Tag Archives: Agriculture

article 3 months old

Material Matters: Platinum, Gold, Bulks And Base Metals

-Upside in platinum from strikes
-Gold demand hikes on Crimea
-ANZ analysts prefer base metals, energy
-Bulks prices to improve
 

By Eva Brocklehurst

Platinum has room to rally if South African labour unrest continues, ANZ analysts believe. Pre-emptive stockpiling has muted the immediate response in the spot price but the analysts think Impala Platinum's declaration of force majeure on supply contracts last week may indicate the pipelines are becoming depleted. In comparison, the price of platinum rose almost 25% between August and September in 2012 from industrial action. This year the strikes started in late January, yet six weeks on platinum is just 8% higher. The analysts suspect producers had more warning and this allowed for the stockpiling. A fundamental supply deficit this year should also provide underlying support for the metal.

Again comparing the situation with 2012, the analysts noted there was an underlying surplus that year which softened the impact of the labour unrest and production. If the strikes continue the analysts expect the price upside potential to continue, although the eventual cessation of action means an outright long position in platinum is precarious. ANZ analysts prefer to purchase platinum against gold, which is considered likely to be weak near-term as Chinese buying remains on the sidelines.

Physical demand for gold has been quite strong, National Australia Bank analysts observe, as Asian consumers respond to lower prices, even as Indian import demand is restricted. This could be a bright spot, but the analysts acknowledge the possibility of further negative shocks to emerging market currencies. Moreover, concerns over the Chinese growth outlook tend to be more significant for industrial metals than gold but as China became the largest gold importer last year, the significance is not negligible.

Countries with poor external balances have created volatility in exchange rates and helped boost demand for safe haven assets, such as gold, in late January and early February. The analysts note markets were quick to price in the concerns while the swift response of some emerging markets to stabilise their currencies alleviated some of the fears. Tensions in Ukraine have also created marked increase in demand for gold. The main concerns stem from both a call for financial aid and the possibility of energy disruptions, enhancing gold as an inflation hedge.

The upcoming election in the Crimea may help to clarify the situation and this is a geopolitical hot spot the analysts will be watching closely. Once source of volatility for gold has now subsided. The premium placed on gold from US political uncertainty has been washed out after the borrowing authority was lifted late last year. The analysts note views on the direction of gold prices have diverged notably, with one extreme expecting a solid pick up in Asian demand and a faltering US recovery to push the price higher, and the other extreme expecting additional strength in the US dollar, US interest rate and equity market rallies to push the price down until supply-side constraints are hit. NAB analysts are in the latter camp, expecting US interest rate increases will place additional pressure on the gold price. An earlier lifting of the Indian import restrictions and geopolitical and emerging market concerns represent the upside risks to forecasts.

Commodity markets have kicked off 2014 in a mixed way. ANZ analysts observe base metals and bulk commodities have been held back by slower seasonal factors and restrictive Chinese policies. Meanwhile, precious metals and energy markets reflect overly aggressive selling in 2013 or supportive seasonal factors at the start of 2014. The analysts observe the headwinds have been largely factored into the markets, which recently contended with an adjustment to US interest rates and a slowing in Chinese growth expectations. This leaves potential for upside in the rest of the year. The analysts prefer the base metals and energy markets this year, where tighter supply conditions or strong leverage to developed market growth should support prices.

Copper's inventory financing activity has clouded the outlook for that metal but the analysts, again, think this is priced in and mild upside for prices is likely in the months ahead. Oil prices are expected stay around current levels for the rest of the first quarter and into early in the next quarter. Demand from China should support crude as construction activity gets a jog along in spring. Agricultural commodity price gains are still possible in some areas, the ANZ analysts contend, as the political uncertainty in Crimea pushes additional wheat and corn sales to the US. In sugar, further downgrades to Brazil's production targets remain a risk.

ANZ analysts observe the cash-strapped Chinese steel sector has pulled back operating levels, finding it hard to raise cash. The analysts think this is temporary and prices should start to recover, although the upside will be limited. In terms of the steel inputs, the analysts have become more positive on coking coal, with prices expected to move back over US$130/t in coming months. Iron ore prices are expected to move back over US$120/t as well. Thermal coal is considered a little more difficult as a mild winter has left Chinese stocks at higher than normal levels. Supply will be the main price determinant, according to the analysts, with the level of Chinese coal output the key to supply.

National Australia Bank analysts expect bulk commodities should improve in the short term, as steel inputs benefit from the resumption of production after the northern winter. Base metal complex outcomes are varied, with supply side factors helping nickel and zinc outperform in recent months. The NAB analysts also note slowing Chinese growth has weighed on commodities generally, as capital flows have reversed towards the developed economies which have sustained an improved outlook. Still, the analysts warn that the first months of Chinese data are notoriously unreliable for gauging trends because of the effects of Chinese New Year celebrations. The next couple of months should provide better indicators.

