Tag Archives: Agriculture

article 3 months old

Material Matters: Platinum, Oil, Bulks and Fertilisers

 - Support for platinum
 - Oil's impact on base metals
 - Positives for iron ore, thermal coal, fertiliser prices
 

By Chris Shaw

Following three years of falling supplies, platinum mine output from the five largest producers in the world rose by 5.5% last year but Barclays Capital notes this was not enough to deliver anything better than a mostly flat global mine output result in 2010.

In the early stages of 2011 platinum prices have traded above U$1,800 per ounce, their highest level since July 2008. With prices rallying, Barclays questions whether platinum supply will also continue to grow.

According to Barclays, most of the production growth potential rests with expansion by the major producers rather than start-ups entering the market. As an example, Barclays notes Anglo Platinum, the largest producer, intends lifting output to 2.6 million ounces this year from 2.57 million ounces in 2010, while Impala Platinum similarly anticipates boosting output to 1.85 million ounces this year from 1.74 million ounces last year.

Barclays had previously estimated prices would need trade above US$1,500 per ounce to support output growth, but higher cost pressures from factors such as higher wages now imply this floor is also somewhat higher. 

Additional challenges are coming from lower head grades and delays to a new coal-fired power station in South Africa, which leads Barclays to suggest mine supply in 2011 is likely to grow by just 3.7% in year-on-year terms. 

This should see the market swing into deficit in 2011, so if any supply disruptions materialise over the course of 2011 Barclays suggests prices will be pressured to the upside.

In the oil market, Citi notes the current oil price spike has spooked markets somewhat as investors factor in the potential for an energy price shock. But this may be an over-reaction, as Citi notes higher oil prices alone don't cause recessions and drive up inflation.

As an example, Citi notes in the 1970s labor costs tied to cost of living adjustments meant energy supply disruptions had a far greater impact on inflation than would have otherwise been the case. Current conditions are also not directly comparable given technology, productivity and outsourcing advancements and slack in the labour force.

Looking at markets relative to present inflation data by using correlation statistics such as trailing earnings multiples versus core inflation, Citi finds a strong argument for US market strength over the next six to 12 months. 

This can be explained at least partly by the fact while inflation data shows some recovery in prices for items such as food, prices for items such as beverages, utilities and apparel are subdued and are weakening for the likes of autos and healthcare. This means higher input costs are to some extent being mitigated, leading Citi to suggest the implication is any inflation scare may be more short-lived than is generally considered.

Turning to iron ore, Credit Suisse points out despite recent market nervousness with respect to stockpiles, liquidity issues in China and political uncertainty in the Middle East, prices continue to trade at near record levels in a range of US$180-$185 per tonne. 

In Credit Suisse's view it will be demand that drives the next leg up in prices, as March-May is seasonally the strongest period for the global steel industry. There is evidence this is already underway, as global steel production enjoyed a strong January of equal to 820 million tonnes on an annualised basis. 

This equates to additional iron ore demand of 100-105 million tonnes on Credit Suisse's numbers. The lack of any significant global ex-China restocking of iron ore offers further upside as utilisation rates pick up, while Credit Suisse suggests supply disruptions are another wild card given recent lost production in both Australia and Brazil.

This leads Credit Suisse to suggest the iron ore market is set to remain “stronger for longer”, with a return to long-run pricing of around US$70 per tonne FOB Pilbara unlikely to occur prior to 2017-2018.

The key concern is a liquidity squeeze in China, as Credit Suisse accepts this could impact on iron ore demand via less availability of funds for the general manufacturing and housing industries. Data in coming months will be monitored, Credit Suisse suggesting if stronger trading patterns in commodities don't emerge from March 1st there will be increased cause for concern.

RBS has looked at commodity markets generally in the wake of the unrest in the Middle East, suggesting the turbulence is boosting oil prices but hurting the base metals at the same time. The issue is if the problems in the region continue and spread further some oil production could be lost, so driving prices higher.

As RBS notes, this has the potential to impact on global growth, so influencing demand for base metals. Regardless, the coming year is more about supply growth and pricing in RBS's view, meaning any sell-off in coming months would be a trading buy opportunity.

Those metals with the worst fundamentals, which RBS suggests are zinc and lead, are most vulnerable to any correction, while copper and aluminum are seen as more resilient.

In coal, Commonwealth Bank notes Newcastle spot thermal coal prices rose 4% last week to US$131.71 per tonne, which was stronger performance than either Richards Bay (South Africa) or North Europe prices. 

The relative performance reflects the easing of cold weather conditions and continued weak demand in Europe in CBA's view, while also highlighting Asia's stronger demand outlook. CBA expects further support for Newcastle coal prices in coming months as both Indian and Chinese domestic coal production is falling short of demand and the gap between Indian domestic prices and international seaborne coal prices narrows.

Given the currently positive environment for thermal coal, CBA expects prices will trade above US$100 per tonne for the next few years.

Finally, Goldman Sachs notes Di-Ammonium Phosphate (DAP) prices continue to firm across most regions, which offers some upside risk to forecasts given current spot prices are above the broker's estimates for both FY11 and FY12.

Credit Suisse agrees and sees this as an ongoing supportive factor for Incitec Pivot ((IPL)), as market upgrades to fertilizer price forecasts should continue, so pushing up earnings estimates for the company. At present Credit Suisse is above consensus with its earnings per share (EPS) estimate of 36.5c for FY12, while it is broadly in line with its FY11 forecast of 32.5c.

Credit Suisse rates Incitec Pivot as Neutral, while the FNArena database shows a Sentiment Indicator rating of 0.5 and a consensus price target of $4.60.

 

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

article 3 months old

Material Matters: Bulks, Copper, Zinc And Chinese Tightening

- Push for monthly coal price contracts
- Fundamentals remain supportive for copper, iron ore, not for zinc
- Chinese monetary tightening not a big threat to commodity prices

By Chris Shaw

A trend in bulk commodity markets in recent months has been a shift to shorter-term contracts, with UBS noting recent moves by BHP Billiton ((BHP)) imply pressure is now being applied to achieve a similar shift in pricing in the metallurgical coal market.

Currently met coal is priced on a quarterly contract basis, but BHP has informed its Japanese steel industry customers of its intent to move to monthly contracts from April. UBS expects the new mechanism would likely be a rolling monthly-lagged average price based on a daily reported index.

To encourage such changes UBS sees BHP as likely to offer monthly contracts at a discount to formal quarterly prices, which the broker sees as offering some modest downside risk to short-term price forecasts.

UBS expects BHP will be at least partially successful in such a move, given the company at present controls around 25% of met coal supply. Goldman Sachs agrees, expecting the most likely outcome at present is a headline price of about US$300 per tonne FOB for low volatility hard coking coal. 

Goldman Sachs also expects an increase in the use of hybrid contacts, which incorporate some monthly and some quarterly priced tonnage. Such a change would be helpful for BHP as at present the company faces some volume risks from recent flooding of mines in the Bowen Basin in Queensland. An increase in prices by a move to monthly contracts would therefore offset lower production in 2011.

The end game in the view of UBS is an eventual move to spot pricing, as BHP is strongly in favour of spot pricing for all bulk commodities given the view this represents a more equitable and efficient signal than annual benchmark price contracts. 

