocurrency blog The Control. Earlier this month, cloud-storage startup Storj raised almost $30 million in five days via an ICO.

Kik, which has raised about $120 million (in real money) from investors including Tencent Holdings Ltd., could serve to add a new layer of legitimacy to the process.

“Kik will be the largest install base of cryptocurrency users in the world,” Chief Executive Officer Ted Livingston said. “Kin, on day one will be the most-used cryptocurrency in the world.”

Eoin Treacy's view -

Tech startups have cottoned onto the fact that cryptocurrencies are based on reasonably easily repeatable strings of code so they can create their own. Monero, Dash, NeosCoin, MaidSafeCoin, SysCoin, SIBCoin, Couterparty, ShadowCash, Storjcoin X, Nexus, Potcoin, Synereo, NAV Coin and Stellar Lumens, to name a few, have all been created in the last two years and that’s leaving out the large ones like Ethereum and Ripple.  



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May 24 2017

Commentary by Eoin Treacy

Global gold study: Find your 'safe place'

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

In a volatile macro environment, follow the cash flow & avoid the debt laden 
The USD gold price has rallied +10% this year, following a sustained sell-off post the U.S. election in Nov 2016. Markets remain focused on global growth prospects (and U.S. rate hikes), but rising tensions in the Middle East and Asia, along with concerns around U.S. policy disappointment & the Chinese property market pose risks to the pro-growth trade. We believe the global gold sector presents a compelling investment thesis despite our neutral outlook on gold. Costs have fallen across the sector, lifting free cash flow (average FCF yield of 6% this year), while debt levels are falling (average net debt/EBITDA now 1.2x). The sector is trading on an undemanding 7.6x EV/EBITDA, but we believe the companies best positioned to manage price volatility are still those with the highest quality portfolios. Evolution (13% FCF yield), Barrick Gold (12%) & St. Barbara Mining (10%) are the best cash generators. Newmont (8% FCF yield) has the best balance sheet amongst the majors (0.6x net debt/EBITDA), is trading on 0.8x P/NPV, and is our top pick amongst global majors. 

Divergent trends amongst the global large-cap, mid-cap and small-cap sectors
Global gold majors remain focused on reducing costs, increasing cash flow and repairing balance sheets. Gearing amongst majors remains elevated (29% average), offsetting appealing cash flow metrics; we believe the majors will continue to progress longer term growth options while retaining free cash to pay down debt. Mid-cap gold miners are in better positions, with stronger balance sheets & internal growth options. The mid caps are trading on 7.6x EV/EBITDA (8.5x for global majors), highlighting the discount applied by the market for lower reserves. Small cap golds provide compelling value opportunities, with strong cash flow (St Barbara 10% FCF yield, Regis 9%) and the best 3-year production growth prospects across the sector. OceanaGold (Hold) has a clear growth mandate, while Alacer Gold & Dacian Gold (both 0.5x P/NPV) are building new projects, are fully-funded and screen deep value. 

 

Eoin Treacy's view -

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

The lack of free cash flow yield was one of the reasons the gold mining sector was unable to perform when gold prices were closer to $1900 because they were investing so much of their revenue and indeed borrowing against it to fund new supply. That all changed when prices declined. Investment was cancelled and a major process of rationalisation ensued. The result is that the gold mining sector generally has sounder balance sheets today than when prices for their products were considerably higher. 



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May 23 2017

Commentary by Eoin Treacy

Noble Group 'Fighting for Its Life' as S&P Sees Default Risk

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

The Hong-Kong based trader’s troubles are deepening after two turbulent years that have been marked by losses, asset sales, and accusations of improper accounting that it has denied. Since surprising investors two weeks ago with a quarterly loss, the shares have tumbled to multiyear lows and the price of its bonds has fallen by more than half. S&P’s warning follows downgrades from Moody’s Investors Service and Fitch Ratings Ltd. in recent days.

There’s “potential that the company will face distress and a nonpayment of its debt obligations over the next 12 months,” S&P said in a statement late Monday as it cut the company’s ratings by three steps to CCC+. “The company’s capital structure is not sustainable,” S&P said.

The shares plunged as much as 32 percent to 40 Singapore cents, and were at 42 cents as the halt kicked in after just 36 minutes of trade on Tuesday morning. The stock has lost 75 percent this year, following a 44 percent drop in 2016 and 65 percent plunge the year before. The company’s 2020 bonds sank to an unprecedented 39.4 cents on the dollar.

Eoin Treacy's view -

Investment banks concluded the commodity bull market is over a few years ago as they shuttered or sold-off trading operations en masse and largely exited the business. Noble Group is a major commodity trader, at least for the moment. Its current difficulties beg the question whether market participants are taking positions at odds to the company’s best interests in an effort to initiate a forced sale. 



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May 18 2017

Commentary by Eoin Treacy

Miningball

Thanks to a subscriber for this well-argued report by Tyler Broda and colleagues at RBC making the case for a bull market in industrial commodities because they are still cheap and prices are likely to rise. Here is a section:

The data shows, unsurprisingly, that the sector is cyclical. What we find fascinating is that the downturn from 2012-2016 was so intense that most of the data sets are now showing extreme cyclical levels. As we have anecdotally pointed out at numerous times, the behaviours of the mining management has changed (for now). Starting with the success from cutting excess thermal coal and zinc production, Glencore was able to take leadership in focusing on meeting market demand rather than “maximising” sunk capital utilization. This has spread to the iron ore industry where Rio Tinto’s “Value over Volume” mantra is  noticeable shift in strategic culture following the change of CEO. We are seeing more rationality in production across the board and financing remains sparse for greenfield projects. Investors are demanding discipline and management teams are largely delivering.

Although the rhetoric suggests that this time is different, and an appropriate level of skepticism is advised, the data does back up the above anecdotal trends. In our view, the sector has rarely been positioned in as constructive a position as it is now and will take time to unwind with the inflexibility of certain data sets (for instance, total production is likely to fall over the medium term if expansion capex is nearing zero) as well as vastly improved cash situations (free cash flow yields have never been higher).

Total copper equivalent production has stayed relatively flat through the 2013-2016 period as the initial impacts of slowing capex levels began to reduce growth trends. Additionally, the removal of production has reduced the production base (either via some small divestments or by closure due to lower prices). This should increase the productivity of the remaining assets as it would be presumed these are better assets and there is more management focus that can be applied where it matters.