On the supply side, bulks production and some metals are expected to outpace the improvement in demand, even as the global economy recovers, given there are signs of a plateau emerging in Chinese demand, which has been largely responsible for the series of commodity super cycles in the last two decades. The NAB analysts also believe the record pace of crude and natural gas production in North America should ensure comfortable supplies, which will cap the upward potential in prices.
 

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article 3 months old

Added Potential Of Sandalwood Piques Interest In TFS

-Robust sandalwood demand
-Potential new pharma channel
 

By Eva Brocklehurst

Sandalwood has a distinctive and exotic fragrance. Its oil is a key ingredient in the perfume industry but there's another value that may become significant. The main player in Indian sandalwood plantations in Australia is TFS Corp ((TFC)), a Western Australian company which owns 2,400 hectares in Australia's tropical north. TFS owns the distiller of sandalwood oil, Mt Romance.

Moelis is quite positive about the stock, expecting more than $2 billion in earnings over the next 15 years. Moelis has a Buy rating an $1.40 target price. Harvest proceeds may only start making a material contribution in FY17 but the broker is excited that, within a decade, earnings from the company's plantations could exceed the current market capitalisation.

Where the added value may com from is in medical treatments. Viroxis, a US pharmaceutical developer, has announced a positive development in using sandalwood oil to treat warts. The phase 2 clinical study used East Indian Sandalwood Oil, to be precise, for the treatment of skin warts. Viroxis plans to meet with the US Federal Drug Administration (FDA) to obtain approval for Phase 3 trials for a prescription HPV/wart treatment. In the US, the prevalence of HPV/common warts is thought to be as high as 10% in certain populations.
 
The company, based on FDA feedback, will also initiate a new placebo controlled, phase 2 clinical study for the treatment of Molluscum contigiosum (MCV). MCV is a prevalent, highly contagious viral infection of the skin, mainly affecting children. There are currently no approved prescription treatments for MCV. Informal studies conducted by Viroxis indicated that EISO was very well tolerated. The possible anti-viral capability of EISO has potential for a variety of treatments. Viroxis sees a potential US$2.8bn in skin warts treatment in the US alone.

Moelis expects TFS to become the sole global provider of sustainable EISO over the coming year. Demand from the fragrance, carving and religious market for both the wood and oil remains robust and, at the very least, the pharmaceutical channel will support pricing. Furthermore, Moelis thinks that sector is will to "pay up" to guarantee supply of a key active ingredient. The company's first commercial harvest is to recommence in May and the broker expects insights into the sales data to be provided at the November AGM or by the first half result in February 2015.

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article 3 months old

Select Harvests In A Sweet Spot

-Global almond supply falls short
-Orchards maturing at key time
 

By Eva Brocklehurst

Almond producer, Select Harvests ((SHV)), is in a sweet spot. The company's share price has rallied over 40% since November but, rather than considering an opportunity was missed, one broker believes there's more to come. Moelis is upbeat regarding the near-term potential for Select Harvests in an industry where global supply is falling way short of demand.

The harvest from the company's 11,560 acres of almond-bearing orchards next month is expected to match 2012's bumper crop, and prices are higher. Moelis expects prices might be up 10-15% at $6.60/kg, compared with the $5.03 received for the 2012 almond crop.

A key consideration for Moelis, and reflecting the potential over the next couple of harvests, is that 2014 and 2015 harvests will mark the point where a large percentage of the almond trees move into the optimal phase in the growth cycle. The broker envisages this will allow the company a high degree of flexibility in terms of replanting and sustainability. Couple that with the fact that international demand is growing at 8% per annum and supply at 4% per annum and the attraction starts to become evident. Select Harvest is in a strong international position to capitalise on the woes of a prolonged drought in California, where 83% of global almond supply is sourced.

The other positive consideration for the broker is that the company has put in place a comprehensive risk mitigation program over the past couple of years. This includes bee pollination agreements, frost fans on farms and key, long-term access to water. Add this to a vertically integrated business model and Moelis anticipates healthy profits to come. Management is also seeking new growth opportunities, including added processing volume and orchard acquisitions. Last November Select Harvests acquired 2,430 acres, including 680 acres of mature orchards.

Moelis maintains a Buy rating and $7.00 price target. Despite the rally in the share price recently the broker is confident there's more on the horizon, based on the fundamentals and an undemanding valuation. The company has increased its acreage across Victoria, NSW and South Australia and now has a 15% share of the Australian market. The broker's estimates reflect this sweet spot with earnings per share forecast to rise from 40.1c in 2013 to 53.8c in 2014 and peak at 55.2c in 2015, before reducing to 48c in 2016.
 

