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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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February 07 2017

Commentary by Eoin Treacy

Australia's Stock Market Is Decoupling From the World

This article by Adam Haigh  and Garfield Clinton Reynolds for Bloomberg may be of interest to subscribers. Here is a section:

``The banks are in a different dynamic,'' said James Audiss, a senior wealth manager at Shaw and Partners in Sydney, where he helps oversee about A$10 billion. ``U.S. banks make good money from trading and as rates go higher they have more spread to work with. Aussie banks don't really have that and if anything there is going to be a compression of the spread between central bank rates here and there.''

Trump's rise to the presidency has buoyed U.S. bank shares since early November, with the financial sector among the biggest winners under the new administration. While American lenders made little headway in January as the rally stalled, a gauge of Australia's biggest banks posted the worst month since August.  

It's unusual to see this decoupling. Moves on Australia's benchmark stock index are more closely tied to those on both the S&P 500 and the MSCI World index than any other major gauge in the region over the past five years, as this chart shows. Financial shares often tip the balance as they comprise more than one third of the Australian index.

 

Eoin Treacy's view -

Ahead of the financial crisis the market cap of BHP Billiton and Rio Tinto was roughly equivalent to the combined valuation of Australia’s four largest banks. That all changed with the collapse in commodity prices. The miners went through a painful bear market, while low interest rates raised the allure of banks’ competitive yields. The S&P/ASX 200 Financials Index now represents 37.6% of the broader S&P/ASX 200 Index. 



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February 06 2017

Commentary by Eoin Treacy

February 06 2017

Commentary by Eoin Treacy

Email of the day - on nickel's underperformance

Do you know why Nickel is not joining in the commodity boom and whether eventually it might? Wonderful service

Eoin Treacy's view -

Thank you for your kind words and this question which may be of interest to other subscribers. Indonesia has historically been the primary supplier of nickel but from 2014 it toyed with banning exports of ore in an effort to stimulate domestic production of refined metal This article from Stratfor, dated October 12th carries some additional detail. Here is a section:  

The decision to delay the ban once again, announced by the acting chief of the Energy and Metals Resources Ministry on Oct. 4, comes as little surprise. Though foreign investors have committed some $12 billion to build 27 smelters nationwide in the past four years, anecdotal reports and trade data indicate that much of that money has yet to generate higher exports of refined metal products. In one example, the value of Indonesian exports of raw nickel ore — of which the country was once the world's largest producer — has collapsed. In 2013, the year before the first ban took effect, it stood at $1.65 billion, but by 2014 that figure had dropped to $85 million; by 2015, it had fallen to zero. Though exports of refined nickel products rose in 2014 from 2013, they, too, plunged in 2015 and continued to decline in value through the first four months of 2016. Nickel is not unique in this respect, either: The value of metal ore exports as a whole has collapsed, and that of most refined metal products has stagnated or declined.

The 2014 ban came on the heels of a slowdown in China's economy and a dip in metals prices, caused in part by the increasing ore supplies of key competitors such as the Philippines. Low prices then undercut investor interest in building smelting facilities, as did uncertainty surrounding the status of Indonesia's regulations. Meanwhile, the lack of even minimal support infrastructure for construction operations meant that the companies that agreed to build smelters often found themselves responsible for building and funding roads, power generators and other basic utilities to support them. Nevertheless, despite these headwinds, many smelting projects are still underway or in the planning stages.

 



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February 03 2017

Commentary by Eoin Treacy

Australia's record-breaking mining exports hint of new sector boom

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

The encouraging data sharply contrasts with the record deficit of $4.3 billion the country recorded only 12 months ago.

HSBC chief economist Paul Bloxham told AAP the export boom should considerably boost company profits, dividend payments, share prices and wages in the mining sector.

His comments will be tested beginning next week, as some of Australia's top mining companies including Rio Tinto (ASX, LON:RIO), BHP Billiton (ASX:BHP), Newcrest Mining (ASX:NCM) and South32 (ASX:S32) are set to start reporting their 2016 results.

This is only the second monthly trade surplus Australia has recorded in nearly three years, which evidences once again the country’s continued reliance on and vulnerability to changes in commodities markets.

The news comes on the back of a report from the Department of Industry, Innovation and Science, which predicted that Australia’s mining and energy export earnings would jump by 30% between 2016 and 2017, hitting a small yet encouraging record of $204 billion.

 

Eoin Treacy's view -

Australia exported more than a billion tons of iron ore last year for the first time. At the same time prices broke out of a more than yearlong base so higher volumes were greeted with higher prices which has certainly helped to improve the country’s trade balance. The surge in coking coal prices due to temporary shortages will also have acted as a short-term boost. However with coking coal now well off its peak it is less likely to represent the same positive influence on trade this year. 



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February 03 2017

Commentary by Eoin Treacy

New Nafta Could Settle Canada-U.S. Lumber War, Resolute CEO Says

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

A renegotiation of Nafta could be used to settle a lumber dispute that’s been simmering between Canada and the U.S. for decades and threatens to make housing unaffordable for thousands of Americans, according to the world’s largest newsprint maker.

The Canadian government will probably want lumber included in a new North American Free Trade Agreement, Richard Garneau, chief executive officer of Montreal-based Resolute Forest Products Inc., said by phone. “I think that makes sense,” he said.

The U.S. has initiated an investigation into softwood lumber imports amid allegations Canadian timber is heavily subsidized and shipments are harming U.S. mills and workers. President Donald Trump has also signaled that the U.S. may seek more favorable terms in trade pacts such as Nafta.

A previous softwood lumber agreement expired in October 2015. That was followed by a 12-month moratorium, during which Canada was able to continue shipping lumber tariff-free.

 

Eoin Treacy's view -

Lumber is a highly political commodity since the US has a domestic industry but also needs to import from its northern neighbour to supply is burgeoning housing market. Home starts hit their highest level since 2007 in December which is a testament both to high home prices and the health of the US economic expansion. 



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February 03 2017

Commentary by Eoin Treacy

February 02 2017

Commentary by Eoin Treacy

Philippines to shut half of mines, mostly nickel, in environmental clampdown

This article from Reuters appeared in Singapore’s The Edge newsletter and may be of interest to subscribers. Here is a section:

The Philippines ordered the closure on Thursday of 21 mines, mainly nickel producers that account for about half of output in the world's top nickel ore supplier, in a government campaign to fight environmental degradation by the industry.