The rolling 3-year production growth is now down to sub-2% growth rates and we would not expect (beyond a copper and iron ore led production uptick in 2018) that this will be able to grow with such low levels of planned expansion capex and the lead times that it takes from project start to finish.

Eoin Treacy's view -

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

Mining has long been known as a highly cyclical sector. In fact, because investing in new supply is so capital-intensive it requires evidence that can be brought to creditors so they will make the money available to break ground. That takes time and everyone is waiting for the same data so when one company gets the wherewithal to expand so do many more. That means the capital intensive nature of the extraction business ensures its cyclicality because new supply often comes to market at the same time. 



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May 17 2017

Commentary by Eoin Treacy

Glencore: 'Electric vehicle revolution is happening faster than expected'

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

Vehicles with conventional internal combustion engines typically contain about 20 kilograms of copper. For electric vehicles the copper load is up to 80 kilograms (and increased quantities of cobalt, nickel, manganese).

Bloomberg reports Ivan Glasenberg, CEO of Glencore, the world's third largest producer of copper, told investors at an industry meeting in Barcelona “the electric vehicle revolution is happening and its impact is likely to be felt faster than expected.”

Almost all carmakers are increasing investment in electric vehicles as governments adopt tighter emissions targets, he added.

In a recent report consultants McKinsey forecast that barring large-scale substitution by aluminum and other materials or a significant increase in recycling, primary copper demand could potentially grow to 31 million tonnes by 2035 as per capita usage rates in emerging markets, particularly in China, approach levels in developed economies. The prediction represent more than 40% growth from today's annual demand levels of around 22 million tonnes.

Eoin Treacy's view -

Electric vehicles are on a major growth trajectory as the cost of batteries trends lower while the cost of regulatory compliance for car manufacturers increases. That represents a significant change for the automotive sector which Tesla has benefitted enormously from. The question for the company is whether it can prosper when subsidies eventually expire and when more battery factories open up in South Korea, Japan and China. 



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May 12 2017

Commentary by Eoin Treacy

Container shipping: rising tide

Thanks to a subscriber for this article by Richard Milne for the Financial Times may be of interest to subscribers. Here is a section:

Soren Skou, chief executive of Danish conglomerate AP Moller Maersk said global demand for containers — a proxy for trade growth — was at its highest level in years in the first quarter.

“It’s a very strong quarter for global trade. Five per cent is significantly above global [gross domestic product] growth. It’s driven by strong growth in Europe, and continued strong growth in the US,” he told the Financial Times.

Global trade growth has been sluggish ever since the 2008/09 financial crisis. That has hurt container shipping lines — of which the Danish group’s Maersk Line is the largest — with annual growth falling from more than 10 per cent before the crisis to 1 to 3 per cent in recent years. Maersk recorded only its second ever loss since the second world war in 2016.

Maersk Line still made a loss of $66m in the first quarter of 2017 as a rise in freight rates from record lows last year was offset by an 80 per cent jump in fuel costs. But the group stuck to its full year forecast of a profit of more than $616m at Maersk Line as a sign of its confidence in improving shipping markets.

Eoin Treacy's view -

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

It’s an understatement to say that the Baltic Dry Index is prone to wild swings. It rallied from a low of 290 in early 2016 to a March peak of 1338 and yet there is still significant stress evident across the shipping sector. The Index is currently testing the region of the trend mean which reflects a potential area of support. 



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May 11 2017

Commentary by Eoin Treacy

Flooding hits northeast Arkansas rice hard

This article by David Bennett for Delta FarmPress may be of interest to subscribers. Here is a section:

“At this point, we’re estimating over 150,000 acres of rice will have been lost by the time this is over,” says Jarrod Hardke, Arkansas Extension rice specialist. “Of course, soybeans and corn will be taken out, but to less an extent. There wasn’t as much of those crops planted in the region being affected – especially corn, which is typically planted in lighter soils on higher ground.”

The May 1 NASS report said 89 percent of Arkansas’ expected 1.2 million-acre rice crop had been planted.

 “Once rice is 10 days submerged, you can start writing it off. Some will survive but once that 10-day mark is hit you’re on the downhill side of expectation for a good rice crop. Rice may like a flood but doesn’t like to be submerged. And while it may survive being submerged longer than other crops it has a breaking point.”

In many cases, says Hardke, “the water isn’t going down but is leveled out. And farther downstream the flooding is getting worse. The additional rain last week just added insult to injury. More rain is forecast for (the week of May 8).

 

Eoin Treacy's view -

The soft commodity sector has been acting as a drag on the wider commodity complex for much of the year but there are initial signs of some respite emerging. The low price of grains and beans was pricing in close to a perfect crop this year but adverse weather has at least partially ameliorated that situation. 



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May 09 2017

Commentary by Eoin Treacy

Australia Presses for Nation Building But Forecast Doubts Linger

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

 

Morrison is changing the terms of the economic debate, from dire warnings on debt and deficit to a more politically astute one of prosperity and opportunity. His infrastructure plan aims to create a virtuous circle: such investment may trigger private-sector spending and increased household consumption that would boost the economy.

“We continue to forecast a slower deficit consolidation than projected in the budget,” Marie Diron, associate managing director at Moody’s Investors Service, said in a statement after the release. “We assume that GDP growth will be somewhat slower than projected by the government, at 2.5-2.7 percent in the next few years. Productivity growth has slowed in Australia, like in other high-income economies. We estimate that this slowdown is partly related to long-lasting factors that will continue to weigh on growth.”

Infrastructure projects include a new airport in Western Sydney; acquiring greater or outright ownership of the Snowy Mountains hydroelectric scheme and then expanding it; upgrading highways across the nation; and funding for a Melbourne-to-Brisbane inland railway.

Eoin Treacy's view -

The Australian economy has gone 25 years without a recession which is an incredibly impressive achievement. In that time the currency has been highly volatile; acting as a pressure release valve. The decision to spend A$75 billion in infrastructure projects will help to absorb some of the available labour that the drop off in commodity supply growth investment has left but the outright effort to stoke inflation through wage growth is likely to take a toll on both the currency and bond yields. 



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May 08 2017

Commentary by Eoin Treacy

Big Short in Loonie on Concern Over Oil, Trump, Housing

This note by Maciej Onoszko for Bloomberg may be of interest. Here it is in full:

Hedge funds and other speculators increased their short positions in the Canadian dollar to the highest level on record, according to data from the Commodity Futures Trading Commission. The loonie, which is the worst-performing major currency this year, has been under pressure in recent weeks amid concerns over a potential trade war with the U.S., a plunge in crude oil and financial woes of alternative mortgage lender Home Capital Group Inc.