Still on bulks, Citi expects iron ore prices will remain strong for some time given the market is entering a sweet spot for demand and there continue to be constraints on the supply side. If current prices last through the end of February Citi expects 2Q11 contracts will be set at around US$182 per tonne, well up from its forecast of a price around US$160 per tonne and market consensus of US$130-$140 per tonne.

While short-term there are some signs Chinese steel mills are baulking at paying current prices for iron ore, Citi's expectation of a market deficit of around six million tonnes this year and 33 million tonnes next year should continue to support prices. 

Also supportive is the ongoing ban on Indian iron ore exports, as this means exports from this market won't be normalised before China's peak demand period. Supply concerns for Australian producers are also evident thanks to adverse weather conditions, while producers in Brazil are dealing with heavy rainfall. 

This leads Citi to suggest iron ore spot prices will remain at current levels until late in the second quarter of this year, by which time Indian exports should resume and demand eases. Any price weakness is expected to be modest, Citi forecasting relatively stable prices of around US$150-$160 per tonne over the next couple of years. 

In the base metals, Goldman Sachs continues to argue there is a compelling case for copper given on a 12-month view demand should outpace supply and inventories should fall. This is likely to see demand rationed to create a more balanced market.

Driving copper prices has been emerging market demand, with China the driving force behind the copper market's recovery. As evidence, Goldman Sachs estimates while OECD demand for the metal increased by more than 6% last year, this compares to a 9.3% increase in emerging market consumption.

Chinese copper consumption may slow to growth of 7.5% in 2011 on Goldman Sachs's numbers, but this should still be well above expectations of 4.7% consumption growth in Western Europe and 2.5% in the US. On the supply side Goldman Sachs suggests the issues of declining grades and a lack of large, greenfields projects should prevent supply from keeping pace with demand shorter-term. 

Higher prices late last year and early this year have seen some de-stocking in China, but Goldman Sachs expects demand will normalise by the middle of the year, which should result in a market deficit of around 600,000 tonnes in 2011.

This supports price forecasts of US464c per pound this year and US494c per pound in 2012, though Goldman Sachs sees scope for a price spike to levels well above these forecasts. To reflect this, forecasts currently factor in prices of more than US500c per pound in the final quarter of this year and the first two quarters of 2012.

To play copper Goldman Sachs prefers PanAust ((PNA)) Equinox ((EQN)) and Sandfire ((SFR)) among the pure plays and BHP Billiton and Rio tinto ((RIO)) among the diversifieds. Sentiment indicator readings for these companies according to the FNArena database stand at 0.3 for PanAust, 0.6 for Equinox, 1.0 for Sandfire and Rio Tinto and, 0.8 for BHP.

In contrast to copper, RBS suggests the fundamentals for zinc remain dismal given an 800,000 tonne surplus in 2010. This brings total surpluses since 2007 to more than 2.3 million tonnes, or about 20% of expected 2011 output.

A further surplus is expected in 2011 and RBS doesn't expect the market will return to a deficit prior to 2013. What won't help the market is the existence of at least 1.5 million tonnes of unreported stock, most likely to be in China. 

Despite these poor fundamentals the zinc price has performed strongly, rising by more than 140% from its low in 2008. But the state of the market sees RBS suggest zinc prices are likely to range trade at best between US$2,000-$2,500 per tonne in 2011/12.

The weakness of the zinc market fundamentals suggest zinc will underperform the other base metals, so RBS suggests the balance of risk favours a short zinc trade at present. 

With respect to nickel, Goldman Sachs suggests stronger prices have increased the chances of some mine restarts in Western Australia. Norilsk has already confirmed it plans to re-commence production at its Lake Johnston project in Western Australia during the June half, while output could also resume from the Black Swan mine as well. In addition, Poseidon Nickel ((POS)) is understood to be considering restarting the Mt Windarra mine.

A recent mineral sands conference was attended by Deutsche Bank and the broker notes presentations at the event supported a positive outlook for market fundamentals for titanium dioxide. The market had been through 20 years of oversupply and weak pricing power but capacity shutdowns in 2008/09 changed the market's balance, this at the same time as demand rebounded.

The acceleration in demand was primarily in emerging markets, driven by a growing middle class and rising per capita incomes pushing up demand for quality of life products. The expense of new greenfield projects means capacity has lagged demand over the past couple of years, so with global inventories at their lowest levels for the past 10 years, Deutsche remains positive on the price outlook for titanium dioxide. Forecasts currently call for price gains of more than 10% through 2012.

This is supportive for the earnings profile for Iluka ((ILU)) in Deutsche's view, so there is no change to the broker's Hold rating. The FNArena database shows Deutsche is among the more conservative on the stock as Iluka is rated as Buy six times, Hold once and Sell once. The consensus price target for Iluka according to the database is $9.22, which compares to a current share price of around $9.85. 

As a final word in terms of a broad outlook for commodity prices, Citi suggests higher reserve requirement ratios in China mean investors should be more cautious over the shorter-term. While the changes in requirements have to date shown no signs of impacting on Chinese growth and therefore demand fundamentals for commodities, the extent of recent price gains warrants some additional caution in Citi's view.

As well, Citi suggests the ongoing correction in emerging market equities could at some point spread to commodities markets given their link to emerging market growth, so forecasts now factor in some short-term price weakness. 

Deutsche Bank has taken this a little further and examined how previous monetary tightenings in China impacted on the commodity complex, the analysis showing mixed results. Three times commodity prices were rising in the run-up to a tightening in policy and only once did prices trade lower in anticipation of rate hikes.

Commodity price performance during rate hike programs has also been inconclusive, though the most relevant appears to be the 2006 tightening cycle. In that period, Deutsche notes crude oil and gold outperformed the industrial metals. 

Deutsche's conclusion is that given monetary tightening to date has been relatively modest and with expectations any growth slowdown will also be modest, any possible negative impact on commodity prices is likely to be limited. 

What supports this view is that supply constraints have tightened certain markets meaningfully, particularly with respect to copper and iron ore. If on the other hand the market starts to punish those commodities most reliant on Chinese demand, Deutsche suggests iron ore, copper and aluminium could be most at risk of price weakness. Uranium, corn and met coal would likely be most resilient in such conditions.

article 3 months old

Two More Decades Of Wet For Australia?

(This story was originally published on 8th February, 2011. It has now been re-published to make it available to non-paying members at FNArena and readers elsewhere).

By Greg Peel

As a financial journalist, it is not my place to take sides on the climate change debate. However, I have no qualms in stating my own, honest opinion, taken from a position of simply not being a scientist.

The way I see there are two arguments, and I am not including arguments put forward by industry lobbyists: (1) the earth is warming; (2) the earth is not warming and indeed may be cooling. On the assumption (1) is correct, then: (a) man-made carbon emissions are the cause; or (b) the cycle is natural and while made-made emissions don't help they don't actually make much difference.

My opinion is that which ever of these variations proves to be true, where is the downside in easing the plundering the world's finite natural resources and shifting towards commercially viable alternative and renewable forms of energy? Where is the downside in curbing pollution? I have not heard a viable argument (outside of short term profits and jobs) that suggests why such pursuits are foolish, and many an argument as to why they are not. However, it would seem that in order to achieve such a transition there simply has to be a government mandated price applied to carbon. Exactly how that can best work...well...that's another debate.

