Market Sentiment & Lateral Thoughts

from Neil Behrmann and other authors

Commodity slide to boost importing nations but will hurt producers

Attention is focused on gold, but a much steeper price slide in industrial commodities will benefit importing nations and hurt producing nations.
As can be seen from the table, prices of copper, aluminium, nickel, lead and zinc have crumbled from their 2011 peaks while the price of silver has halved. Moreover, according to data of Macquarie Bank bulk commodities such as iron ore have tumbled then recovered slightly while coking coal has slumped by 23 percent. Energy prices have slid with oil down by 24 percent, steam coal by 14 percent and uranium by 18 percent. The decline in these key raw material prices coupled with a stressed labour market facing layoffs are the prime reasons for low global inflation in the face of unprecedented monetary ease.
In contrast exports of Australia, Canada, South Africa, Russia, Brazil and emerging nation producers from Indonesia to the Congo are in a downtrend. Those nations benefited from the commodity boom and bubble of the preceding years. The big question is will they be able to cope in tougher times.

                                   Commodities Price Implosion

Commodity or index 2008 December crash low 2011 Peak price April 16 2013 %  decline from 2011 peak to April 16 2013
Gold (ounce) 680 1920 1374 -28
Silver (ounce) 8.5 49.8 23.2 -53
Platinum (ounce) 760 2250 1449 -36
Base metals price US$ in tonnes
Copper 2750 10,200 7120 -30
Aluminium 1300 2800 1804 -36
Tin 10000 33000 21250 -36
Zinc 1000 2705 1814 -33
Lead 850 2900 1983 -32
Nickel 9000 29500 15455 -48
Crude oil WTI (barrels) 35 115 87.5 -24
CRB Index 200 680 530

-28

Investment and speculative inventory overhang main reason for price slump

The vast majority of commodity analysts are basing forecasts on production and consumption trends. With the exception of precious metals, however, they have failed to take into account massive speculative and investment demand during the past few years. Hedge and pension funds and wealthy individuals allocated a proportion of their capital, not only into gold, but into a variety of exchange traded commodity products on the advice of bankers. The result is that there is a sizeable, difficult to estimate overhang of commodities in the hands of investors and banks.

Bellwether copper the prime example 

Take copper as an example: Goldman Sachs comments that recent increases in London Metal Exchange copper inventories – which have more than doubled since the third quarter of last year to 611,000 tonnes, are now at their highest levels since the onset of the commodities boom 10 years ago. Moreover copper stocks in China have risen by 550,000 tonnes to 650,000 tonnes in the past five years. Goldman Sachs contends that the level is not that serious as they reflect seven weeks consumption. But those inventories are rising due to prices which are well above the cost of mining. Compared with copper prices exceeding $7,000 a tonne, cost of production estimates, depending on the mine, range between $3,000 and $5,500 a tonne. As a result production has exceeded consumption in a slack global economy and inventories have continued to rise.
“Moreover, the ‘visible’ copper inventories are only part of the overall copper inventory picture,” says Simon Hunt Strategic Services. CEO Simon Hunt who travels to China frequently contends that there are substantial hidden stocks in China and elsewhere.
“As we keep saying, reported stocks are only the tip of the pile of total inventories because of what has been bought by the financial community in recent years,” Mr Hunt says.

Gold shakes confidence in commodity investments

The slump of the gold price which took gold market dealers, experts and others by surprise, illustrates what can happen when speculators and investors attempt to exit a position as the price is falling. Oil and gold are the most liquid commodities from a commodity market point of view. Despite that gold slumped by 15 percent in a few days. In contrast speculators and investors bought relatively illiquid base metals and other commodities when the market looked good, in other words prices were relatively high. Since those so called investments are more than likely to be in negative territory, holders could well be tempted to sell whenever prices rally. Indeed holders of mining shares have already had a torrid time. Despite the overall bull market in equities, Xtrata’s shares have crumbled by 38 percent from its 2011 peak, Rio Tinto by 37 percent and BHP by 31 percent. Analysts have been swiftly downgrading earnings forecasts to keep up with the falling prices of their production.

© Copyright Neil Behrmann, author Trader Jack-The Story of Jack Miner

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