Manila also suspended operations at another six mines, including the country's top gold mine operated by Australia's Oceanagold Corp, as Environment and Natural Resources Secretary Regina Lopez vowed to put the public's welfare above mining revenues.

"My issue here is not about mining, my issue here is social justice," Lopez, a staunch environmentalist, said at a briefing that showed footage of damage from mining to an audience including priests and residents of mining communities.

 

Eoin Treacy's view -

To the best of my knowledge, Nickel was the worst performing LME traded industrial metals over the last couple of years. Indonesia’s decision to relax export restrictions was a major influence on that outcome but the result has been that many mining operations are not economic at today’s prices. 



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January 27 2017

Commentary by Eoin Treacy

Latin America Abandons Fuel Subsidies in Shift to Austerity

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

"These countries are under enormous fiscal pressure and are reacting to it," said Samar Maziad, a sovereign analyst at Moody’s.

President Mauricio Macri has made Argentina’s economy more competitive since he took over in 2015, and an 8 percent gasoline price increase this month has contributed to Buenos Aires-based YPF’s recent rally to the highest in more than a year. Argentina is moving to completely liberalize prices by 2018. YPF declined to comment on its stock price.

Mexico has lifted prices about 20 percent this month as it opens state-owned Petroleos Mexicanos’s monopoly to foreign competition. It has pledged to completely phase out fuel subsidies over the course of the year. The so-called “gasolinazo,” or fuel-price slam, sparked protests across the country that curtailed fuel distribution and has left President Enrique Pena Nieto’s approval rating at an all-time low of 12 percent. Mexico is planning another fuel price increase on Feb.

The main outlier is Venezuela, the region’s biggest exporter with the cheapest gasoline in the world at about 15 U.S. cents to fill a tank, even after the first price increase in almost two decades last year. Colombia got a head start when it began tracking international prices in 2008, a year when fuel subsidies contributed to an economic contraction.

In Brazil, where subsidies drained an estimated $40 billion from Petrobras between 2011 and 2014, Chief Executive Officer Pedro Parente has shown greater independence from the government to set fuel rates. Under Parente, the company formally known as Petroleo Brasileiro SA set a new price methodology in October and has implemented five adjustments since then.

 

Eoin Treacy's view -

Fuel subsidies are politically popular but ruinous for oil companies. Subsidies represent a drag on finances which are at partially offset when oil prices are high but represent an existential threat when prices are low. The collapse of regional currencies, massive deficits and challenges to growth have resulted in populist socialist governments being replaced with more fiscally minded right wing parties across the continent. As commodity prices recover that is translating into their stock markets beginning to do better. 



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January 25 2017

Commentary by Eoin Treacy

January 24 2017

Commentary by Eoin Treacy

Goldman Hails Global Rebound as Currie Sees Commodity Demand

This article by Stephen Engle , Ben Sharples , and Ranjeetha Pakiam for Bloomberg may be of interest to subscribers. Here is a section:

“We’re seeing a cyclical uptick in global economic activity and that’s driving demand, not only for oil but all commodities,” Jeffrey Currie, head of commodities research, said in Hong Kong on Tuesday. “That’s the core reason why we upgraded our outlook on commodities to overweight,” he said, referring to the bank’s November decision.

Commodities made a comeback in 2016 with the first annual gain in six years as stimulus in China stabilized growth, and oil producers led by OPEC reversed course to limit supplies. Currie -- who spoke both on Bloomberg TV and to a reporter -- said the impact of China’s stimulus will probably last well into the first half of 2017. He added that policies from new U.S. President Donald Trump may reinforce inflationary pressures, aiding raw materials.

“U.S. and China are focal points where we’re seeing the uptick, but even the outlook for Europe is much more positive than what people would have thought six months to a year ago,” he said.  “It’s not what’s happening on the supply side but rather what’s happening on the demand side.”

 

Eoin Treacy's view -

The Continuous Commodity Index (Old CRB) is unweighted and therefore gives a more accurate picture of activity in the commodity markets than the CRB Index which is heavily skewed by oil prices. The Index hit a medium-term peak in 2011 below 700 and trended lower for five years until the beginning of 2016. 



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January 24 2017

Commentary by Eoin Treacy

Sibanye $2.2bn acquisition of Stillwater passes antitrust conditions

This article by Cecilia Jamasmie for Mining.com may be of interest to subscribers. Here it is in full:

Sibanye Gold (JSE:SGL) (NYSE:SBGL), South Africa’s largest miner producer of the precious metal, has been given the green light to proceed with the $2.2 billion acquisition of Stillwater Mining (NYSE:SWC), the only US platinum producer.

The deal, announced in December, was subject to antitrust conditions that fall under the US’s Hart-Scott-Rodino premerger legislation.

“Satisfying the HSR Act antitrust condition in a timely manner is an important first step towards concluding the acquisition of Stillwater,” chief executive Neal Froneman said in the statement.
The Johannesburg-listed company, which was spun out of South Africa’s Gold Fields in 2013, spent most of last year shopping for new mines, particularly in the platinum sector.

The company first expanded into the grey precious metal used in jewellery and diesel car engines in Sep. 2015, by buying Aquarius Platinum and three Anglo American Platinum mines.

Together with reducing Sibanye’s dependence on its aging South African mines, the deal will make the company the world's third largest palladium producer and fourth biggest platinum group metals miner, Froneman noted last month when announcing the planned acquisition.

If it goes through, the takeover will be the second-biggest South African outbound M&A transaction since 2015.

 

Eoin Treacy's view -

Sibanye Gold has an Estimated P/E of 8.61 and yields 5.56%. The sharp decline in precious metals prices as well as the expense of the company’s expansion plans contributed to a steep decline in prices over the last few months; falling from a peak near $21 to a low below $7. A mean reversion rally is now underway and clear downward dynamic would be required to check momentum beyond a brief pause. 



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January 24 2017

Commentary by Eoin Treacy

Email of the day on Chinese cotton demand

“Thank you very much for the very interesting comments on China's steel imports in the last two daily comments. If China is indeed trying to prepare herself for war, wouldn't they be buying other commodities too? Are you or anybody in the collective aware of them buying other commodities? As far as I know they have been trying to reduce their strategic stocks of cotton since about 15 months. They might have changed that policy, but at least I am not aware of it. As always I enjoy your comments & audio-video very much. Thanks again. best rgds"

Eoin Treacy's view -

Thank you for this educative email and for your kind words. It is my supposition that China at the very minimum seeks to bolster is military capability to at least boost its conventional deterrent capabilities. 