So it is from this relatively neutral stance that I make note of a scientific theory that has been gaining some traction of late – that of the Pacific Decadal Oscillation (PDO). I qualify this report straight away by noting the Australian Bureau of Meteorology is so far undecided on the theory's validity but would like to pursue further research before arriving at any opinion.

We are all now familiar with the incidences of El Nino and La Nina. We understand they are related to periods of warming and cooling in the Pacific and other ocean waters. These cycles can be weak or strong, and the recent drought in Australia coincided with strong El Nino periods and the current “wet” coincides with a particularly strong La Nina.

On average, these cycles last six to eighteen months and occur every three to seven years. There are nevertheless no hard and fast rules, and long range prediction is as good as impossible. The best we can do at the moment is see a cycle coming only when it's basically right on top of us, and then monitor when it  is the temperature variations begin to turn back again. Meteorologists were able to tell us that a La Nina was apparently beginning late last year but they have only subsequently been able to note that this is a particularly severe cycle. 

With the benefit of historical records, research and modelling, the theory of the PDO has arisen. This suggests that overlaying the shorter, sharper El Nino and La Nina cycles are longer wet/dry cycles which last 20-30 years. Both the opposing short cycles come and go within each longer cycle, but typically if the longer PDO cycle is “dry” then El Ninos are more severe and La Ninas are less severe, and vice versa for “wet” PDO periods.

Looking at the data for the twentieth century through to today, 1900 fell in a wet PDO which lasted until 1924, a dry PDO occurred from 1925-46, another wet from 1947-76, and a dry from 1977 on. But given the severity of the current La Nina, which has coincided with the breaking of one of Australia's most severe drought periods, the question is: have we now cycled into the next wet period? The timing is certainly right given a wet period is due. If so, we could be in such a period for another 20-30 years.

Now let me reiterate – I am not a scientist. But out of curiosity, I thought I would create a table to explore the implications of the PDO for Australia back to 1900. It's lengthy, but the table appears at the top of this article (in excel format, for download).

Using data from scientific websites (not Wikipedia) I have created four columns in my table. Column one is each year from 1900 rounded to six-moth intervals. Column two is the periods of PDO, with dry periods represented as red and wet as blue. Column three shows the periods of El Nino (red) and La Nina (blue). Column four shows periods of drought (red) and what the Bureau of Meteorology lists as “severe” flood incidents (blue).

The first impression is that the results are not “perfect”. Droughts have occurred in PDO wet periods and floods in PDO dry periods. There was even one flood (1940) right in the middle of a long drought and El Nino period. According to records, this flood confounded meteorologists at the time but was correctly predicted by aboriginal elders.

What is striking, however, are what I call the “triple red” and “triple blue” periods. Australia's longest droughts have occurred when the PDO is dry and El Nino is occurring. Note the periods 1937-47, 1991-95 and 2000-10 compared to other drought periods. Also note that while all the floods here are noted as “severe”, the most severe floods Australia has experienced prior to 2011 were in 1974 (Brisbane, of which we have all been reminded), 1955 (Hunter Valley, made famous by the movie Newsfront), and 1916 (Clermont Qld, inland from Mackay). Notably the Clermont flood occurred as a result of a cyclone which passed through Townsville. The most severe floods have occurred as “triple blues”, when La Nina has arrived during a PDO wet.

What one can draw from my table, I believe, were the PDO theory to be granted scientific currency, is that if an El Nino occurs during a PDO dry the chance of severe drought is amplified (but not guaranteed) and if a La Nina occurs during a PDO wet the chance of severe flood is amplified (but not guaranteed).

As I suggested earlier, scientists are now considering that the strong La Nina that is now upon us, subsequent to the breaking of the long drought, may signal the beginning of a new PDO wet cycle. If so, farmers can rest a little easier about the question of water supply to crops, but may face more episodes of flooding. The Murray-Darling Basin may rejuvenate itself long before politicians come up with a viable solution. Miners may well be in for more regular incidents of lost production from flooded mines.

I personally am not endorsing anything here – just throwing the subject up for discussion. It is, however, interesting to note that what one might call a “skeptical” school of scientists (and again I don't mean any on the payroll of Exxon etc) points to the PDO as a possible explanation for global warming beyond that of man-made emissions.

I also note, again without qualification, that to jump on Australia's recent weather as “confirmation” of the impact of man-made emissions is to ignore the wider sample set. For example, the 2011 Brisbane flood did not quite reach the height of the 1974 Brisbane flood. Cyclone Yasi did not quite prove more severe than Cyclone Tracy, which also hit in 1974. Back in the seventies scientists were actually worried the earth was cooling, such that a new Ice Age may be upon us.

Food for thought. 

article 3 months old

Material Matters: Thermal Coal, Iron Ore, Palladium, And Alumina

SUMMARY

- Thermal coal, fertiliser fundamentals remain favourable

- Short-term support for iron ore prices

- Palladium, alumina tipped to go higher

 

By Chris Shaw

In a not surprising outcome, Australian thermal coal export shipments were weak in January as those in the market had to deal with the impact of significant flooding in Queensland in particular. Macquarie notes Queensland shipments in January are likely to come in below 30 million tonnes on an annualised basis.

Shipments for New South Wales in contrast remained steady at an annualised rate of around 102 million tonnes in both December and January. Combining the two implies total annual shipments of around 130 million tonnes, which compares to total thermal coal shipments in 2010 of 141.3 million tonnes. 

While the impact of the floods is fading, Macquarie suggests one constraint that may continue to linger is the incentive to switch from thermal coal production to production of semi-soft/PCI coal where possible. 

Macquarie notes recent semi-soft contract negotiations were settled at US$180 per tonne for the first quarter of 2011 and will be set at 80% of hard coking coal (HCC) prices in the second quarter. With HCC contracts to be settled at around US$290-$300 per tonne in this quarter, producers who can wash thermal coal into semi-soft coal may be able to take advantage of prices of US$230-$240 per tonne. This is well above the US$119.75 per tonne for the second quarter currently priced into Newcastle swaps.

This suggests some switching is likely to occur, leading Macquarie to forecast total Australian thermal coal exports in 2011 will be in the order of 148 million tonnes. This, plus signs the market for spec coal is likely to be tighter than that implied by export growth from Newcastle, leads Macquarie to suggest there is upside risk to what is being priced into coal futures markets at present.

This view fits in with that of Citi, who expects continued strong thermal coal prices as strong demand and supply restrictions continue to support the market. Citi estimates the rains in Australia will see about five million tonnes of thermal coal supply lost given the Queensland rail system remains closed, while it too picks up on the fact some producers are now giving priority to higher priced products such as semi-soft coal.

Production in Indonesia has also been hampered by heavy rains, while a shortage of rail wagons is impacting on the Russian market. An easing in some of these restrictions saw thermal coal prices come back from recent highs, but Citi remains positive on price prospects in the market.

One reason is if European demand for thermal coal was to recover, the global market would tighten significantly as coal from South America and South Africa is at present being delivered to Asia rather than its more traditional European markets. 

As well, Citi expects China will remain a net importer this year, as while domestic production continues to grow it is not increasing fast enough to keep pace with demand. India should also see significant increases in the amount of thermal coal it imports in coming years, as urbanisation and increasing electrical intensity continue to push up demand. 