Eoin Treacy's view -

The Canadian Dollar skirted the worst effects of the credit crisis by virtue of having a strongly regulated banking sector when just about everywhere else in the G7 had given into the worst excesses to deregulation. The rebound in oil allowed the Loonie to retest its 2008 peak in 2011 but the subsequent decline in commodity prices has taken its toll.



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May 05 2017

Commentary by Eoin Treacy

Avocado prices hit record after bad weather dents supply

This article by Alan Beattie for the Financial Times may be of interest to subscribers. Here is a section:

The US market, the largest consumer of avocados, is facing a 50-60 per cent decline in Californian output from average levels, because of bad weather, while its main source of imports, Mexico, is expecting a 20 per cent fall in production, says Óscar Martínez at Reyes Gutiérrez, a Spanish avocado importer and distributor.

“The US needs to get extra avocados, and Peru is expected to divert their supplies attracted by their high prices,” he adds.

Avocado trees tend to alternate between “on” years, producing a bumper crop, and “off” years, where the tree recovers from the stress of the previous year’s large production.

In Mexico, the world’s largest producer and exporter of avocados, the off-year has coincided with bad weather, sending the market soaring.

Prices for Mexican Hass avocado have more than doubled since the start of the year, with a 10kg box of avocados jumping to 550 pesos ($26).

Supplies from other producers have also been hit. “Lower output is also expected for the US and Peru where the harvest has been delayed due to heavy rains and flooding,” says Jara Zicha, analyst at Mintec.

 

Eoin Treacy's view -

My daughters informed me last night that we need to buy more avocadoes because they want to start bringing them to school for lunch. There is already evidence of prices rising with the bags we usually buy going from 8 fruit to 5 in the last couple of months. 



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May 04 2017

Commentary by Eoin Treacy

EY's Attractiveness Program Africa

This report focusing on Africa and its success in attracting foreign direct investment may be of interest to subscribers. Here is a section:

More positively though, in terms of capital investments, the flow of FDI into Africa recovered in 2016 after a dip in 2015. During 2016, capital investment into Africa rose 31.9%. Investment per project averaged US$139m, against US$92.5m in 2015. This surge was driven by several large, capital intensive projects in the real estate, hospitality and construction (RHC), and transport and logistics sectors. The continent’s share of global FDI capital flows increased to 11.4%, up from 9.4% in 2015. That made Africa the second fastest growing destination when measured by FDI capital.

This somewhat mixed picture is not surprising to us. We believe that investor sentiment toward Africa is likely to remain somewhat softer over the next few years. From our point of view, this has far less to do with Africa’s fundamentals than it does with a world characterized by heightened geopolitical uncertainty and greater risk aversion. Companies already doing business in Africa will continue to invest, but will probably exercise a greater degree of caution and be more discerning. We are still of the opinion that any shorter-term shifts in FDI levels will be cyclical rather than structural. We also anticipate that the evolution of FDI — increasing diversification in terms of sources, destinations and sectors — will continue. Over the longer term, as economic recovery slowly gathers pace and as many African economies continue to mature, we also anticipate that levels of FDI will remain robust and will continue to grow.  

Eoin Treacy's view -

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

Africa is a massive continent which for all practical purposes is undeveloped. It is also going to represent the bulk of population growth and the most attractive demographics over the next 30 years so there is a logical explanation for why FDI is flowing towards countries with improving governance and/or abundant mineral wealth. 



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April 28 2017

Commentary by Eoin Treacy

Potash Market Rebound in 'Full Force' as Global Demand Improves

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

Potash prices are recovering after a decade of weakness, lifting the prospects of a turnaround in fortunes for fertilizer companies following a slump in farm spending.

Potash Corp. of Saskatchewan Inc., the world’s second- biggest producer, boosted its full-year earnings forecast on Thursday and said strong demand will continue for the rest of the year as North American farmers seek to replenish soil nutrients after record harvests. Chinese potash shipments are expected to increase in 2017, it added.

The Canadian company’s performance suggests the potash recovery is in “full force," Sanford C. Bernstein & Co. analyst Jonas Oxgaard said in a note. Canpotex -- the joint venture handling overseas sales for Potash Corp. and its two largest North American peers, Agrium Inc. and Mosaic Co. -- has kept the market tight and driven up prices, while volumes have exceeded expectations in North America and export markets, a positive sign for the companies, he said.

“I think we’ve seen the turnaround already,” Oxgaard said by phone. “We expect continued price increases in potash.”

Potash Corp. maintained its forecast for worldwide industry potash shipments of as much as 64 million metric tons this year, up from 60 million in 2016. It raised its prediction for Latin American shipments. China, the largest market, is now seen consuming as much as 15.5 million tons.

Eoin Treacy's view -

The most important thing that happened in the potash market in the last decade was Uralkali’s attempt to reassert its dominance on the market by massively increasingly supply when it broke its relationship with Belaruskali in 2013. More than any other factor that contributed to the collapse in pricing. 



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April 28 2017

Commentary by Eoin Treacy

MVIS Announces A Significant Methodology Change for the MVGDXJ

Thanks a subscriber for this report from Scotiabank which arrived while was in Asia. Here is a section:

We think accounts should take notice of this list because there could be as much as USD 3.2B to trade in these names at the June 2017 quarterly review (assuming our forecast holds). We estimate accounts could buy USD 1.3B in the new Canadian additions and sell USD -1.8B for funding.

What to expect from the Benchmark Change? This is not the first benchmark change for the GDXJ. Market Vector Index Solutions (previously known as Market Vector Indices) expanded the universe for the Junior Gold Miners Index after the ETF provider ran into similar problems in 2014. Specifically, Market Vector Indices allowed larger companies to qualify for the index by changing the requirements from needing 90%-98% (of the full market capitalization of the eligible universe) to needing 80%-98%. According to our analysis, the market capitalization range for new constituents effectively doubled to USD 95M – USD 995M (from USD 95M – USD 448M under the previous methodology). The buffer zones (for existing constituents) also expanded to include constituents that ranked between 75% and 80% (of the eligible universe) versus 80% and 90% under the previous methodology. The previous methodology change was announced on October 13, 2014 and took effect at the December 2014 quarterly review.

