Rudi's View | Feb 27 2007
By Rudi Filapek-Vandyck
Resources are back. A growing number of experts, chartists, analysts, investment strategists and market commentators have turned more positive towards the likes of copper, uranium, steel and gold over the past few weeks.
To paraphrase US based investment guru Dennis Gartman: all the things that hurt if you would drop them on your foot are becoming fashionable again. Gartman advised on Friday investors should position themselves for another firm uptrend in gold. He’s far from the only one who’s bullish on the near term outlook for the precious metal.
However, the most radical turnaround in market sentiment seems to be taking place in copper. Until a week ago, few experts were willing to join the resources team at GSJB Were in calling the inevitable change in fortune for the bellwether of the industrial commodities.
Technical chartists stuck to their view of a long term bear trend as global inventories were gradually moving up, the spot price continued to look vulnerable and industry estimates suggested an outlook for a supply surplus this year.
In January US based metals specialists at Lehman Brothers concluded: “we remain convinced that many observers continue to overestimate mine supply growth. Large mines such as [Freeport-McMoRan/Rio Tinto’s (RIO)] Grasberg and [Newmont’s] Batu Hijau will produce much less in 2007 than in 2005. Many supply models fail to account for this.”
In short, argued Lehman Bros, copper prices are likely to settle at higher price levels and probably for longer than many market observers believe they will.
It is a view that has gradually won in popularity over the past two weeks. Over the period, technical chartists at Barclays Capital, and elsewhere, have signaled the metal’s price correction has formed a bottom on the charts, suggesting the metal looks ready for a break out to the north again. Spot copper gained more than 8% over the past few trading days.
At Merrill Lynch, resources specialists have argued that the growing popularity of hedge funds and other professional investors in the commodities sector has increased the intelligence of the market as a whole. This would explain, suggests Merrill Lynch, why the pricing in of revised market prospects in spot and futures prices has occurred quicker in recent years than it did in the past.
Taken from that perspective, it should be no surprise the price of copper is moving up again. The technical correction that caused January’s market massacre seems over while the US housing slump might have hit its bottom. Chinese buyers are expected to return to the market now the year of the golden pig has officially begun. And above all the factors just mentioned: the US housing market is about to enter its traditionally busiest time of the year: May-September.
Strictly taken the latter is still a good two months away, but if we take Merrill Lynch’s observation on board, the market should start incorporating the pickup in demand for copper in the US… well, ehm, now!
More events suggest investor attention returning to commodities seems but logical. Tensions about Iran’s uranium enrichment ambitions have flared up again. Spot uranium has just recorded its biggest jump ever in history (in real terms). The US dollar is under severe downward pressure again. Annual negotiations for thermal coal contracts seem to have turned in producers’ favour – expect news and market upgrades possibly as early as the next few days.
This week a report from Central Bank Publications in London stated nine of ten central banks in the world see reason and scope to further diversify reserve assets into higher-yielding “non-traditional” destinations. These “non-traditional” assets are believed to include stocks and commodities.
Cold weather and an unexpected storm in the US have also put crude oil in a positive spin again (investors are even overlooking that inventories in the US are up). A few weeks ago the oil market appeared in a firm grip by the market bears and futures seemed to be pointing at a prolonged stay in the US$50s per barrel. Now, chartists are talking about “oil finding strength above US$60” with likely upside from here.
However, 2007 is likely to see nickel to be crowned the star amongst the stars with the metal already touching upon fresh highs recently driven by what market watchers believe is the tightest supply-side situation for all metals.
Already scarce inventories have been falling further over the past few weeks and the growing share of so-called ‘cancelled warrants’ – i.e. stocks that are already designated for delivery – relative to total inventory levels has made investors and buyers in the nickel market very nervous. (This is because the amount of available inventories is even smaller than the published figures would suggest).
To make things worse, recently published data by the International Iron and Steel Institute revealed that global growth in steel production had re-accelerated at the turn of the year. Few market watchers foresee a change in market dynamics in the short term. The main danger should come from steel producers seeking substitution, a process that is believed to be in full swing already.
For investors in the Australian share market, the return of a broadly based positive momentum to the natural resources sector comes with a mixed message. On one hand it looks like the missing link at a time when valuation multiples for most other stocks appear dangerously high, and most experts have been stating for months that resources stocks are too cheaply priced – while the rest looks expensive.
On the other hand, a broad price surge for basic materials is likely to revive inflation fears and this may well be the trigger that ends the goldilocks scenario of robust economic growth, abundant liquidity and low interest rates.