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January 24 2017

Commentary by Eoin Treacy

Brazil Optimism Pushes Foreign Investment to Six-Year High

This article by Mario Sergio Lima for Bloomberg may be of interest to subscribers. Here is a section:

Foreign direct investment in Brazil soared to a six-year high in December as investors abroad kept an optimistic view of the country’s long-term prospects, the central bank said.

Brazil attracted $15.4 billion in foreign investment last month, more than twice the amount expected by economists in a Bloomberg survey, and the strongest monthly performance since December 2010. In the whole of 2016, foreigners poured $78.9 billion in Brazil, more than enough to finance the country’s current account deficit of $23.5 billion.

“December’s foreign direct investment was really something,” Fernando Rocha, deputy head of the central bank’s economic research department, told reporters in Brasilia. “It shows foreigners hold a positive long-term view of the country.”

Investors remain generally optimistic that Latin America’s largest economy will emerge from its worst recession on record this year, even as economists surveyed by the central bank have recently cut their 2017 growth forecasts and the International Monetary Fund warned of near-stagnation this year.

December’s investment performance was boosted, in particular, by operations in the auto industry, as well as in the retail and power sectors, Rocha said. Yet overall investment has been “quite widespread” across a number of sectors, he added.

 

Eoin Treacy's view -

The ouster of Dilma Rousseff was a catalyst for international investors to take a second look at Brazil. The Real had been rallying from January 2016 in anticipation of the event and encountered resistance following Michel Temer’s inauguration as investors waited to see what kind of reforms could in fact be delivered. 



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January 23 2017

Commentary by Eoin Treacy

Email of the day on cannabis and steel

For information. Canopy has made an offer to buy Mettrum for Canopy stocks. This will triple my Canopy position and will help you to understand the reason for the similar chart pattern since early December. 

On your presentation yesterday (that I watched today), I was intrigued by the iron ore comment. Canadian iron ore companies (have a look at: Alderon, Labrador iron ore...) are on fire and I sold way too early exactly because I saw China slowing down and their financial situation reminded me of USA 2007-2008. 

So stock piling for war?.... hmm.. It is true that the US never really got out of the depression woes until their implication in the WW2 conflict, which they used also to help breaking European French and English ''Empires'' among others. This is certainly something to watch, and Trump ''shoot first'' attitude probably add to the concern for sure.

 

Eoin Treacy's view -

Thank you for this additional intelligence on the Canadian cannabis sector. Iron-ore is an interesting market because steel is such a political sector. China is expected to account for 71% of global steel production this year according to this article from CNBC. That’s a lot of supply and not all of it is designed to cater to the domestic market. 



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January 19 2017

Commentary by Eoin Treacy

FANG was so 2015

Eoin Treacy's view -

Remember 2015 when the F.A.N.G, stocks were all the rage and media pundits were falling over themselves to tell us how you had to own them if you were to have any chance of outperforming the major indices. 2016 was predictably a tamer year for those shares with some spending much of their time consolidating 2015’s powerful gain. However with Netflix making headlines today on successfully boosting subscribers, following an international expansion, I thought it might be worthwhile to revisit this acronym. 



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January 19 2017

Commentary by Eoin Treacy

Email of the day on Canadian cannabis stocks

Pot luck... If the Canadian government continue to support AND passes legislation favorable to the development of the cannabis industry, some companies may have exponential growth, My pick has been Canopy on the TSX and I will continue to hold it.

Eoin Treacy's view -

Thank you for highlighting Canopy Growth Corp which as you point out is one of Canada’s most popular vehicles for expressing a view on cannabis. Canada is home to a significant number of recreational cannabis and cannabis related pharmaceutical start-ups, which as you say. would benefit from favourable legislation. You never know before the bull market ends there may be calls to exchange the maple leaf for something even more commercial than maple syrup.



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January 18 2017

Commentary by Eoin Treacy

Pot Industry Exhales (a Little) After Trump's Attorney General Pick Testifies

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

Dayton said Sessions "may be against marijuana policy reform, but he is not stupid. He knows that these cannabis laws are hugely popular, not just among Americans in red and blue states, but with his boss who campaigned in favor of these laws." 

While his responses, on their face, were hardly a coup for the cannabis industry, Sessions didn't morally condemn pot smokers either. 

"The United States Congress has made the possession of marijuana in every state, and distribution of it, an illegal act," he testified. "If that ... is not desired any longer, Congress should pass a law to change the rule." 

The Drug Policy Alliance, an organization opposed to the war on drugs, called the testimony "wishy-washy at best." The group's senior director of national affairs, Bill Piper, added: "It is clear that he was too afraid to say the ‘reefer madness’ things he said just a year ago, and that’s progress. But he made it clear throughout the hearing that he will enforce federal law."

 

Eoin Treacy's view -

While a good many politicians have made statements condemning cannabis use “evolution” of their views on the topic are increasingly required as an ever increasing number of states legalise recreational or at least medical use. That has created a bull market in supply of the herb, not least because it grows like a weed. Wholesale prices have contracted considerably as operations initiated following Colorado’s legalisation reach commercial scale. That has resulted in mixed performance for the related shares. 



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January 17 2017

Commentary by Eoin Treacy

Iron ore price: China imports top 1 billion tonnes for first time

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

Forging more than half the world's steel, Chinese imports of iron ore for the full year 2016 topped one billion tonnes for the first time. The 1.024 billion tonnes constitute a 7.5% increase over the annual total in 2015 and is indicative to what extent exporters from Brazil and Australia has been able to displace domestic producers struggling with low grades and high costs.

The total value of cargoes climbed to just under $58 billion, with the average import price over the course of 2016 at $56.50 per tonne. The all-time record in terms of dollar value was set in January 2014, when the country imported $111.3 billion worth of iron ore back when prices were firmly in triple digit territory.

 

Eoin Treacy's view -

Iron-ore prices have not quite broken out to new recovery highs but have sustained last year’s breakout from a well-defined base formation and the upside can be given the benefit of the doubt provided that remains the case. 



