FYI | Dec 06 2006
These are testing times for supporters of the Commodities Super Cycle. The Australian share market seems ready to post another record high, or two, before we enter the new year, but share prices of resources heavy weights BHP Billiton (BHP) and Rio Tinto (RIO) continue to trade 30%, or more, below what securities analysts have put forward as their twelve month price targets.
And many market strategists have started to sound like a broken record too: there is hardly any obvious value left in the Australian share market, most would argue, other than resources stocks.
Until not so long ago this used to be the easiest to sell story in town, so what has happened?
Unfortunately, economic data continue to be weak, on balance, in both the US and Australia. To put it mildly: this is not helping the sector. Especially not the US weakness, as nobody really takes into account the minnow demand Australia represents for the global metals and mining industry.
This is a great time for currency traders, but not so for shareholders in resources companies, or so it would seem.
Regular readers of my weekly editorial will remember that I earlier pointed out in November the odds had shifted towards some likely very weak data in the US between now and the first few months of calendar 2007. There have been quite a few expert predictions this would have a negative impact on the share price performances of resources companies.
Patient investors can take heart from the persistence of resources specialists at GSJB Were. Amidst a broadly carried trend of assuming that most commodity prices will start trending lower soon, GSJB Were today issued a loud and clear “b*ll*cks!”
In fact, those investors (and market experts) betting all their marbles on the fact that metals prices only have one way left from here may be in for a big surprise throughout 2007, GSJB Were believes. The broker seems firmly convinced average spot prices for copper, nickel and zinc will be higher in 2007 than they have been this year. The view is carried by the broker’s belief all three will remain in supply deficit for some time still.
Regardless whether US growth will be weaker or stronger than what is currently penciled in by securities analysts and economists worldwide, GSJB Were believes China has become the one and only key factor for resources and only a recession in the US could possibly change this. It goes without saying GSJB Were does not think a US recession is on the cards.
Lead and aluminium should see lower prices though, and the other metals should follow from 2008 onwards.
As several market strategists have argued over the past few weeks the anticipated price weakness for copper is considered a key contributing factor to the sluggish outlook for resources stocks, GSJB Were’s recalcitrant view on the metal deserves some extra attention.
The broker believes sufficient evidence is mounting to assume destocking in China has now run its course. As a result of this, China ‘s net imports of refined copper should pick up strongly throughout 2007. In addition, GSJB Were believes there is still a tendency among securities analysts to overestimate actual production of the metal.
All this just goes to show it is very dangerous to assume anything in the world of global finance and economics is set in stone or 100% secured or guaranteed to happen. A fact investors and enthusiasts in the uranium sector may take on board as a renewed focus on the sector by the Bush administration has the potential to dampen price prospects in the medium term.
Apart from building more nuclear reactors and keeping some older uranium mines operational for longer, industry feedback suggests additional supply from the large US reserves is under consideration in order to alleviate the pressure on US utilities following the flooding of Cameco’s Cigar Lake mine a few weeks ago.
It goes without saying this could potentially have a large impact on what still is a rather small industry.
Spot uranium above US$100/lb next year? I wouldn’t risk all my marbles for it!
Till next week!
Your I stopped long ago to take anything as a given editor,
Rudi Filapek-Vandyck
(steadfastly supported by the Fab Three Greg, Terry and Chris)