COMMODITIES ESSENTIAL The resource for what matters

Transcription

1 COMMODITIES ESSENTIAL The resource for what matters Main Article, p2thru6 Australia, Metals News and Weekly Charts... I talk about China a lot. But the other side of that coin is Australia (among others.) If China is going to enter (or already has) an extended period of sub-par growth, then China s trading partners are probably vulnerable, namely those providing the natural resources so highly demanded in China. Interestingly, Australia reported some decent economic numbers this week. But all kinds of periphery news suggest the environment isn t very rosy. Trade Essentials, p6 No new recommendations or adjustments at this time. Recent Flash Alert recommended tightening stop-losses on all positions. Positioning, p6 Four open positions with nice open gains: Long DTO, ZSL and BOM; short CORN. 15 November 2012 ******

2 2 Australia, Metals News and Weekly Charts. I talk about China a lot. But the other side of that coin is Australia (among others.) If China is going to enter (or already has) an extended period of sub-par growth, then China s trading partners are probably vulnerable, namely those providing the natural resources so highly demanded in China. Interestingly, Australia reported some decent economic numbers this week: - Moody's said this week Australia will keep its AAA rating for three reasons: government finances are strong, China will support demand for Australia's commodities, and a high Australian dollar is not currently a problem. - The most recent reading on Australian consumer sentiment jumped to 104.3, a 5.2% monthover-month increase to a level that s the highest since April A member of the Reserve Bank of Australia said rates cuts are beginning to impact the economy (presumably for the better.) But all kinds of periphery news suggest the environment isn t very rosy. Australia s Resource Minister said A$230bln worth of new resource projects are at risk due to higher costs. Remember, this pain is exacerbated by falling commodity prices. And it is exactly why the Reserve Bank of Australia recently downgraded their 2013 growth forecast from 3% to 2.5%. They say the peak in commodity investment projects will be lower and happen sooner. Here are words on the topic straight from Reuters: Rio Tinto said on Tuesday that Australia's mining industry grew complacent in its race to cash in on an overheated commodity market, and the global miner predicted the industry faces widespread cost cuts now that prices have cooled. Miners had grown "fat and lazy" after allowing their costs to follow prices higher, Australia's resources minister Martin Ferguson said, warning this was putting at risk $230 billion worth of new resource projects. From here it s easy to go back to China they are the demand side of the equation for commodities. And demand is going to grow more slowly than to what many have grown accustomed. But what about the other side of the equation: supply? In many cases investment in mining is now starting to produce. This means an increase in production that outpaces more moderate consumption. - Copper production at Anglo American will be about 650,000 tons this year, an 8.5 percent increase from 2011.

3 3 - After dipping slightly this year, Codelco's 2013 output of copper will top this year's forecast of about 1.7 million tons and continue increasing over the next several years - Aiming to maximize its resources, BHP Billiton seeks to expand its iron ore capacity by nearly a fifth to reduce costs - China Iron & Steel Association (CISA) said steel prices are likely to be bogged down by lingering overcapacity and will continuing eating away at steelmakers margins - Australia's Fortescue Metals Group plans to reconsider whether it should push ahead with a plan to triple its iron ore capacity - China's copper and lead production rose to record highs in October refined copper output rose 8.6 percent, with total production in the first ten months up 7.4 percent It s hard to say if this will mean anything for Australian investments. It seems as though we can bet Australia s economy will find a lower cruising altitude in the quarters to come. And it s hard to say if this news is priced into the metals already. Surely commodities have gone through rough patches this year. But there have been some recent bright spots in price action. It s just that much of the improvements in those prices likely stem from a reassessment of China. That reassessment sees China avoiding the much-discussed hard landing and avoiding any more meaningful slowdown. Can it happen that way? Sure it can. But if commodities don t resume a bullish super-cycle soon we ll know it s because the demand growth simply isn t thinning out supplies like it has in the recent past. For some perspective on the super-cycle, let s go to some long-term charts... [Charts begin on next page ]

4 ipath Barclays DJ-UBS Commodity Index Total Return: the first scenario (chart 1) suggests this commodity index rallies to new highs whilst continuing its retracement of the collapse back in 2008; the second scenario (chart 2) suggests this index is done retracing and could commence a sustained downturn. 4

5 5 Copper: maybe short-term bullish, but copper needs to get in gear to avoid a break of support that could open the flood gates and send copper reeling much, much lower. Gold: Looking relatively bullish... especially if it can reenter that uptrend channel going all the way back to 2008.

6 Crude Oil: certainly the bottoming-out of global demand plus new US crude supplies are weighing on crude oil s price, but shifting market sentiment and short-term supply data could easily spark a breakout in either direction (though the bias is probably slightly bearish.) 6 Weekly QCLc1 Fundamentals are weighing, but the next break may depend entirely on risk appetite (or geopoolitical crisis) Crude Oil Futures, Weekly 3/23/2008-3/17/2013 (NYC) Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q Price USD Bbl Based on broad market risk appetite in the short-term, I think it makes sense to be cautiously bullish. It is why I recommended you tighten stop-losses on open positions. Before it makes sense to guess whether or not a bounce now would generate a larger bullish move into next year, I think we need to watch price action closely. While there are plenty of reasons to abandoned bearishness, there are still plenty of very serious global macro and sentiment risks lurking (precious metals perhaps the exception). Add the political wild card we know as the fiscal cliff and you ve got the makings of a really fun next couple of months. Stay tuned. Trade Essentials. No new recommendations or adjustments at this time. A Flash Alert on Thursday recommended tightening stop-losses on all positions. Positioning Position Date Ticker Direction Entry Stop Last Target Return Notes PS Crude DoubleShort 9/21/2012 DTO Long TBD 17.25% Tightened stop. PS UltraShort Silver 9/21/2012 ZSL Long TBD 9.95% Tightened stop. DB Double Short BM 10/5/2012 BOM Long TBD 12.47% Tightened stop. Teucrium Corn Fund 11/2/2012 CORN Short TBD 3.71% Tightened stop. Click on the hyperlink to view the audio/visual chart analysis. Bold denotes change.

7 7 JR Crooks