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January 17 2017

Commentary by Eoin Treacy

Alibaba jumps ahead of Amazon with Maersk tie-up

This article by Sam Chambers for splash247 may be of interest to subscribers. Here it is in full:

Alibaba’s move to partner with Maersk Line should be seen as a game of one-upmanship with US rival Amazon, a leading name in online logistics has said.

Chinese customers will now be able to book space on Maersk ships, a first for the industry and one that potentially removes many freight forwarders as middlemen.

Dr Zvi Schreiber, CEO and founder of logistics technology Freightos, offered his perspective on the bigger picture and what this deal means for online shoppers and Alibaba’s rival, Amazon.

“Maersk is testing the waters of digital sales with one of the world’s largest ecommerce companies while threatening forwarder business. But for Alibaba, this is a direct challenge to global retailers like Amazon. Beyond drones and futuristic supermarkets, Amazon opted to get licensed as a forwarder. Alibaba one-upped them by going directly to the world’s largest ocean liner. Point, Alibaba.” 

 

Eoin Treacy's view -

There is a great deal of speculation going on at present relating to the implications of a Trump presidency on global trade. Certainly an America first manufacturing policy would have profound implications for low cost, high population countries’ ability to compete against what would in all likelihood be a highly automated US attempt to re-shore. Nevertheless even with the most ambitious timetable that kind of initiative could take years to unfold. 



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January 13 2017

Commentary by Eoin Treacy

The FTSE-100

Eoin Treacy's view -

The UK’s largest cap index is in the process of completing a 16-year range by breaking on the upside. The Index has rallied for six consecutive weeks, hit new all-time highs last week and improved on that performance this week. Prior to this breakout it had spent three years ranging below, but in the region of, its previous peaks. While a short-term overbought condition is evident that is consistent with what is to be expected from a major breakout. 



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January 11 2017

Commentary by Eoin Treacy

Down But Far From Out

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

Gold prices may have peaked in 2013 but so did the balance sheets and debt loads of the gold miners within our coverage, as the companies chased M&A and project development. Throughout 2015, and in particular 2016, the industry as a whole made FCF generation and balance sheet deleveraging high priorities. As seen below, the net debt balances of the gold miners under our coverage have declined 47% since the peak while Net Debt/EBITDA has improved by a full 1x turn, despite an average gold in 2016 that was 12% below the 2013 average.

The industry-wide focus on cost cutting and FCF generation has created companies that are less levered plays to rising gold prices, as was the case in the run up to peak gold prices in 2013. Industry FCF generation, as measured by our coverage universe, has improved greatly in the last few years. Despite much higher gold prices in 2012/13 (averaging $1,540/oz), FCF was negative as both capex and operating costs were significantly higher than current levels. As mentioned above, an industry-wide focus on FCF has clearly shown in the last few years. We forecast 2016E FCF in our coverage universe to exceed $4bn, the highest figure since the turn of the decade. 

Eoin Treacy's view -

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

Gold miners are much more leveraged to the gold price today than they have been in a very long time. They have slimmed down budgets, are eschewing spending on new projects and therefore any improvement in gold prices is reflected in free cash flow.  



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January 10 2017

Commentary by Eoin Treacy

Musings from the Oil Patch January 10th 2016

Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section global cooling:

As for a new Ice Age, the Russian Academy of Science’s Pulkovo Observatory in St. Petersburg, considered one of the world’s most prestigious scientific institutions, recently issued a new study titled, “The New Little Ice Age Has Started.” According to the study, the average temperature around the globe will fall by about 1.5o C (2.7o F) when the planet enters the deep cooling phase of this new Little Ice Age, expected in the year 2060. The study goes on to predict that after 2060 the Earth will experience four-to-six 11-year solar cycles of cool temperatures before beginning the next quasi-bicentennial warming cycle around the turn of the 22nd century.

Habibullo Abdussamatov is the head of space research at Pulkovo and the author of the study. He has been predicting the arrival of another ice age since 2003, based on his study of the behavior of the sun’s different cycles and the solar activity that then results. His model is based on data from the Earth’s 18 earlier little ice ages over the past 7,500 years, six of them experienced during the last thousand years. Based on his model, he began predicting over a decade ago that the next little ice age would start between 2012 and 2015. Abdussamatov’s models have been affirmed by actual data, including the rise of the oceans and the measurable irradiance sent earthward by the sun. Given the accuracy of his predictions, which have been demonstrated in numerous studies since 2003, he now predicts that we entered the 19th Little Ice Age in 2014-2015. This forecast would appear to fly in the face of climate change scientists pointing to 2015 and 2016 as being the warmest years on record – and forecasts that we will experience more record warmth in coming years.

Mr. Abdussamatov’s views stand in opposition to the conclusions of climate models, as he has tied his forecast of a prolonged cooling spell to solar, not man-made, factors. The recent disappearance of sunspots from the face of the sun, which also occurred during the Little Ice Age in the late 1600s, has made Mr. Abdussamatov’s contention no longer an isolated view. In fact, organizations such as the National Astronomical Observatory of Japan and the Riken research foundation have reached similar conclusions. The battle over whether man-made or natural forces are the primary driving force behind global warming and climate change will likely become more contentious in the next few years. The key point is that the world’s population is at greater risk of serious harm from colder temperatures rather than warm temperatures, which seems to be ignored by government officials and the media. We guess, cold and ice doesn’t lend themselves to as spectacular disaster scenes as heat-related weather events.

Eoin Treacy's view -

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

I am more than willing to accept that humans have an impact on our environment. After all there are a lot of us and we engage in a great many industrial activities. However the sun is a major contributor to weather patterns and its cycles cannot simply be ignored. I predicted back in 2009 the most recent solar activity peak would represent a lower low and that has now come to pass. As we head into another solar minimum we can anticipate colder winters in the years ahead. However to go from there to a prediction of an impending mini-Ice Age is quite a leap. 



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January 10 2017

Commentary by Eoin Treacy

Coking coal price correction turns into rout

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

It's only the 5th, but the year to date fall in the price of coking coal has already reached 8%. The steelmaking raw material is also a round $100 below its multi-year high of $308.80 per tonne (Australia free-on-board premium hard coking coal tracked by the Steel Index) hit in November.