Elsewhere in the bulk commodities space, Goldman Sachs notes the seaborne spot iron ore market has started the Chinese New Year strongly, prices either at or near record highs. This price strength had been expected and has been met by higher steel prices through Asia.

Goldman Sachs expects this rally has further to run in the short-term, as steel demand from China improves and as major suppliers continue to deal with constraints. Longer-term though Goldman Sachs is more cautious, as scrap prices have fallen and steel price gains appear more a function of cost push from higher raw material prices than evidence of significantly stronger demand. 

Any weakening in underlying demand will see steel prices fall and as this would impact on margins Goldman Sachs suggests it could be a precursor to weaker iron ore prices. This is unlikely in coming weeks, but remains a distinct possibility in the second half of this year in the broker's view.

Deutsche Bank in contrast sees scope for iron ore to remain somewhat scarce for the next two years, thanks largely to bottlenecks as mining companies build infrastructure and source equipment needed to handle the amount of material has to be transported over long distances. 

There is also potential for some structural issues in iron ore markets, Deutsche suggesting these include the Indian steel industry attempting to ban iron ore exports and a slow recovery in Brazilian export levels. Cost inflation in China may also emerge as an issue, pushing the marginal cost of production in that market to around US$115 per tonne.

Deutsche expects steel production growth this year will decelerate after increasing by a double-digit rate next year, something that is likely to limit demand for iron ore. But with supply expected to continue to struggle to meet demand, the broker sees iron ore prices averaging US$175-$180 per tonne over the next two years.

Turning to palladium, Standard Bank notes the metal continues to enjoy good price support on the back of solid industrial demand. Contributing here are auto sales, where numbers for major manufacturers were up in January. This follows steady improvement in 2010.

Using adjusted sales numbers, Standard Bank suggests auto sales appear much more supportive for palladium than at the start of last year and more supportive than similar figures for platinum. A further seasonal pick-up is expected in February and March.

On a six-month view Standard bank expects both palladium and platinum prices will head higher, but current market conditions suggest palladium is favoured to perform the better of the two metals.

In the base metals, Goldman Sachs notes a recent recovery in primary aluminium production has driven an equally sharp improvement in demand for metallurgical grade alumina. The stockbroker estimates demand in 2010 was 87.6 million tonnes, forecasting this will increase to 111.2 million tonnes in 2015.

Based on current estimates for refining capacity, Goldman Sachs estimates this would imply a steady increase in refinery utilisation rates in the low 90% range in 2014 and 2015, so as legacy metal-linked contracts expire in coming years it is expected the average contract price will converge with the spot price.

This improvement in utilisation, along with increasing cost pressures, should be enough in Goldman Sachs's view to generate gradual price improvement. From levels of around US$340 per tonne (FOB) in 2010, the broker is forecasting alumina prices of US$371 per tonne this year and US$455 per tonne by 2015. 

Alumina Ltd ((AWC)) is the primary pure play on the Australian market, the FNArena database showing the company is rated as Buy twice, Hold five times and Sell once with a consensus price target of $2.70.

Turning to the agricultural commodities markets, BA Merrill Lynch notes the USDA has lowered is 2010/11 global grain inventory estimate by 24bps to 19%. The change saw inventory estimates lowered for all crops.

BA-ML suggests falling grain supplies should continue to support grain prices at elevated levels, so giving farmers encouragement to invest in agricultural inputs this year. This implies good news for fertiliser plays such as Incitec Pivot ((IPL)) and Nufarm ((NUF)), enough for BA-ML to rate both stocks as Buy at present.

BA-ML is not the only one to pick up on this theme as the FNArena database shows Incitec Pivot is rated as Buy five times, Hold twice and Sell once with a consensus price target of $4.60, while Nufarm scores four Buys and four Sells and has a consensus price target of $4.82. 

article 3 months old

The Implications of a Potential Top in Commodities

GaveKal offered the following observations this week:

The most striking event on the markets over the last couple of weeks has probably been the sell-off in bonds. Taken together with the fact that OECD equities have pushed higher, it would imply that portfolios have briskly adjusted to a growth scenario (as opposed to a 'double dip' scenario). Yet the PBoC's interest rate hike yesterday is a reminder that the recent shifts in asset allocations, as hectic as they seem, might not yet fully reflect the reality of a solid recovery in the developed world set against slowing momentum in emerging markets. In particular, one wonders if commodities and commodity-related assets (such as the AUD) have priced in the fact that:

1) QE3 is obviously no longer on the table, which should take some "financial investors" out of the energy and commodities markets (particularly with carry-trade costs remaining high). This is backed up by multiple US data points, including stronger payrolls and personal income, rising consumption, rising business bank loans, bottoming credit card debt, improving small business sentiment and signs of returning pricing power.

2) Developing market growth is less commodity-intensive than emerging market growth, which is heavily geared towards infrastructure investment. Which brings us to the next point...

3) China is the largest global consumer of key commodities-including coal, iron ore, manganese alloys, copper (see p. 2)-and a marginal mover of the energy markets. And in light of money-supply growth at +20% (as expected for January), spiking food CPI and worrying asset price inflation, the PBoC tightening cycle has surely only just begun. Meanwhile other major emerging markets, such as Brazil, India and Indonesia, are also fairly early in their tightening cycles. Demand growth from these nations will still be solid, but the rate of growth is probably set to slow. And because markets are made on the margin, this is bound to have a significant effect on prices.

4) Technical factors indicate a top in commodity indices, while recent weather-related shocks, such as the La Nina effects on wheat, corn and sugar production, or the Australian-floods effect on coal supply, should recede. It is also interesting that oil prices weakened this week, even as more Egyptian protestors poured into the streets, and despite further signs of rising global growth.

In our most recent Quarterly, we argued that strong global growth would make QE3 (and any other subsequent QE programs) far less likely. The question was then how commodities would react: Would prices fall because of less easy money or would this effect be negated by a stronger global growth environment? It is a tough call, but with tightening in Asia (especially China) also weighting in, two out of three factors are moving against commodities. Of course, it is still too early to draw any long-term conclusions, but we would not be surprised to see the commodity rally continue to fizzle. And in turn, this poses a number of additional questions.

Most notably, we cannot help but wonder whether the AUD/USD can really maintain its strength (after all, it is 32% overvalued on a PPP basis)? Looking beyond the FX markets, would any potential roll-over in commodities, be initially interpreted as a) good news for equities, or as b) a sign that risk assets are correcting? Our long-term view is that weakness in commodities would allow many corporates to have their cake (stronger growth) and eat it too (steady margins). But in the short term, equities do look a little overbought-and meanwhile, we have had some big moves in bonds! Since mid-October months US 10-year yields have moved up some +130 basis points (see p. 2), Germany +115bp, France +100bp and Singapore +80bp, the Philippines +120bp and Indonesia +170bp. Granted, OECD bonds were immensely overvalued a few months ago, as we long complained. And while we remain cautious on OECD bonds, with commodities looking toppy, it is hard not to wonder if some of the more solid emerging market bonds (e.g., Indonesia) will not start finding more of a bid.

The above expressed views are GaveKal's, not FNArena's (see our disclaimer). All copyright GaveKal.