Overall, the 2014 index additions outperformed the GDXJ by 9.8% between the date the methodology changes were announced and the determination date for the index review. The additions outperformed the GDXJ by an additional 14.0% between the determination date and the effective date of the index review, bringing total outperformance to 23.8% from the announcement date of the methodology changes. Note, the 2014 additions had a 3.6% post-announcement pop, so accounts that cautiously waited for a methodology change could still wade into the trade post-announcement and benefit from the index flows.

Eoin Treacy's view -

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

The fact that the junior gold miners ETF is being reconstituted to allow more large companies entry begs the question why have a juniors ETF in the first place? The answer of course is that the fund has grown to $4.2 billion under management which is a lot of money to invest in small companies and needs the room to buy larger cap companies. The result is that there will be little difference between GDX and GDXJ. 



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April 27 2017

Commentary by Eoin Treacy

Copper, lead, zinc prices to stay on the boil

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

Industrial metals prices are projected to jump 16% this year due to strong demand, especially from China, and supply constraints, including mine disruptions in Chile, Indonesia and Peru, the World Bank says in its commodities markets outlook published on Wednesday.

Researchers at the institution believe zinc has the brightest prospects this year and will follow up 2016's 60% price gain with a 32% jump this year.

Lead, often a byproduct of zinc mines, will also build on last year's gains and is expected to add 18% in value due to mine supply constraints brought on by permanent closures due to resource exhaustion, as well as discretionary closures and downscaling in Canada, Peru and Australia top zinc miner and trader Glencore.

[Lead] demand remains strong for the battery and industrial sectors, including increasing demand for “stop/start” vehicles, which use batteries containing 25 percent more lead than conventional units. However, lead demand faces threats from a maturing electric bike sector in China and alternate battery technologies (e.g., lithium).

The authors of the report also warn however that zinc-lead fundamentals may change longer term as higher prices "prompt greater supply in China, and Glencore’s idled capacity eventually restarts."

 

Eoin Treacy's view -

The industrial metals represent a clear bright spot within a commodity complex that is under pressure from excess supply, not least in the food sector. The mining sector on the other hand has been through a painful process of rationalisation where expansion has been cancelled and uneconomic supply shuttered. Generally speaking it takes time for higher prices to justify the expense of reopening mines so the potential for a further recovery remains intact. 



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April 26 2017

Commentary by Eoin Treacy

Commodities

Eoin Treacy's view -

The weakness in precious metals, energy contracts and particularly soft commodities has resulted in the Continuous Commodity Index breaking below the trend mean and it is now testing the November lows above the psychological 400 level. A short-term oversold condition is now evident but upside follow through on Tuesday’s upward dynamic will be required to signal more than temporary steadying in this area. 



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April 24 2017

Commentary by Eoin Treacy

Email of the day on shipping

Many thanks for the ongoing quality of the service you are providing. I am writing to enquire about your opinion the dry bulk industry. Just by looking at the individual stocks' chart (SBLK, SB, GOGL, DRYS) as well as the dry bulk index, they seem to have bottomed out and in an initial stage of recovery. I am not very familiar with the drivers of this particular industry, but I find the chart action quite appealing. Any kind of input would be highly appreciated.

Eoin Treacy's view -

Thank you for this topical question. Shipping is a highly cyclical business and has been in a funk since the decline that followed the heady days of the commodity boom. With high shipping rates, new ships were ordered and have been delivered. However the fall-off in global growth meant all that extra capacity contributed to a situation where there are plenty of ships to cater to the world’s freight requirements. So what has changed?



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April 07 2017

Commentary by Eoin Treacy

U.S. Launches Missile Strike on Syria in Response to Gas Attack

This article by Tony Capaccio and Nick Wadhams for Bloomberg may be of interest to subscribers. Here is a section:

At the United Nations, diplomats privately debated a resolution that would condemn the poison-gas attack and demand access to Syrian air bases by UN investigators. Russia, which has backed Assad militarily since late 2015, would probably veto that measure after putting forward a separate measure which wouldn’t compel Syria to provide such access.

At the UN Security Council on Wednesday, U.S. Ambassador Nikki Haley stood up at her desk to show diplomats photos of dying children gasping for air. She accused Russia of pushing a “false narrative” that blames rebel forces for the attack, and issued a new warning.

Safronkov, the Russian diplomat, said he’d been “very frank” in consultations with U.S. officials.
“We have to think of negative consequences, and all responsibility of military action will be on the shoulders of those who initiated such doubtful and tragic enterprise,” he told reporters at the UN

Syria’s government said pilots bombed what turned out to be a rebel-controlled chemical weapons stockpile, while Russian officials on Wednesday said it’s too soon to assign blame for the attack. Nonetheless, it appeared before Thursday night’s missile strike that Russia’s support for Assad hadn’t diminished.

Tillerson’s talk of creating a coalition “gives the impression that in the West there is a rush to use the situation to take from Assad the success in turning around the situation in the country and attain their previous goal: removing him from power at any cost,” Konstantin Kosachyov, chairman of international affairs committee in the Russian parliament’s upper house, said by email.

The State Department official said Thursday afternoon that Tillerson would go to Moscow as planned for meetings with senior officials on April 12. That visit was expected to include a meeting with President Vladimir Putin.

 

Eoin Treacy's view -

Russia’s only Mediterranean port is in Syria. They cannot afford to lose it. With so many warring parties and a number of competing agendas the conflict is messy to say the least because it is far from clear what group would rule the country if the current regime were toppled. Nevertheless, Russia has one of the clearest objectives and the fact it is unwilling to rein in Assad’s most brutal tendencies is a testament to just how tenuous their combined control of the country is. 



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April 05 2017

Commentary by Eoin Treacy

Global Shipping Fleet Braces for Chaos of $60 Billion Fuel Shock

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

Little more than 2 1/2 years from now, the global fleet of merchant ships will have to reduce drastically how much sulfur their engines belch into the atmosphere. While that will do good things -- like diminishing the threat of acid rain and helping asthma sufferers -- there’s a $60 billion sting in the tail.

That’s how much more seaborne vessels may be forced to spend each year on higher-quality fuel to comply with new emission rules that start in 2020, consultant Wood Mackenzie Ltd. estimates. For an industry that hauls everything from oil to steel to coal, higher operating costs will compound the financial strain on cash-strapped ship owners, whose vessels earn an average of 70 percent less than they did just before the 2008-09 recession.

The consequences may reach beyond the 90,000-ship merchant fleet, which handles about 90 percent of global trade. Possible confusion over which carriers comply with the new rules could lead to some vessels being barred from making deliveries, which would disrupt shipments, according to BIMCO, a group representing ship owners and operators in about 130 countries. Oil refiners still don’t have enough capacity to supply all the fuel that would be needed, and few vessels have embarked on costly retrofits.