On Thursday the price dropped another 4.5% to $208.10 a tonne, the lowest since September 29 and one of the biggest declines (for the spot price) on record. In 2011 floods in key export region in Queensland saw the coking coal price briefly trade at an all-time high $335 a tonne.
With demand both more diverse and less predictable, the increasingly widespread transition towards market-based pricing couldn’t be more timely

Still, metallurgical coal is up 150% over the past year and averaged $143 a tonne in 2016 (about the same as it did in 2013). There was a more than $100 differential between the spot price average and the fourth quarter contract benchmark.

 

Eoin Treacy's view -

The oldest adage in the commodity markets is that “the cure of high prices is high prices”. There was a temporary dearth of coking coal so prices rose quickly for most of the latter half of 2016. However with new supply coming to market the necessity to pay ever higher prices has been reduced and coking coal has pulled back sharply. A potentially lengthy period of ranging is likely required before substantially higher prices can be sustained. 



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January 06 2017

Commentary by Eoin Treacy

World's Worst Commodity Radioactive for Investor Portfolios

This article by Joe Deaux, Natalie Obiko Pearson and Klaus Wille for Bloomberg may be of interest to subscribers. Here is a section:

“It’s the world’s best asset in the world’s worst market,” said Leigh Curyer, chief executive officer of NexGen Energy Ltd., a Vancouver-based uranium producer. “I don’t think there’s a mine profitable at current spot prices. This short-term spot price isn’t reflective of the cost of producing a pound globally.”

The outlook isn’t entirely bleak. Losses are forcing uranium mines to cut production or close, which may eventually create a supply crunch, while accelerated building of nuclear plants in China and India could help revive demand. But it may take a while for those developments to take hold, according to a report last month from Morgan Stanley, which said it can’t identify any medium- or long-term driver for prices.

Uranium extended its fade last year even as most other raw materials recovered. The Bloomberg Commodity Index of 22 items posted its first annual gain since 2010, advancing 11 percent.

 

Eoin Treacy's view -

When Tata Motors bought Land Rover it held onto the name for obvious reasons. It knew it didn’t stand a chance of selling a luxury vehicle under the moniker Tata Motors. If nuclear energy could do the same it would be in a much better position. Reactors being built today bear little resemblance to those which have garnered such a bad reputation over the last number of decades. However that is not the point. Public opinion is not yet in favour of uranium fuelled energy and there is little evidence that is about to change not least because it simply does not have a high profile credible spokesperson to champion it. 



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January 05 2017

Commentary by Eoin Treacy

Bitcoin Suffers Biggest Fall in Two Years Following China Currency Gains

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

Bitcoin's value suffered its biggest single-day decline in two years Thursday, just hours after China's offshore yuan posted its biggest two day gain and days after the cryptocurrency touched $1,000.

The price of bitcoins against the U.S. dollar fell 13% in London trading, changing hands at around $950 each by 13:45 GMT. Bitcoins traded as low as $880 during a volatile session which saw it reach as high as $1137, according financial bookmakers IG.

The moves follow the biggest two-day gain on record for China's offshore yuan, which trades more freely than the domestically controlled currency of the world's second-largest economy. Speculation of government buying led the gains as investors bet authorities are determined to stem capital outflows and avoid a sustained decline in the currency ahead of the inauguration of President elect Donald Trump, who has vowed to label China as a currency manipulator.

The connection is relevant in the nearly all of the daily trading in bitcoin is linked to the yuan, which has fallen more than 7% against the dollar over the past year, as speculators attempt to skirt currency controls and ensure value.

The offshore yuan gain 1% to 6.7989 against the greenback in Asia trading, putting downward pressure on the dollar index and boosting the yen in foreign exchange trading. The move whipsawed the dollar index, a measure of its strength against a basket of six global currencies, from a near 14-year high on Tuesday to three-week low of 101.74 by the start of European trading before it recovered to 102.10 by 13:45 GMT

Eoin Treacy's view -

I have been pointing out in recent audios that China represents the majority of Bitcoin trading and what goes on in that country is likely to have a profound impact on the value of the cryptocurrency. In many respects we might look on Bitcoin as the anti-Renminbi because it tends to do best when Chinese investors are worried about the stability of their domestic currency. 



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January 04 2017

Commentary by Eoin Treacy

China Said to Consider Options to Back Yuan, Curb Outflows

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

China’s currency stockpile has probably shrunk further after hitting a five-year low of $3.05 trillion in November, according to the median estimate in a Bloomberg survey before data due as early as this week.

Capital outflows from China accelerated in recent months as the yuan suffered its worst year of losses against the U.S. dollar since 1994, declining 6.5 percent. About $760 billion left the country in the first 11 months of 2016, according to a Bloomberg Intelligence gauge. The yuan will decline 2.7 percent the rest of this year, according to the median estimate in a Bloomberg survey.

“The policies, if implemented, can help increase foreign-exchange supply in the onshore market, and hence help defend the yuan in the short term,” said Carol Pang, vice president for fixed income, currency and commodities at Zhongtai International Holdings Ltd. in Hong Kong. “However, it won’t change market expectation of further depreciation.”

 

Eoin Treacy's view -

The Renminbi is somewhat oversold at present following a quicker pace of depreciation in the last quarter than seen in the three-year downtrend to date. Therefore there is scope for a reversionary rally or at least some steadying. 



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January 04 2017

Commentary by Eoin Treacy

Email of the day on long-term iron-ore prices

Just wonder why the Iron ore chart in the library starts only in 2008. Is there another source for 50 years of iron prices?

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. Iron-ore is not traded on a futures exchange. Historically prices have been fixed by contracts between the major miners and consumers with little involvement from the markets. The price for iron-ore quoted in the Chart Library is for Chinese imports at Ningbo and is used as a benchmark because China is such a dominant force in the market. We only have data since 2008 because that is when China started reporting it.  



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January 03 2017

Commentary by Eoin Treacy

China to become net importer of some rare earths

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

According to the Adamas outlook for rare earth demand from 2016 through 2025 over the past five years upwards of 30,000 tonnes of annual rare earth oxide demand were lost due end-users’ growing concerns over supply security. On top of that more than 20,000 tonnes were lost as a result of the ongoing phase out of several mature technologies, such as fluorescent lamps, NiMH batteries, and hard disk drives used in PCs.

According to the authors following the lengthy and painful adjustment, the REE market will return to strong global demand growth for a number of rare earth elements including neodymium, praseodymium, dysprosium, and lanthanum. The resulting rise in price will help "sustain the profitability and growth of today’s dominant producers, and incentivize continued investment in exploration and resource development globally":

REE demand will boom from 2020 onwards as growth rates of top end-use categories including electric vehicles, wind turbines and other hi-tech applications accelerate.