GaveKal is a financial services firm that offers institutional investors and high net worth individuals fund management, independent research on global macro-economic trends and events, and independent advisory work on China and its impact on the global economy.

For more information, visit www.gavekal.com

article 3 months old

Shifting Between Commodities And The Rest

By Rudi Filapek-Vandyck

Commodities analysts at Credit Suisse likely captured the mood among many institutional investors and funds managers as February sees prices for risk assets climb ever so higher: resources stocks cannot outperform when commodity prices are falling. Thus far we've seen relentless rallies for commodity prices, but CS analysts are quick in their response: current prices will not prove eternally sustainable.

Hence it becomes a matter of timing?

CS analysts have left the timing issue aside and concentrated on mid-cycle value instead. What this means is they have tried to establish which companies inside the mining and metals sector in Australia still represent good value even if commodity prices will eventually move lower. The analysts have tried to put together a set of dynamics and input variables in order to create a through-the-cycle valuation assessment.

Without going too much into details, the broker's exercise has generated one absolute stand-out and that is copper producer Equinox ((EQN)). Others that still stand-out on valuation grounds are Rio Tinto ((RIO)), BHP Billiton ((BHO)), Iluka ((ILU)) and New Hope Coal ((NHC)).

Market strategists at Goldman Sachs published another update on their Conviction Buy list, with online jobs services provider Seek ((SEK)) being the latest newcomer to the list. In line with CS's comments, and with the three Weekly Insights stories I wrote this year so far, it has to be noted the balance in GS's conviction for the year ahead has gradually shifted away from metals and energy stocks, though it has to be acnowledged there's still a large connection with commodities and growth to be found.

Goldmans current Buys-with-Conviction consists of the following stocks:

- Aquarius Platinum ((AQP))
- BHP Billiton ((BHP))
- CFS Retail Property ((CFX))
- News Corp ((NWS))
- PanAust ((PNA))
- Seek
- UGL ((UGL))
- Wesfarmers ((WES))

Over at UBS, market strategists clearly have set their sights on potential outside the resources sector. UBS's list of Key Calls has been extended with Tabcorp ((TAH)) and Graincorp ((GNC)). Both names are complementing Asciano Group ((AIO)), CSL ((CSL)), JB Hi-Fi ((JBH)), Qantas Airways ((QAN)) and Rio Tinto ((RIO)).

Tabcorp seems to have been elevated because of increased M&A potential once the corporate split is in place. While Graincorp shares are labeled simply too cheap. Also, UBS analysts anticipate Graincorp's earnings per share will grow by 33.5% in 2010 and by 64.3% in 2011.

Two other names on the list might do even better with Rio projected to improve EPS by 101.7% in 2010 and by 32.9% in 2011. Qantas, on the other hand, is projected to grow EPS by 184.5% in 2010 and by 117.3% in 2011.

An interesting exercise was conducted by transport analysts at Citi. They opened coverage on the sector on Tuesday and part of the sector analysis was made up by a competitive analysis between Asciano ((AIO)) and QR National ((QRN)). To go immediately to the stockbroker's end conclusion: between now and 2020 Asciano will dwarf QRN in market share gains and consistent growth. Not difficult to see why the first one has received a maiden Buy rating while the second now carries a Sell rating from Citi.

And lastly but not least, analysts at RBS remain true to their earlier observations that paying attention to changes and shifts in local short positions data can provide investors with some timely insights. As such, RBS notes there's an increasing level of investor interest from the short side for companies including Leighton Holdings ((LEI)), Downer EDI ((DOW)), UGL, WorleyParsons ((WOR)), Transpacific Industries ((TPI)), Toll Holdings ((TOL)), Macquarie Group ((MQG)), Bank of Queensland ((BOQ)), Perpetual ((PPT)), David Jones ((DJS)), Myer ((MYR)), Harvey Norman ((HVN)), Billabong ((BBG)), WA Newspapers ((WAN)), BlueScope Steel ((BSL)), OneSteel ((OST)), Atlas Iron ((AGO)), Riversdale Mining ((RIV)), Amcor ((AMC)), Ansell (ANN)), Nufarm (NUF)) and ResMed ((RMD)).

On the flipside, shorts interest seems to be declining for stocks including Oil Search ((OSH)), Beach Energy ((BPT)), Australian Securities Exchange ((ASX)), Computershare ((CPU)), Transfield Services ((TSE)) and Equinox Minerals.

article 3 months old

Opportunities That Spring From Egypt’s Political Unrest

The Triggers for Egypt’s Political Unrest… And the Investment Opportunities That Spring From it

By Steve McDonald, Investment Analyst Host of The Oxford Club’s Market Wake-Up Call Friday, February 4, 2011

Editor’s Note: In this edition of the Investment U Weekend Update, Steve tackles… How the unrest in Egypt could turn into an investment opportunity… How the political cauldron in Egypt could affect oil prices… The Russians’ gold-buying spree… and the point at which you should buy gold on the dip… Broken index funds… The “Slap in the Face” Award

* * * * * * * * * *

Take a Long-Term Approach on Egypt

There’s no question that the unrest in Egypt is the world’s primary focus at the moment. But for investors, it could turn out to be a big opportunity. Opinions vary about how this situation will work out, but many analysts think this situation could actually have a very positive outcome for Egypt and investors.

Graham Stock, Chief Investment Strategist at Insparo, described Egypt’s call for change as very similar to what took place in Poland during the Solidarity movement. According to Stock, Egypt is the biggest player in North Africa and says its focus on liquefied natural gas (LNG) and as a pipeline player makes the current selloff a huge buying opportunity for long-term investors. Both LNG and pipelines aren’t going anywhere – and will remain profitable after this situation settles down.

Jim Licata, Chief Investment Strategist at Blue Phoenix, calls Egypt the “Jewel of the Nile” and also sees this selloff as a huge buying opportunity. Licata especially likes Apache Corp (NYSE: APA ) as an Egypt play. It has 20% to 30% of its assets in Egypt and says if the stock retreats to the US$100 range (it’s currently at US$118), it’s a buy.

Nobody is recommending a short-term trade in anything related to Egypt. This situation will take time to improve and requires a long-term outlook. Almost every analyst sees Egypt as being a better investment opportunity after the power transition is complete.

Two Triggers for the Egyptian Unrest

Edward Yardeni of Yardeni Resources stated in an interview this week that the unrest in Egypt is the result of the evolution of globalization and the wealth it’s generated. Specifically, he sees two problems… The wealth generation is concentrated in too small a percentage of the emerging world population. He says we could see Egypt’s situation replicated in parts of Asia. The recent spike in global food prices is the spark that’s driving the unrest – and is exacerbated by the fact that emerging markets are hoarding grains.

As I said last week, food is one of the biggest plays in the world right now and can only get bigger.

How Egypt’s Woes Could Affect the Oil Market

So what impact will the Egyptian situation have on the price of oil? Beyond the incredibly complex political effect it could have in the Middle East, the immediate concern for investors is the Suez Canal. Why? Because 20% of the world’s oil travels through the canal – and if that flow is compromised, we could see big price increases in crude.

Arjuna Mahendran, head of Asian investment strategy at HSBC, said this week that oil is on everyone’s mind. The good news is that there is little to no anti-Western sentiment in the protests and no threat to the flow of oil so far. However, everyone – especially the traders in the NYMEX oil pits – will be watching this situation very closely.