“There will be an absolute chaos,” said Lars Robert Pedersen, the deputy secretary general of Denmark-based BIMCO. “We are talking about 2.5 million to 4 million barrels a day of fuel oil to basically shift into a different product.”

 

Eoin Treacy's view -

Until ship owners have visibility on whether refiners will be changing the delivery conditions on futures contracts for fuel oil/gas oil, they will be unwilling to commit to multi-million dollar retrofits of existing ships. This news comes on top of last year’s decision by the Ballast Water Management Convention which requires all ships sailing in international waters to install a Ballast Water Management System by September 2017 which also necessitates a significant additional cost for maintaining existing shipping inventory. 



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March 31 2017

Commentary by Eoin Treacy

Empty reservoirs, dry rivers, thirsty cities' and our water reserves are running out

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

The gap between water supply and demand – predicted to reach 40% by 2030 – will not be filled by surface water resources, so aquifers are being exploited more and more for agriculture, power generation and daily use in fast-growing cities.

About 30% of the world’s freshwater comes from aquifers, yet a third of the 37 largest aquifers studied by the University of California between 2003-13 were severely depleted, receiving little or no replenishment from rainfall.

Some of the most stressed aquifers are in the world’s driest regions such as Asia, up to 88% of which is water-stressed. South Asia accounts for half the groundwater used globally, but the continent’s aquifers – many of which were formed millennia ago when areas like northern China had a more humid climate – are no longer being replenished regularly by rainfall.

Boreholes are getting deeper and water tables are falling. In Pakistan’s Punjab province, over-pumping is lowering the water table by up to a half a metre per year, threatening food and water security and making thirsty crops, such as sugarcane and rice, tougher to grow.

 

Eoin Treacy's view -

The rapid pace of urbanisation as well as the steady migration of people towards the coasts is stressing both the ability of natural water resources to cater to the number of people as well as the ability of infrastructure to deliver adequate water supplies. That is as true of California as it is of Pakistan. The rising global population is quite another problem since there is little infrastructure where the majority of population growth is occurring. This map of where the least number of people have access to indoor toilets also highlights just how acute the lack of basic sanitation is. 



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March 28 2017

Commentary by Eoin Treacy

The next move after a weak March could be a useful rally

Thanks to a subscriber for this report by Warwick Grigor for Far East Capital Limited focusing on Australia. Here is a section on the property market:

Have you noticed how much debate there is over so many issues that we confront? It is usually a face-off between those who can see an issue clearly in one corner, and those with vested interests in the other. As an example, the global warming debate is one that has been ongoing for a long time largely due to the inability to achieve consensus amongst scientists and the complications of obtaining meaningful measurements. But something that should be less controversial is the state of the property market in Australia. Do we have a bubble or don't we?

We do have an extraordinarily strong market that cannot go on forever. The bigger the cycle upturn the harder the fall on the other end. The collapse of the mining and resources boom was proof of that. After every party there is a hangover. We are seeing many initiatives being proposed, and some undertaken, that are designed to take the heat out of the market. Yet there will still be pain in due course especially for the inexperienced property investors who have been dragged into euphoria of booming property prices.

In the meantime we see arguments for and against a bubble and an impending collapse. Perhaps we should be focusing on sensible measures rather than trying to do a King Canute. You don't have to wait for direction from the government or the regulators in order to think ahead. Start getting your finances in order now so you can weather the storm.

 

Eoin Treacy's view -

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

Australian government bond yields might not be as low as those in Europe, Japan or the USA but they have been trending lower for just as long. Relative seclusion from the credit crisis in the USA and sovereign debt and banking crisis in Europe as well as proximity to the commodity demand growth markets of Asia has allowed Australia to go a long time without a recession. That suggests what happens in China is likely to have much greater influence on Australia than anything that goes on in North America or Europe. 



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March 28 2017

Commentary by Eoin Treacy

A startup says it can now produce enough for 4 million meatless burgers a month

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

Brown and his team will have plenty of competition. In restaurants alone, more than 5 billion lb of ground beef are consumed every year. And then there’s the other meat-alternative companies that have charged into the space. Beyond Meat is another high-profile faux-beef company that’s looking to make inroads into the retail market, and Memphis Meats announced last week it created the world’s first meatless chicken tenders made from self-reproducing cells.

Until now, Impossible Foods has slowly entered the market by popping up in high-profile restaurants in New York City and San Francisco. The goal, though, is to get in front of the most devout meat lovers. In fact, that’s part of Brown’s metric for success. Forget the people obsessed with vegetables.

“Our definition of success is: we score zero points if a vegan or vegetarian buys our burger,” Brown says. “The more of a meat lover they are, the more they are our target customer.”

The company’s market research has shown that even the most devoted American meat eaters will never stop wanting it—but they would be interested in a product that tastes just as good and is also made of plants, Brown says. In other words, a product that comes from an animal is not part of the intrinsic value of a burger. It’s more about how delicious, nutritious, and affordable that product is.

 

Eoin Treacy's view -

Meat is big business but it is also highly water intensive and over consumption can contribute to a number of health issues. If every burger is a quarter-pounder then Impossible Burger is going after about 1% of the restaurant meat market in its first year. That’s an ambitious target and the company’s success will come down to both taste and cost. If the new breeds of veggie burgers have the same taste and texture as beef and are also cheaper, that represents a significant threat to the farming sector quite apart from the trend towards veganism. 



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March 15 2017

Commentary by Eoin Treacy

Treasuries Surge After Fed Maintains Forecasts for 2017, 2018

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

Treasuries surged after the Federal Open Market Committee raised interest rates as expected and maintained forecasts for additional increases for the next two years, dashing expectations it might signal a quicker pace of hikes.

Yields were lower by five to 10 basis points at 2:45 p.m. in New York, with the five-year lower by 10 basis points at about 2.03 percent. Yields had risen to their highest levels in at least a year in the past week as market-implied expectations for a quarter-point increase in the fed funds rate approached certainty. Market focus was on any new language in FOMC statement, changes to member forecasts for the funds rate, or both. Most economists and strategists saw more risk of an increase to the 2018 median than to the 2017 median.