 

Eoin Treacy's view -

Rare earth miners went through a crushing bear market and it is arguable whether it has ended. The growth of new sources of demand is a potential medium-term bullish catalyst. However it is unlikely China will surrender its dominance of the global supply chain not least because it wishes to attract and support advanced manufacturing companies. 



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December 30 2016

Commentary by Eoin Treacy

Australia ASX 300 Overextensions

Eoin Treacy's view -

Over the last two days I have created spreadsheets for the constituents of the S&P500 and the FTSE-350; ranking them by overextensions relative to the trend mean. Today I am conducting the same exercise for Australia’s ASX 300. 

This is a particularly illiquid time of year and it takes less capital for traders to move markets. This is easiest where accelerated moves are in evidence, stops will have been placed and algorithmic systems have little difficulty identifying them. 
 



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December 29 2016

Commentary by Eoin Treacy

Indian Sugar Shortage Deepens as Cane Crop Set to Disappoint

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

India’s sugar shortfall is worsening as disappointing cane crops boost the need for imports this season.

Reduced cane supplies in the states of Maharashtra and Karnataka mean output will probably fall to the equivalent of 21.3 million metric tons of white sugar, according to Tropical Research Services, which advises several hedge funds on agriculture markets. That’s 4 percent smaller than forecast last month and 15 percent below a year earlier.

The El Nino weather pattern that ended this year hurt cane crops in India, the biggest sugar-consuming country and second- largest producer. At the same time, the harvest in No. 2 exporter Thailand is running behind last season’s pace, helping tighten global supplies already forecast to fall short of demand.

“Early reports from both the key Maharashtra state in India and also from Thailand suggest their cane crops could disappoint," James Liddiard, a partner at Agrilion Commodity Advisers LLC, said in a report Wednesday.

 

Eoin Treacy's view -

Brazil’s sugar crop is coming in ahead of expectations suggesting that the disappointing figures in Thailand and India will be at least partially compensated for. However contracts are in backwardation out to late 2018 so the supply deficit is not a short-term phenomenon and it will take time for new planting to rebalance the market. 



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December 23 2016

Commentary by Eoin Treacy

Gleanings

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

Another theme we think is surfacing is inflation driven by Trump's potential fiscal stimulus program. Hence, a return to "real assets," or stuff stocks, should have an increased weighting in portfolios. Verily, the price of real assets, relative to financial assets, is at historic lows. Consequently, investors' mindsets should be focused towards higher inflation, higher interest rates, and reduced disinflation. As an example, China's PPI hooked up in September for the first time since 2012. We believe the same thing is happening here in the U.S. 

Accordingly, REITs, timber, agriculture, collectibles (wine, art, diamonds, precious metal coins, farmland, etc.), and MLPs should have an increased weighting in portfolios, in our view. To this MLP point, we recently met with one of the savviest MLP-centric portfolio managers on Wall Street, who believes the midstream and downstream MLPs are ripe for a number of good years going forward. He suggests the bad news is in the rearview mirror: the capital markets are wide open for the MLPs; we are consuming an extra 1 million barrels of crude oil per day, and the MLPs traded at around a 30% discount relative to par.

 

Eoin Treacy's view -

The MLP sector is highly leveraged as a rule so it collapsed when oil prices fell. By the same token it is also benefiting from the rise in oil prices and with the high yields evident, particularly in the pipelines sector, it now offers upside leverage. 

The Alerian MLP Total Return Index hit a new recovery high this week and a clear downward dynamic would be required to question medium-term potential for additional upside. 



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December 20 2016

Commentary by Eoin Treacy

Email of the day on wool prices

I was looking for the up to date fine wool chart in the soft commodities section of the chart library. It seems that it has stopped updating in February 2014? Is it possible to rectify this please? Thank you and Happy Christmas

Eoin Treacy's view -

Thanks you for this inquiry which may be of interest to other subscribers. Unfortunately, ASX no longer quotes wool futures which is why the price stops in 2014. Following an extensive search on Bloomberg there are no wool futures contracts quoted on any exchange. There is a spot price quoted by the Australian Wool Exchange representing the Annual Wool Selling program which has end-of-week pricing and is updated on Fridays.  



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December 16 2016

Commentary by Eoin Treacy

Mexico's Trump-Fueled Rout Belies Latin America Markets Bonanza

This article by Ben Bartenstein, Aline Oyamada and Isabella Cota for Bloomberg may be of interest to subscribers. Here is a section: 

“Latin America will recover more than other regions in GDP terms and do more reforms,” said Dehn, a London-based head of research at Ashmore Group, whose top pick is Brazil.

President Michel Temer’s push to pass spending and pension overhauls is another reason investors remain bullish on Brazil.

The real has jumped 19 percent this year, the second-largest advance in the world, helping bolster returns in local bonds. It will soar another 10 percent by the second-quarter of 2017 before weakening to 3.4 per dollar by year’s end, according to Gustavo Rangel, the chief Latin American economist at ING Financial Markets LLC and the region’s top currency forecaster last quarter, according to Bloomberg rankings.

While Brazil’s prospects continue to improve, Mexico’s outlook is more mixed. Trump’s pledges to rip up the North American Free Trade Agreement and build a wall along the southern border have unsettled investors in assets from the region’s second-biggest economy, with the peso plunging 16 percent this year. Mexico sends almost 80 percent of its exports to the U.S.

 

Eoin Treacy's view -

For almost a decade the Dollar trended consistently lower against the currencies of commodity producers and emerging markets. That ended a few years ago and currency market volatility now plays an important role in any consideration of when and whether to invest in these markets. 



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December 09 2016

Commentary by Eoin Treacy

South Africa's Sibanye Gold to Buy Stillwater Mining for $2.2 Billion in Latest Platinum Push

This article by Kevin Crowley for the Wall Street Journal may be of interest to subscribers  Here is a section: 

The moves illustrate the tectonic shifts recalibrating the global mining industry after the commodities bust. The Stillwater purchase is Sibanye’s first foray outside of Southern Africa and its latest bold move to diversify beyond gold mining.