On a positive note, a Wall Street Journal article this week stated that gold is a better hedge against Egyptian unrest than oil. It doesn’t see much threat to the price of oil and there’s a better case for gold to run higher on the uncertainty. And let’s face it… the last thing we need right now is a major spike in energy prices.

From Russia With Gold

The Russian government announced this week that it will buy another 100 tons of gold per year to replenish its gold reserves. This comes after a 23% increase in its gold reserves last year and has some observers wondering if the recent gold selloff is a new buying opportunity. After all, 100 tons per year is nothing to sneeze at and most central banks and governments have increased their gold holdings for some time now.

Jonathan Barrat, Managing Director of Commodity Broking Services, says that commodity-driven inflation and deficits in the developed world will continue to put upward pressure on the price of metals. He sees US$1,320 per ounce as a good chance to buy gold on the dip. Cynthia Carroll, CEO of Anglo American ( AAL.L ), see worldwide demand growth for metals extending beyond 2030 and that mining is the sweet spot in the growth of both China and India.

Remember, as the value of metals increase, it increases the net worth of mining companies that have reserves in the ground. It’s what mining analysts call the “multiplier effect” of the mining industry – and is why many analysts feel that miners are a better investment than metals themselves.

The Changing Nature of Index Funds

For two decades, the S&P 500 and other index funds have been gems for investors who won’t venture into the area of stock picking. But there are big changes afoot in this huge investment area. The most popular index fund type – the S&P 500 and Russell 2000 – weight their indexes by the stocks’ market caps.

But in its latest issue, the Journal of Indexes mentioned that alternatives are available now that are outperforming the cap-weighted funds by a significant amount. One alternative is to weight companies equally and ignore their market value. Another is called minimum volatility, which favors the most stable stocks available in the index.

But the best returns have come from Risk-Efficient index funds that do the opposite, or weight an index by the most volatile stocks in that index. The results are very surprising. The high-volatility-weighted funds have far outperformed the market-value-weighted index funds. Even the stable and equal-weighted funds have fared much better than the traditional market-value-weighting.

Conclusion? Cap-weighting index funds could very well be out of touch. During the first 25 years of index investing, the S&P 500 turned a single dollar invested in 1975 to nearly US$17 by 2000, net of inflation. But over the next 10 years they lost US$0.29 per dollar invested, turning US$1 into US$0.71. That stinks!

It might be time to take a look at your choice of index funds.

The “Slap in the Face” Award

This week, it goes to Greece… again. My apologies to the cradle of civilization! Despite the fact that there’s a revolution happening on the streets of Egypt, it still costs about half as much for Egyptians to insure their debt as it does for the Greeks. That’s how bad Greece’s money situation is.

For example, it currently costs about US$835,000 to insure US$10 million dollars of Greek debt. But even with the political instability the Egyptians have at the moment, they’re only paying about US$440,000 to insure the same amount of their debt. At the World Economic Forum in Davos this week, a chairman of a major bank (he remained anonymous for obvious reasons) said the Greeks must be smoking dope if they think they’re going to pay back their debt. It looks like the Greek mess is far from over. And I’m concerned about what that says about the rest of the PIIGS.

That’s all for now. Catch you next week.

Steve McDonald

Reprinted with permission of the publisher. The above story can be read on the website www.investmentU.com. The direct link is: http://www.investmentu.com/2011/February/a-positive-outcome-for-egypt.html#more-18232

Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Views expressed are not FNArena's (see our disclaimer).

article 3 months old

Material Matters: Sugar, PGMs, Fertilisers And Gold

By Chris Shaw

In the first half of 2010 global sugar prices ranged from US13c per pound up to US34.8c per pound, with prices remaining in the firmer end of this range through the second half of last year. The market has stayed strong in the early going of 2011, Barclays Capital noting prices have re-tested 30-year highs this week.

Market fundamentals support high prices in the view of Barclays, as demand remains firm and global inventories are at low levels. As a reflection of this, Barclays anticipates the global market will be in deficit by 0.3 million tonnes in 2010/11, the third annual deficit in a row.

The tightness of the market reflects widespread supply disappointments, with Brazilian production flat in year-on-year terms and both Thai and Australian production coming under pressure. For the latter, the full impact of Cyclone Yasi is yet to be quantified but given Australia's importance as an exporter the expectation is for further upward pressure on prices shorter-term.

Elsewhere, Barclays notes Chinese production has been weak thanks to unfavourable weather conditions, Russian output has been mixed and India's position as either an importer or exporter this year has yet to become clear.

The higher prices experienced last year saw importing nations draw down stock levels significantly and Barclays sees this as continuing to support prices given the potential for a reaction to any further supply side issues.

Demand should also remain solid, with Russia expected to cut raw sugar import duties and with Chinese imports expected to continue to increase following a rise of 66% in year-on-year terms last year. 

Barclays suggests indications of a better crop from major producers such as Brazil and India will be required to ease market concerns for 2011/12, but on the flipside the group expects higher costs of production to limit the extent of any price falls.

Given such an environment, Barclays doesn't expect sugar prices to trade sustainably below US20c per pound over the year ahead.

Turning to the precious metals, Standard Bank has been expecting an improvement in global vehicle sales and it sees recent data as suggestive this pick-up is now underway. Japanese vehicle sales pushed higher in January, growing by better than 6% in month-on-month terms, while US sales rose by 12.7% and 16.3% in December and January in year-on-year terms.

As these countries are major consumers of platinum and palladium, Standard Bank suggests the latest auto sales data is a positive for sentiment towards these metals. 

While manufacturer re-stocking of platinum group metals occurred ahead of this anticipated increase in production, Standard Bank expects improving auto sales figures should keep investment interest at solid levels in coming months. To reflect this, Standard Bank is forecasting average prices of US$1,850 per ounce for platinum and US$780 per ounce for palladium in the first quarter of the year. 

Monetary policy tightening in China has the potential to impact on that country's demand for each metal over the course of the year, but Standard Bank expects this will be offset by stronger demand from the US and also European manufacturers. By the end of the year the bank expects a platinum price of US$1,950 per ounce and a palladium price of US$950 per ounce. 

Still on precious metals Citi expects with the current environment of negative interest rates, gold's reputation as a store of value should see the price of the metal supported at the US$1,400-$1,450 per ounce level through 2011.

Having said that, Citi cautions that given some signs of improving investor confidence the gold “risk trade” of the past three years could potentially dissipate. This implies risk to the gold price outlook is skewed to the downside relative to its forecasts. 

Given such a view Citi's preference in the gold sector is for a basket of smaller growth stocks, as it sees this end of the market outperforming physical gold over the course of the year. In contrast, the broker expects physical gold will outperform the larger cap plays in the sector.

From an Australian perspective Citi rates Medusa Mining ((MML)), Kingsgate Consolidated ((KCN)) and Oceana ((OGC)) as its preferred plays, the three stocks all being rated as Buys. Elsewhere among the sector Citi rates Dominion Mining ((DOM)), Newcrest ((NCM)) and St Barbara ((SBM)) as Holds. 

The FNArena database shows Sentiment Indicator readings for these gold plays of 1.0 for Medusa and Oceana, 0.2 for Kingsgate, 0.0 for Dominion, 0.8 for Newcrest and 0.3 for St Barabara.