Median forecast for 2019 rose to 3% from 2.875%, while 2017 and 2018 medians remained at 1.375% and 2.125%; 5Y yields reacted most sharply, falling as much as 11bp, and the 5s30s curve rebounded from 102bp to 109bp within minutes

 

Eoin Treacy's view -

Today’s rally across assets class against a background where the Dollar gave up some of its recent strength represents a clear example of the buy the rumour sell the news.

Investors had priced in a rate hike and two more this year. They were looking for an even more hawkish tone from the Fed to justify higher yields and a stronger Dollar. They didn’t get it so positions were reversed. 

 



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March 09 2017

Commentary by Eoin Treacy

Ivory Coast Cocoa Farmers See Rainfall Boosting Mid-Crop Harvest

This article by Baudelaire Mieu and Olivier Monnier for Bloomberg may be of interest to subscribers. Here is a section:

Good rainfall in Ivory Coast’s cocoa-growing areas has farmers upbeat on prospects for the season’s smaller crop that starts in April.

Soil is moist in producing regions including the fertile southwest, and the development of flowers that turn into pods is getting a boost from the wet weather, growers said this week.
Farmers in Ivory Coast, the world’s top cocoa producer, harvest a main crop from October to March and a smaller one, called the mid-crop, from April to September.

Recent rain “gives hope for the mid-crop,” Jacques Oulaye, a cocoa farmer based in Gbapleu, in the country’s western mountain region, said by phone March 6. “Young flowers in the trees have begun to blossom, meaning the new pods will go out soon.”

A large mid-crop would compound a surplus of cocoa piling up in Ivory Coast, after the main crop was bigger than expected and some local companies defaulted on contracts to export cocoa.

The International Cocoa Organization last week forecast the West African country’s harvest will increase 20 percent in the current season, contributing to a global surplus that’s projected to be the biggest in six years.

 

Eoin Treacy's view -

The Ebola epidemic which ravaged West Africa between 2014 and 2016 represented a bullish outcome for cocoa prices since it had a negative impact on yields. However with the easing of the outbreak, farmers returned to their holding and supply increased not least because of the outpouring of sympathy for the region from the international community and the assistance farmers have received from major consumers keen to ensure they have secure supplies. 



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February 23 2017

Commentary by Eoin Treacy

Renewed Love for Gold into Early 2017

Thanks to a subscriber for this report from RBC, dated February 13th, which may be of interest. Here is a section:

Through the first month of 2017, global commodity AUM flows have shifted course as funds have returned to precious metals and out of energy. This was a reversal in pattern from that seen through Q4/16, which saw total outflows of $20.5B in precious metals holdings and inflows of $8.4B into energy. This corresponded to a 0.7% increase in TSX weighting for precious metals to 7.3% and a 1.3% decline in energy in January. However, despite the promising start to the year for precious metals, total commodity AUM still sits 13% below the $123B seen in September 2016 and the current TSX weighting of 7.75% still sits 1.9% below the high of 9.6% seen in July 2016.

This month, we have seen an acceleration of inflows into physical gold ETFs, which we view as a positive sign fundamentally, and believe that we will continue to see inflows due to geopolitical concerns, persistence of low real rates globally, and growing US inflation expectations. We would recommend that investors focus on companies with attractive margins, solid balance sheets, organic growth opportunities and a consistent operating strategy.

Eoin Treacy's view -

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

Following an impressive rally in early 2016 Total Known ETF Holdings of Gold followed the trajectory of the gold price and pulled back below the trend mean. A rally back towards 60 million ounces is currently underway and a sustained move above that level would lend credibility to the view that a low of more than temporary significance has been found. 



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February 21 2017

Commentary by Eoin Treacy

North Korea lights fire under coking coal price

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

On Saturday the totalitarian dictatorship's largest trading partner, China, reacted to the Feb. 12 test of a long-range ballistic missile by announcing a ban on coal from the rogue nation till the end of 2017.

The decision by the China's Ministry of Commerce, issued jointly with the country's customs agency, was made to comply with a UN Security Council resolution that China helped draft and pass in November.

Along with restricting the export of coal, the resolution also targets non-ferrous metals, statues and other luxury items like tapestries.

China's import ban on North Korean coal was supposed to be lifted in January but the missile test has meant that Beijing's coal ban will continue.

Last year China imported 22.4 million tonnes of anthracitic coal that can be used as an alternative to coking coal in the steelmaking process from North Korea, a nearly 15% rise from 2015.

China forges more steel than the rest of the world combined and the country last year imported a total 59.2 million tonnes of coking coal, an increase of nearly 24% over 2015.

Eoin Treacy's view -

China and Russia have long applied a satellite state foreign policy strategy in order to protect their borders from the risk of being overrun by a surprise land invasion. North Korea has played just such a role for China which the ban on coal but import of anthracite highlights. Does anyone really think North Korea would be testing ballistic missiles without China’s tacit support? 



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February 20 2017

Commentary by Eoin Treacy

Email of the day on the cost of gold mining

Thank you for another very well done Friday audio. Your comments on gold were very interesting for me. I wonder if you or the collective have an idea about the possibility of technological innovation that might make gold production cheaper, the way oil production has become cheaper.. Thanks in advance

Eoin Treacy's view -

Thank you for your kind words and I am delighted you are enjoying the new format of videos and audios. Anglogold Ashanti have been pioneering a number of new technologies not least reef boring and thermal spawning. Both are designed to economically extract gold from previously uneconomic regions such as very thin reefs or the supporting walls of old mines. As with any new technology, development takes time but the company is hopeful about the prospects for future production. This informative section from Anglogold Ashanti’s site may also be of interest. 



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February 20 2017

Commentary by Eoin Treacy

Email of the day on the Dow/Gold ratio scenarios

I have been following your Dow/ gold analysis, but while in the long term you are probably right, in the short term there are other interpretations of how the ratio could move, especially if you put the ratio on a log scale 

I’m attaching another possible and probable path in normal scale, and in log scale. the short term rise could be a pause before the real bottom, it has happened in the past. 

PS: considering you are a real international traveler and investor, where would you say are the safest banks today?  I think Singapore, but I heard it is getting difficult to open an account there 

Eoin Treacy's view -

Thank you for these nicely illustrated charts. Is there the possibility that the Dow/Gold ratio pull back? Absolutely. It posted a higher reaction low in the early 1930s and a lower low in the early 1980s. In both cases it pulled back following the initial breakout out. 