The acquisition is also a vote of confidence in the platinum group of metals, which includes platinum and palladium, most commonly used in the auto industry to reduce engine emissions, in addition to a strategic diversification away from the often-difficult operating environment in South Africa.
Sibanye has a long and storied history in the mining industry. It was spun off in 2013 from three aging South African mines held by Gold Fields Ltd., a company founded by colonial pioneer Cecil John Rhodes.

In a press release Friday, Stillwater, of Littleton, Colo., which has two mines in Montana and Colorado, said its board approved the deal. The $18-a-share bid represents a 23% premium to Stillwater’s closing price on Dec. 8. The two largest shareholders of Johannesburg’s Sibanye have confirmed their support of the deal.

Eoin Treacy's view -

Platinum is trading close to historic lows relative to the gold price. Part of the reason for this is because diesel has taken a hit from the Volkswagen emissions cheating scandal. Meanwhile the rise of electric vehicles represents an additional challenge since they do not require catalytic converters. These are important considerations but there is the additional fact that platinum is a small market, supply is limited and the cost of extraction is high. 



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December 08 2016

Commentary by Eoin Treacy

In mammoth task, BP sends almost three million barrels of U.S. oil to Asia

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

While BP's operations are currently the most sophisticated, others have also begun developing U.S./Asia trade.

China's Unipec, the trading arm of Asia's largest refiner Sinopec (600028.SS), is shipping about 2 million barrels of WTI to China this month, while trading house Trafigura is also exporting some 2 million barrels of U.S. oil to Asia.

Incentives to bring U.S. crude into Asia have risen after the Middle East-led producer club of the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut output, encouraging refiners across the region to seek alternatives to offset potential supply shortfalls.

"OPEC is putting U.S. shale oil to the test... (and) we will truly see what it can deliver," said Bjarne Schieldrop, chief commodity analyst at SEB. He predicted 2017 would be a "shale oil party" with a surge in U.S. exports after the OPEC production cuts.

The operation to send the oil, worth around $150 million, to Asia-Pacific buyers lasted four months and involved BP traders in the United States and Singapore, while colleagues from London were responsible for ship chartering, the sources said and data showed.

BP took advantage of arbitrage between cheaper U.S. West Texas Intermediate (WTI) CLc1 crude and the global benchmark Brent LCOc1.

The deal was aided by cheap tanker rates and a price/time curve, where future oil deliveries are more expensive than those for immediate discharge, making sourcing oil from as far away as North America profitable.

Eoin Treacy's view -

The US has just started exporting crude oil for the first time in decades and if the Keystone pipeline is finally permitted in 2017 if would give Canadian heavy crude an outlet to Texas’s refining and shipping infrastructure that would allow even greater volumes to be exported.

The expanded Panama Canal raises the prospect of a short-cut to Asia from Texas. That is of course once ships have been retrofitted to be tugged through the new canals which is taking somewhat longer than originally anticipated



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December 07 2016

Commentary by Eoin Treacy

Chinese-Korean group to build $2 billion lithium batteries plant in Chile

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

Lithium, frequently referred to as "white petroleum," drives much of the modern world, as it has become an irreplaceable component of rechargeable batteries used in high tech devices.

The market, while still relatively small — worth about $1bn a year — is expected to triple in size by 2015, according to analysts at Goldman Sachs

That should be great news for Chile, as the country contains half of the world’s most “economically extractable” reserves of the metal, according to the US Geographical Survey (USGS). It is also the world’s lowest-cost producer, thanks to an efficient process that makes the most of the country’s climate.

Chile is essentially “the Saudi Arabia of lithium,” according to Marcelo A. Awad, executive director of the Chilean brand of Wealth Minerals, Canadian company that also has interests in Mexico and Peru.

The country, he noted in a recent interview, is perfectly positioned, with ports across the Pacific from the world’s largest car market, China, which is expected to increase electric vehicles production in years to come. There, lithium is also used to manufacture rechargeable ­batteries that power hundreds of millions of smartphones, digital cameras and laptops.

The challenge for foreign investors, particularly the Asian conglomerate, is to persuade Chilean authorities of making the leap from exporting the white metal to producing lithium batteries at the point of extraction.

Estimates from the group’s advisors believe opening the proposed plant would make the value of the product 35 times higher than what it could be obtained by just selling it as lithium carbonate

Eoin Treacy's view -

Elon Musk might be one of the world’s great promotors but there is no denying that he has upended the automotive sector with just about every major auto manufacturer planning to release a range of electric vehicles within the next few years. 



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December 07 2016

Commentary by Eoin Treacy

Outlook for 2017: Better times ahead

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

According to a joint study by Thomson Reuters GFMS and the Silver Institute, the global silver market will record a supply deficit this year for the fifth year in succession. However, at 52.2 million ounces (1,623 tons), this is less than half what it was last year (chart 7). Silver demand should have fallen by 9% to a 4-year low of 1,064.6 million ounces (33,109 tons), while silver supply should fall by “only” 3% to 1,012.4 million ounces (31,486 tons). The biggest drag on the demand side is a 24% decline in demand for coins and bars. Jewellery demand is also expected to dip by nearly 8%. Industrial demand, which accounts for around half of total demand for silver, also declines, albeit only slightly. A steeper fall has been prevented by the rise in photovoltaics which is projected to have risen by 11% to a record level.

On the supply side, 2016 should see the first – albeit slight – fall in global mining production for 13 years (chart 8, page 5). This is because, following the closure of numerous zinc and lead mines, less silver is produced as a by-product. Due to liquidation of hedging positions (dehedging) by mining producers, additional supply has been withdrawn from the market. The supply of scrap silver, however, remained virtually unchanged. Owing to a significant rise in demand for silver ETFs – GFMS assumes net inflows of 71.4 million ounces (2,220.5 tons) for 2016 – and almost as large an increase in exchange-registered stocks, the broader market deficit has increased to 185.5 million ounces (5,769 tons). This is the highest figure since 2008.