Citi has also updated on the agricultural commodities sector, suggesting the current political unrest in North Africa and the Middle East could impact on fertiliser exports given both regions represent significant sources of supply. Together the two regions account for about 25% of globally traded DAP, (Di-ammonium Phosphate), while also dominating the market for the key inputs for DAP production.

In Citi's view, continued social unrest in both regions raises the chances of significant supply disruptions to both DAP and its component inputs. This would likely drive DAP prices substantially above the current level of US$595 per tonne, so boosting earnings for Incitec Pivot ((IPL)) as the Australian play on the sector.

Citi currently rates Incitec Pivot as a Buy, while the FNArena database shows a total of six Buys, one Neutral and one Sell recommendation. The average price target for Incitec Pivot according to the database is $4.38, which compares to a current share price of around $4.50. 

Following the lead of other brokers, Goldman Sachs has revised its commodity price forecasts predominately higher, the changes reflecting both a marking-to-market of current prices and a perceived strengthening in market fundamentals. 

In adjusting its forecasts Goldman Sachs has attempted to take into account the fact confidence in a global economic recovery has improved, as well as improvement in the physical market balances for a number of commodities.

Across the base metals, Goldman Sachs is now forecasting average annual prices in USc per pound for aluminium of 103c in 2011 and 106c in 2012, which are unchanged, and for copper of 464c for 2011 and 494c for 2012, up from 404c and 413c respectively. For nickel the broker is now forecasting average prices of 971c this year and 875c in 2012 against 825c and 813c previously, while for zinc forecasts now stand at 101c in 2011 and 99c in 2012 against previous estimates of 94c and 95c respectively.

Among the bulks, Goldman Sachs is now forecasting iron ore fines prices of US$174 per tonne for CFR China in 2011, an increase of 14%, while its 2012 forecast increases by 4% to US$145 per tonne. Prices are expected to peak at US$190 per tonne in the second quarter of this year before easing as supply and demand become better balanced.

On the back of the floods in Queensland Goldman Sachs had already made significant changes to its coal price forecasts, so the latest changes are relatively minor. For met coal the broker has lifted its prime low-vol hard coking coal forecast for the second quarter to US$300 per tonne from US$280 previously, while thermal coal prices are essentially unchanged. 

In uranium the broker continues to expect prices will peak at around US$70 per pound in the first quarter of this year, before easing to end the year in the high US$50 per pound range. Goldman Sachs has not adjusted its gold price forecast, which stand at US$1,329 per ounce this year and $1,383 per ounce in 2012, While the broker has made only minor changes to its platinum group metal (PGM) estimates.

On the back of the changes to its forecasts, Goldman Sachs has shifted its order of preference for the various commodity sectors for 2011. In order copper is now the broker's most preferred exposure, following by the platinum group metals, mineral sands, met coal, iron ore, thermal coal and then gold.

The changes to its numbers have impacted on earnings estimates and price target across the resource stocks covered by Goldman Sachs. In terms of preferred exposures, in copper the broker likes PanAust ((PNA)) and Sandfire Resources ((SFR)) as a small cap play, while Aquarius Platinum ((AQP)) remains a Conviction Buy in the PGM sector.

In mineral sands Iluka ((ILU)) remains a Buy, as is Mineral Deposits ((MDL)) among the smaller caps. Among the major miners Goldman Sachs rates both BHP Billiton ((BHP)) and Rio Tinto ((RIO)) as Buys, the former ascribed a Conviction Buy rating, while Fortescue Metals ((FMG)) and Macarthur ((MCC)) in the coal sector are similarly rated as Buys.

The less than favourable medium-term outlook for uranium prices sees Goldman Sachs rate both Energy Resources of Australia ((ERA)) and Paladin ((PDN)) as Sells at current levels. 

article 3 months old

Material Matters: Oil, Steel, Gold And Fertilisers

By Chris Shaw

Some short-term factors appear to be driving oil prices at present and given this distortion Barclays Capital has looked instead at what it sees as some key long-term themes for the market.

One of these is demand, Barclays noting demand estimates in 2010 have been consistently revised up to the point global demand growth for the year could be the strongest for the past 30 years. With non-OPEC oil demand continuing to dominate, the group suggests it is reasonable to question whether consensus long-term demand estimates are now somewhat too low.

As an example, Barclays points out current International Energy Agency (IEA) forecasts are for Chinese oil demand to reach 14.3mb/d (million barrels per day) by 2015, which would constitute a cumulative increase of only 4.95mb/d for the period 2010 to 2030. By way of comparison, demand growth in 2010 alone was 0.94mb/d.

One implication of such forecasts, according to Barclays, is that for these existing demand growth assumptions to be correct sharply higher prices would be required, as this would keep demand growth in check. The other implication is while there has been an increase in investment on the supply side, the supply-demand balance in the global oil market continues to move into a more precarious position.

To Barclays this means oil has become scarce, so implying a need to shift ever larger shares of total economic resources into oil exploration and recovery.

Over in the steel market, Macquarie notes prices have enjoyed a strong start to 2011, with prices for hot rolled coil pushing above US$800 per tonne in many regions. While increases to raw material prices have contributed, Macquarie attributes the rise primarily to margin expansion.

According to Macquarie, apparent demand growth and a lack of raw materials have combined to improve market fundamentals, as at present steel production is not enough to meet demand. This has given steelmakers some pricing power and allowed for an expansion in producer margins.

The market may well see further price gains shorter term in Macquarie's view, as key inputs such as coal and iron ore have seen price gains, in the case of the former these stemming from significant supply constrains due to the flooding in Queensland. As well, Chinese steel production has picked up and there are signs of some re-stocking in that market.

Macquarie expects that in coming weeks hot rolled coil prices outside the US, which have lagged to date, will start to play catch-up. This should drive steel prices higher shorter term, though the broker notes such periods of steel shortage tend to not be long-lasting.

By mid-year conditions are expected to have deteriorated such that steelmakers should be using high priced raw materials at the same time as steel prices themselves are undergoing something of a correction. This implies the current strong margins being enjoyed by steel producers will also head lower.

Gold has come under some pressure in recent weeks and Deutsche Bank sees scope for the price to fall below US$1,300 per ounce in coming sessions. Such a fall is likely to prove short-lived in the broker's view, as positive structural trends remain in place that could push the metal potentially as high as US$2,000 per ounce over the next two years.

From an economic perspective, Deutsche notes confidence levels in general and in the US in particular have improved of late creating an expectation tighter monetary policies are likely to become an objective. This implies deflation fears have been extinguished and inflation will then be addressed. Such a scenario implies lower investment demand for gold and so lower prices.

But Deutsche points out a counter argument is the fiscal imbalance that has become more significant over the past 25 years won't be quickly reversed. This in part reflects the view it has been accommodative monetary policy that has been a key driver of global growth and this easy policy trend will be difficult to reverse.

Commonwealth Bank takes a different view, suggesting the US dollar will in fact firm from around the middle of 2011. This trend, plus improving world growth prospects and improving returns on alternative assets, will combine to put downward pressure on gold prices through the end of this year and into 2011.

There is some evidence this view is gaining weight in the market, as Commonwealth Bank notes in recent weeks net long gold futures positions held by money managers have been reduced. The bank suggests this indicates such investors are lightening their bet on whether gold prices can continue to move higher.