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February 20 2017

Commentary by Eoin Treacy

Citigroup Pays Fine to Settle South African Rand Collusion Probe

This article by Vernon Wessels and Renee Bonorchis for Bloomberg may be of interest to subscribers. Here it is in full:

Citigroup Inc. agreed to pay an administrative penalty of 70 million rand ($5.4 million) to settle a South African antitrust investigation that it participated in a cartel to manipulate the value of the rand.

The figure does not exceed 10 percent of Citigroup’s annual turnover in South Africa and comes after the New York-based lender undertook to cooperate with the Competition Commission and “avail witnesses to assist the prosecution of the other banks that colluded in this matter,” the Pretoria-based commission said in an e-mailed statement on Monday.

“This settlement was done to encourage speedy settlement and full disclosure to strengthen the evidence for prosecution of the other banks,” Commissioner Tembinkosi Bonakele said in the statement. Barclays Africa Group Ltd. has also agreed to cooperate, people familiar with the matter said last week.

The commission on Feb. 15 referred a collusion case to the country’s Competition Tribunal for prosecution and identified lenders including Bank of America Merrill Lynch, HSBC Holdings Plc, BNP Paribas SA, Credit Suisse Group AG, JPMorgan Chase & Co. and Nomura International Plc as among those that participated in price fixing and market allocation in the trading of foreign-currency pairs involving the rand.

Commerzbank AG, Macquarie Group Ltd., Australia & New Zealand Banking Group Ltd., Investec Ltd. and Standard Bank Group Ltd. were also named.

Eoin Treacy's view -

This news item may be responsible for the spike in open interest in Rand options. The currency has been strengthening since the news broke, in line with other commodity currencies and suggests that a good many traders were short and that the continued resilience of the commodity complex is a tailwind for related currencies. 



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February 17 2017

Commentary by Eoin Treacy

Beyond The Supercycle How Technology is Reshaping Resources

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

First came the “fly-up,” the price spike on world markets for oil, gas, and a broad range of natural resources that began in 2003. Then came the abrupt bust, as prices tumbled and global spending on natural resources dropped by half in the course of 2015 alone. Now, even as resource companies and exporting countries pick up the pieces after this commodity “supercycle,” the sector is facing a new wave of disruption.1 Shifts taking place in the way resources are consumed as well as produced—less noticed than the rollercoaster commodity price ride but no less significant—will have major first- and second order effects on both the sector and the global economy. These shifts are the result of technological innovation, including the adoption of robotics, Internet of Things technology, and data analytics, along with macroeconomic trends and changing consumer behavior.

We see three principal effects of this technological revolution:
Consumption of energy will become less intense as people use energy more efficiently thanks to smart thermostats and other energy-saving devices in homes and offices, and the use of analytics and automation to optimize factory usage. Transportation, the largest user of oil, will be especially affected, by more fuel-efficient engines and by the burgeoning use of autonomous and electric vehicles and ride sharing.

Technological advances will continue to bring down the cost of renewable energies such as solar and wind energy, as well as the cost of storing them. This will hand renewables a greater role in the global economy’s energy mix, with significant first- and second-order effects on producers and consumers of fossil fuels.

Resource producers will be able to deploy a range of technologies in their operations, putting mines and wells that were once inaccessible within reach, raising the efficiency of extraction techniques, shifting to predictive maintenance, and using sophisticated data analysis to identify, extract, and manage resources.

Scenarios we have modeled suggest that these developments have the potential to unlock $900 billion to $1.6 trillion in incremental cost savings throughout the global economy in 2035, an amount equivalent to the current GDP of Indonesia or, at the top end, Canada. As a result of lower energy intensity and technological advances that improve efficiency, energy productivity in the global economy could increase by 40 to 70 percent in 2035. We believe these changes will have profound implications not just for companies in the resource sector and for countries that export resources, but also for businesses and consumers everywhere.

 

Eoin Treacy's view -

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

The long-term cycles of supply and demand can be boiled down into the simply maxim that high prices encourage consumers to be efficient and suppliers to invest in expansion. Low prices encourage consumers to use more while suppliers are forced to be more efficient. Following a decade long super cycle producers are now much more efficient while consumers are really only beginning to increase demand as economic growth picks up. 



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February 14 2017

Commentary by Eoin Treacy

Bottom is in for Uranium; Gold & Silver Off to the Races in 2017

Thanks to a subscriber for this report from Cantor Fitzgerald which may be of interest. Here is a section on uranium

Kazatomprom that it plans to cut its annual uranium production by 10%, or by 5.2M lbs U3O8. This amount translates into roughly 3% of 2015 global production and marks an inflection point in the space. Since at least 2001, Kazatomprom has relentlessly increased production into an oversupplied market and is arguably the single biggest cause for the weakness in the commodity aside from the Fukushima disaster. In fact, we had long since given up on expecting Kazatomprom to exercise production restraint as its mines were the lowest cost operators in the world and constant production increases appeared to be a cultural focus in Kazakhstan.

While some skepticism exists on whether Kazatomprom will actually follow through with this cut (as opposed to OPEC style “cuts”), we suspect that at least some of the production reduction will occur among joint venture operations managed by western producers such as Cameco. Moreover, we believe the impact will be more than the announced cut amount because the market was likely factoring in a typical Kazatomprom increase as opposed to a cut. So instead of a 3-5% increase we are expecting a reduction of 10%, or a 13-15 percentage point swing.

Cameco’s announcement of Tokyo Electric Power Holdings’ (“TEPCO”) termination of its supply contract has cast some concern over what will happen with the U3O8 pounds that were earmarked for the Japanese utility. In total, the contract was for 9.3M lbs U3O8 to be delivered from 2017-2028, this works out to 775,000 lbs annually. TEPCO was selling some if not all of the material it was contractually obligated to purchase already. As such, we believe the worst case scenario arising from the cancellation is that Cameco does the exact same thing and sells the material into the spot market. However, we think there is room for potential positivity from this announcement, as Cameco could instead elect to not produce the pounds at all (and further cut costs by doing so) or it could elect to store them in inventory to await higher prices. Either of those two actions would effectively be removing some of the excess supply in the market. 

Eoin Treacy's view -

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

azakhstan stamped its dominance on uranium market by engineering a multi-year decline and succeeded in driving a significant number of small explorers out of business.  Last week’s news Tokyo Electric cancelled a major Cameco contract highlights just how successful their policy of flooding the market with supply has been. Having achieve their goal, the decision to limit supply is an important catalyst for the uranium market. 