The deficit should turn out somewhat lower due to recent large ETF outflows, though.
For 2017, Thomson Reuters GFMS and the Silver Institute except silver demand to decline by a further 3% to 1,035.0 million ounces. The supply of silver on the other hand should rise by around 1% to 1,024.8 million ounces. All demand components apart from jewellery are expected to decrease, with coins and bars once again falling the most, dipping by 9%. Industrial demand should fall by 2%, as demand from the photovoltaic sector – in contrast to the previous year – is also expected to decline, meaning that it can no longer compensate for persistent weakness in other sectors. Industrial demand would thus shrink for the seventh year in a row (chart 9). The increase in the supply of silver is almost entirely due to a larger supply of scrap silver, which should rise by 11% in response to higher prices. This will largely compensate for the accelerated decline in mining production by around 2% compared with the previous year. At the same time, de-hedging by silver producers will decline next year, meaning that less supply will be withdrawn from the market. Consequently, the deficit on the physical silver market is expected shrink to only 10.2 million ounces. This would be the smallest deficit since the last surplus year of 2012. ETFs are expected to record inflows of 40 million ounces. The broader market deficit would thus amount to 50.2 million ounces, a reduction of more than 70% compared with 2016.

Eoin Treacy's view -

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

The bond market has priced in the return of some inflation, at least the kind central banks measure. However it has yet to appear in official statistics with the result that real interest rates have posted a rather large move. Precious metals tend to do best when inflation is outpacing interest rate increases (negative real interest rates) which is not currently the case. There is ample potential for inflation to pick up if fiscal stimulus is implemented next year which suggests there is scope for precious metals to regain some of their lost lustre next year. 



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November 30 2016

Commentary by Eoin Treacy

A China recovery is coming

Thanks to a subscriber for this article by Simon Hunt in copperworldwide.com. here is a section:

China’s economy is recovering. Accommodating monetary policy is being augmented by expanding the fiscal deficit which might include tax cuts. Construction is beginning to recover since total surplus inventory has fallen to the key seven-month level. The NDRC has released 25 infrastructure projects most of which were frozen earlier this year because cases of corruption were detected. Both wages and consumer spending continue to increase. In some key manufacturing sectors inventories have been reduced. Many private sector companies are now managing cash flow appropriately so are improving profitability. Investment will follow in 2017. Against this background real consumption of metals has begun recovering and will gather pace in 2017.

Eoin Treacy's view -

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

One of the reasons China has been going through such a difficult time is because many of the markets it sends exports to have been in difficulty. The US credit crisis, the EU’s sovereign debt and banking crisis and the collapse of commodity prices all hit demand for China’s exports.   



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November 28 2016

Commentary by Eoin Treacy

Fearing tighter U.S. visa regime, Indian IT firms rush to hire, acquire

This article by Sankalp Phartiyal and Euan Rocha for Reuters may be of interest to subscribers. Here is a section: 

Indian companies including Tata Consultancy Services (TCS), Infosys and Wipro have long used H1-B skilled worker visas to fly computer engineers to the U.S., their largest overseas market, temporarily to service clients.

Staff from those three companies accounted for around 86,000 new H1-B workers in 2005-14. The U.S. currently issues close to that number of H1-B visas each year.

President-elect Trump's campaign rhetoric, and his pick for Attorney General of Senator Jeff Sessions, a long-time critic of the visa program, have many expecting a tighter regime.

"The world over, there's a lot of protectionism coming in and push back on immigration. Unfortunately, people are confusing immigration with a high-skilled temporary workforce, because we are really a temporary workforce," said Pravin Rao, chief operating officer at Infosys, India's second-largest information technology firm.

 

Eoin Treacy's view -

India has benefitted enormously from the offshoring of jobs in the customer service, programming, IT and pharmaceuticals sectors. However a number of these large Indian companies are dependent on ready access to their US based customers so they can offer the best possible service which is why India has tended to dominate H1B visa applications. When headlines such as this one highlight how India got 84% of such visas in 2014 there are very real risks that a more protectionist administration could pose a threat to India’s heretofore comfortable access to Silicon Valley. 



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November 15 2016

Commentary by Eoin Treacy

OPEC, Russia Expand Diplomatic Push to Secure Oil-Cuts Deal

This article by Javier Blas, Angelina Rascouet and Grant Smith for Bloomberg may be of interest to subscribers. Here is a section:

OPEC embarked on a final diplomatic effort to secure an oil-cuts deal, with its top official heading on a tour of member states as Russia scheduled informal talks in Doha this week with nations including Saudi Arabia.

The behind-the-scenes diplomacy follows an unannounced meeting in London between OPEC Secretary-General Mohammed Barkindo and Saudi Minister of Energy and Industry Khalid Al-Falih, said one OPEC delegate. Just two weeks before the group’s Nov. 30 ministerial meeting in Vienna, Saudi Arabia, Iraq and Iran are still at odds over how to share output cuts, said another delegate. 

 

Eoin Treacy's view -

OPEC and Russia have succeeded in talking oil prices up on two separate occasions over the last few months and the announcement of this meeting would appear to be a fresh attempt to jawbone prices higher. The reality is that agreeing to cut production means each country that agrees to comply risks losing market share to those who don’t. In ordinary times securing broad agreement would be difficult but Saudi Arabia, Iran and Iraq do not have the finances to absorb such a risk right now and additionally are all prosecuting wars, which are not cheap. 



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November 14 2016

Commentary by Eoin Treacy

Email of the day on gold

Gold is soft.  It's had some savage moves in the last few days.  Is it possible this due to new currency notes in India?  India is a large market for the jewellery trade.

Thank you for all your good work.

Eoin Treacy's view -

Thank you for this question which may be of interest to other subscribers. When the cash business in gold was clamped down on it marked an important turning point for the jewellery retail sector Los Angeles’ once vibrant jewellery district. The removal of large denomination bank notes in India will probably have an effect on how gold is purchased but is unlikely to have an influence on the cultural important of the metal particularly around wedding season. 



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November 09 2016

Commentary by Eoin Treacy

Investment ramifications of a Trump Presidency

Eoin Treacy's view -

It was a bruising campaign but with control of all three branches of government the Republican Party now has a relatively unfettered path to introducing a broad range of policy options. The one obstacle of course is that the entrenched bureaucracy in Washington and the various unions are totally opposed to just about any change to the status quo. 

Corporate taxation and the tax code more generally could be up for debate. Securing a budget large enough to make a dent in the deferred maintenance of the USA’s infrastructure is perhaps the clearest ambition of a Trump Presidency. Protectionism is also high on the agenda and the responses of NATO and EU spokespeople to the news was a picture of unease at this new source of uncertainty. Immigration is also likely to be a major topic of conversation for this administration. 

 



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November 09 2016

Commentary by Eoin Treacy