Deutsche's analysis shows gold equities have weakened more than the gold price in recent weeks, so given the broker remains positive on the gold price outlook medium-term the broker also remains positive on the sector overall.

Preferred gold plays listed in Australia for Deutsche are Newcrest Mining ((NCM)) and Avoca Resources ((AVO)), both of which the broker rates as Buys. For Newcrest, Deutsche is attracted to the company's stable and diverse operational portfolio, as well as a number of growth options available to management.

The company is also enjoying falling costs per ounce and rising associated copper output and this continues to imply value at current levels in Deutsche's view. The broker has a price target on the stock of $51.50, which compares to a consensus price target according to the FNArena database of $46.68. The Sentiment Indicator for Newcrest according to the database is 0.8.

With respect to Avoca, Deutsche expects some positive news flow following the group's completion of the Anatolia merger. This includes a pre-feasibility study for the project, resource upgrades and potentially positive exploration results.

Combined, these catalysts should deliver short-term outperformance, so supporting Deutsche's Buy rating. The broker's target is $4.50, which compares to a consensus price target according to the FNArena database of $3.87. The database shows a sentiment indicator reading on Avoca of 0.3.

Credit Suisse's focus has been on the global fertiliser market, this following a better than expected December quarter report from Potash of the US. The company reported both its phosphates and nitrogen divisions performed well in the period, reflective of an improving volume and pricing outlook.

In Credit Suisse's view this positive price momentum in the fertiliser segment will continue, thanks to a combination of limited Chinese export supply through the first half of this year and rising raw material costs.

Other positives for prices according to Credit Suisse are delays at proposed projects such as Ma'aden and rising soft commodity prices in lower inventory levels in the market. This has positive implications for earnings for Incitec Pivot ((IPL)), the broker estimating for every US$10 per tonne change in urea prices there is a $4.8 million impact on group earnings in earnings before interest and tax (EBIT) terms.

DAP (Di-Ammonium Phosphate) prices have an even greater impact on earnings for Incitec Pivot, Credit Suisse estimating for every US$10 per tonne move there is an $11.5 million impact on EBIT. Credit Suisse is currently 9.7% above market consensus with its earnings forecasts for Incitec Pivot in FY11, so it expects upgrades to market estimates in coming months.

Credit Suisse rates Incitec Pivot as Outperform with a price target of $5.10, which compares to a consensus price target according to the FNArena database of $4.33. The database shows Incitec Pivot is rated as Buy six times, Hold once and Sell once.

article 3 months old

How to Play Rising Food Prices

By Steve McDonald, Investment Analyst Host of The Oxford Club’s Market Wake-Up Call Saturday, January 29, 2011

Editor’s Note: In this edition of the Investment U Weekend Update, Steve tackles… Food Inflation – and How to Cash in on it… Demand for Silver Coins Goes Crazy… Coming Soon to a Market Near You… a Rally: The Sectors Primed to Run Higher The”Slap in the Face” Award

* * * * * * * * * *

Food inflation in the United States is up around 3% over the past year – 1.5 times the rate of inflation. What’s more, Andrew Wolf of BBT Capital says a 5% jump is not out of the question and could cause real sticker shock in grocery prices. Already, dairy is up 5.5%, while fruit and vegetable prices have risen by 3.5%.

In fact, CNBC did a comparison of costs for five basic foods – meat, dairy, vegetables, bread and consumables – and found that prices have jumped by as much as 22% to 27%, depending on where you live. If you haven’t seen the big moves yet in your local market, it’s because for the most part, stores have been absorbing the costs.

What you will notice is that the size of packaged goods will be smaller, while the cost has remained the same. That’s a tricky price increase you’re not supposed to notice, but still a price increase.

How to Cash in on Food Inflation

Food commodity traders Jim Bower (of Bower Trading) and Shawn Hacket (of Hacket Trading) say there’s one food that hasn’t seen the big price increases of wheat and corn: Rice. According to both of them, it will run higher. With current rice production at 30 to 40-year lows, this will add fire to the pricing when demand picks up this year, in order to catch up to the production shortfall.

While commenting that grains were the big winners last year, Bower and Hacket also both say to look for cattle, dairy cattle, butter and milk prices to rise in 2011. Also, high grains prices will make farmland costs for planting sky-high. But they say food store stocks are not the best way to play this move. Other ways to profit form this inflation is to use exchange-traded notes (ETNs) and exchange-traded funds (ETFs) that focus on food groups like cattle and hogs, for example. Make sure you research them thoroughly before jumping in.

The Silver Coin Craze

Nicholas Colas, Convergas’ Chief Market Strategist, says the demand for silver coins has tripled in the last 18 months. Why? Because gold is too expensive for the average guy , in addition to concerns about the dollar and the euro, which are driving people to an alternative currency – silver coins. And silver coins are also a good hedge against inflation.

Colas says this is a return the days in the late 1970s when silver ran to around US$52 per ounce. Today, we essentially we have a fixed supply of silver, set against an increasing supply of money, which means the foundation is set for a large price run-up. He likes gold and real estate… if you can afford gold and can wait out the real estate market recovery.

Coming to a Market Near You Soon… a Rally!

Steve East of Height Analytics says we’re likely to see a market pullback in the next few months, but it will merely be a temporary glitch in what he calls a big run in 2011. His prediction for the S&P 500: 1,500 points – over 20% higher. That forecast is based on corporate profits running at all-time highs, with corporate earnings the only V-shaped recovery in the world.

East says the market is currently at about 80% to 83% of its full value, so there’s plenty of room to run. The market multiples have to increase. East likes energy, industrials and materials, all of which have lagged so far.

The”Slap in the Face” Award

Today’s award goes to the folks who created the sales and marketing for cell phones. Their effort is a true modern wonder. My current cellphone is about six or seven years old. Many of my younger friends laugh at it, but it works and costs me nothing. It’s fine for me. It has a camera that I’ve never used and it’s always worked, which is more than I can say for other phones I own.

But they should see the first cellphone I owned – an absolute monster (picture Gordon Gekko’s in the movie”Wall Street”) and was only six or seven years older than the phone I have now. The advances in technology have been ridiculous, but at the time, it was the cat’s meow!

My point is this: I won’t buy a so-called smartphone because as soon as I do, it will be outdated and I’ll still look foolish to younger folks. I still won’t use any more of its amazing applications than I do with this one. I hate the fact that I’m supposed to be available 24/7 on these things and texting just seems redundant. I’m not that interested in knowing what my friends are doing all the time. I don’t care.

But the job that the marketing and sales players have done to convince buyers that they must have the newest and best phones has been one of the best I’ve ever seen and my hat is off to Verizon (NYSE: VZ), Apple (Nasdaq: AAPL) and AT&T (NYSE: T). They’ve created a market out of thin air and demand that’s beyond comparison.

But I don’t want all this phone technology. I find it excessive. It reminds of what my father asked me when I installed an eight-track tape player under the dash of the car I had in college. He said;”Don’t you have a radio in that thing?” I guess nothing ever really changes.

Good investing,

Steve McDonald

Reprinted with permission of the publisher. The above story can be read on the website www.investmentU.com. The direct link is: LINK]

Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Views expressed are not FNArena's (see our disclaimer).