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February 13 2017

Commentary by Eoin Treacy

Africa's Cities: Opening Doors to the World

This heavyweight 166-page report from the World Bank may be of interest to subscribers. Here is a section:

How can Africa’s leaders and policymakers spring cities from this trap? Crucially, they must first realize that the problem does not begin with low capital investment and the lack of physical structures, or even with undersized infrastructure. To be sure, low investment in structures limits urban economic density; it exacerbates spatial fragmentation, and it precludes agglomeration economies. But the lack of investment results from low investor expectations, which result when cities are spatially dispersed and disconnected.

When potential investors and trading partners look at African cities, they see spatial fragmentation and a lack of connections. They know that such fragmentation constrains public service provision, inhibits labor market pooling and matching, and prevents firms from reaping scale and agglomeration benefits. So the key to freeing Africa’s cities from their low development trap is to set them on a path toward physical and economic density, connecting them for higher efficiency and boosting expectations for the future. The first priority is to reform land markets and land use planning — to promote the most efficient uses of urban land, and to develop land at scale.
Informal land markets are not good enough for African cities. Urban land is a vital economic asset, and asset transactions are viable only where purchasers can rely on enduring extra-legal documentation of ownership. A formal market both offers purchasers the protection of the state and — because transactions are readily, observable and recorded — generates the public good of accurate valuation.

Clear rights to urban land are a precondition for formal land markets. African cities struggle with overlapping and sometimes contradictory property rights systems — formal, customary, and informal (box 3). When these systems pose barriers to urban land access, they impede the consolidation of plots and the evolution of land use. Firms cannot readily buy downtown land to convert it from low-density residential use into higher-density apartments, or to build clusters of new commercial structures. Land transactions are long, costly, and complicated (World Bank 2015c). Such market constraints reduce the collateral value of structures, giving developers little incentive to invest in residential height — while tempting all parties to enter informal arrangements (Collier 2016).

 

Eoin Treacy's view -

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

Africa is going to account for a billion new consumers within the next couple of decades so improving standards of governance are going to be essential if that demographic dividend is not going to be squandered. 
 



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February 10 2017

Commentary by Eoin Treacy

A must read: ballast water convention

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

The convention will reinforce multi-year shipping upcycle
The Ballast Water Management Convention, which is scheduled to come into force in September 2017, requires all ships sailing in international waters to install a Ballast Water Management System (BWMS). In light of the high cost and uncertainties associated with BWMS, we expect shipowners to scrap most of their vessels of above 15 years in the coming 2-3 years. We estimate global dry bulk fleets will shrink 1.5% in 2018 and 3.9% in 2019 while VLCC utilization will pick up starting 2018. Buy Pacific Basin and CSD.

An introduction of this convention 
Initiated by the IMO in 2004, the Ballast Water Management Convention was designed to prevent transfers of invasive aquatic species via ships’ ballast water. After the accession of Finland, the convention was ratified in Sept. 2016, and will enter into force in Sept. 2017. Thereafter, new vessels will have to install the BWMS on delivery date. For existing vessels, they are required to carry out retro-fit until their next International Oil Pollution Protection (IOPP) renewal survey (conduct every five years). While some vessels could get a grace period of up to five years (assuming the IOPP is renewed just before September this year), there are high levels of uncertainty over this exemption as the IMO is scheduled to further debate this exemption in July.

Potential impacts on shipping market
The BWMS is expensive (USD2.5m for a VLCC and USD1.5m for a Capesize). This extra cost, along with higher maintenance expense, would substantially lift the breakeven level for 15+ years old vessels. Alongside the freight rate discount (to new ships) and rising demolition prices, our analysis shows that scrapping is the best option for shipowners. Currently, 14% of dry bulkers and 19% of VLCCs are above 15 years old and we expect this proportion of capacity to largely exit in the coming 2-3 years. Coupled with falling newbuild deliveries, we expect dry bulk supply growth to drop to 0.9% in 2017, and decline 1.5% in 2018 and 3.9% in 2019 (vs. 2.3% in 2016). Similarly, we expect VLCC utilization rates to pick up to 85.1% in 2018, in part due to the 2015-16 peak cycle.

 

Eoin Treacy's view -

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

The Baltic Dry Index has been ranging in a volatile manner for eight years because a lot of the new ships ordered in the commodity bull market were delivered at just the time that global economic activity collapsed. The result has been a surplus of ships, where the lives of old vessels were prolonged because it was more economic to keep them in service than to scrap or sell them. The introduction of the Ballast Water Management Convention has the potential to represent a significant bullish catalyst for the sector. 



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February 10 2017

Commentary by Eoin Treacy

Copper Jumps Most Since 2013 as Strike Combines With China Boost

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

“We continue to see concerns about the deficit in the copper market,” Bart Melek, head of global commodity strategy at TD Securities in Toronto, said in a telephone interview. “We could have a significant deficit if this strike continues for a while.”

Copper for delivery in three months climbed 4.6 percent to settle at $6,090 a metric ton at 5:50 p.m. on the London Metal Exchange. That’s the biggest gain since May 2013. Aluminum, lead, nickel, tin and zinc also advanced on the LME.

An index of 18 base-metal producers climbed as much as 3.4 percent, with shares of Freeport-McMoRan Inc. and Rio Tinto Plc among the biggest increases.

 

Eoin Treacy's view -

Strike action at the world’s largest copper mine is the catalyst which has spurred interest in copper prices over the last couple of days. However the bigger picture is that global economic growth is picking up following a lengthy period of disappointment and commodity producers are cautious about investing in new supply following the trauma of a significant bear market. 



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February 08 2017

Commentary by Eoin Treacy

The Dow/Gold Ratio

Eoin Treacy's view -

The Dow/Gold Ratio is one of the most storied ratios in finance not least because it is made up of two of the instruments with the longest back histories. We can spend a great deal of time thinking and writing about secular bull and bear markets but the Dow/Gold ratio gives us evidence of how major bull markets transition into decade long periods of underperformance of stocks versus gold before transitioning again into decades long bull markets of relative outperformance by stocks.
 
There are three major peaks and two confirmed major lows on the above chart. 

 



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February 08 2017

Commentary by Eoin Treacy

Email of the day on uranium charts

There seems to be an error with the chart of uranium which you referenced last month, would it be possible to please update it (see the enclosed chart)?

Eoin Treacy's view -

Thank you for this email which may be of interest to subscribers. Uranium is not a freely traded commodity so there is only one daily price. Therefore it is best to view it as a line chart. I am not sure why we receive open, high, low, close data but I have now switched the chart to default to line in the Chart Library.



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