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Material Matters: Agriculture, Gold, Copper, Zinc And Thermal Coal

-Oz grain to outperform
-Gold rally needs inflation kick
-Copper drawdown key to balance
-Zinc surplus to stay a while
-Thermal coal rally unlikely
 

By Eva Brocklehurst

There's some relief on the way for local agricultural commodities from the weaker Australian dollar but supply will continue to rule the roost. Commonwealth Bank analysts observe the market traded defensively in 2013, pressured by an increase in supply. This should remain the case in 2014, particularly for grain and oilseeds. Longer-term, the analysts suspect waning demand in the biofuel market - from probable legislative changes - will constrain prices. Also, changes to China's agricultural policies, including a shift from domestic price support to direct production subsidies, could add pressure.

CBA analysts expect grain prices to stay high relative to long-run averages. Australian grain prices should outperform international benchmarks this year because of tight supply, although local prices are expected to be under some pressure as, and when, new supply comes on board. Beef is expected to be a better performer in the year ahead, contingent on a return to favourable conditions. Australian cattle prices have dropped, reflecting drought-induced de-stocking, despite US cattle prices rising to record highs. Re-stocking will emerge if widespread rains are received this year. If that occurs the analysts expect that, combined with strong international markets, the Eastern Young Cattle Indicator could bounce back to $4.20/kg by the end of 2014 from the current drought-induced level of $2.92/kg.

Gold endured a tumultuous year in 2013 but Macquarie doesn't think the price has yet found a low. The analysts tip the gold price to fall to new post-2010 lows in the first half of 2014, as investors continue to liquidate holdings and supply/demand fundamentals remain weak. Now that bad news is out of the way, an Indian-led recovery is expected in the second half. There's been a modest rebound this month, which the analysts attribute to short covering, index re-balancing and seasonal demand from China. Still, the base case trends - tapering of QE, improving global economy and low inflation - are intact and factored in. Hence, the analysts believe the risk now lies with any disruption to this benign scenario. Macquarie expects mine supply will be only slightly below 2013, with new projects sufficient to offset reduced supply from older mines. Also, producer hedging, while likely to rise in this period of low gold prices, is not expected to have a significant impact.

So it's up to India to provoke any rally in gold, it seems. Macquarie notes the country's call on the global market was dramatically reduced by government intervention last year. The analysts believe the government policies will, in the end, be unworkable and controls will be relaxed at some point this year. Gold imports should pick up when this happens. The analysts believe a more substantial recovery requires fresh investor demand, or a sign that the global inflation genie is stirring. One notable aspect, according to Macquarie, is that China surprised the market last year by the extent of gold demand. The analysts assume this will continue in a theatre of low prices and growing incomes.

Two questions JP Morgan is asking in respect of the copper balance is how quickly concentrate stocks will be drawn down and whether mine supply disruptions will be lower than in recent years. Mine supply growth was driven by a rise in output in the second half of 2013 and global realised mine disruption of 2.3% was well down on expectations for 5.0% at the start of the year. This is a big change from recent years, when mine production tended to be over-estimated. JP Morgan expects strong production growth, primarily driven by high grading at major mines, will not persist.

Hence, the question regarding how quickly stocks are consumed. There's been a notable increase in concentrate stocks, particularly in China. JP Morgan expects a gradual drawdown as smelting outpaces production growth in concentrate. Outside of China, the analysts note stock accumulation occurred in Chile as a result of technical issues at key smelters and many of these issues are still to be dealt with. The analysts also expect exports of copper concentrate should continue from Indonesia. All up, for the present, the analysts expect cathode markets and LME copper spreads to stay tight in the first half of this year.

In zinc, the analysts conclude that aggregate mine production growth will be higher in the next two years than the prior three years combined. Zinc concentrate markets are expected to tighten from the second half of 2015 but JP Morgan does not expect any major refined market deficits until 2016.

On the subject of thermal coal, Goldman Sachs suspects productivity gains could be a mixed blessing for producers. The industry is now expected to focus on efficiencies instead of rushing supply to market, as demand growth slows and margins come under pressure. Higher volumes and lower costs at a company level imply an industry-wide downward shift in the cost curve. India and other emerging markets, while supporting seaborne demand, are not expected to match the scale seen in China in the period 2008-12. Environmental legislation will also increasingly take a toll. Global carbon prices are too low to affect consumption in the near term but the analysts expect they will drive future investment to other types of power generation.

Goldman analysts believe an end to improving productivity in China and a rise in input cost inflation is needed for seaborne coal prices to rally once more. Either that, or a faster appreciation of the Chinese currency. These scenarios while possible are considered unlikely. On the downside, falling commodity currencies and rising productivity is likely to drag the cost curve down and demand from emerging markets will suffer as a period of cheap capital comes to an end. This could put high cost producers under considerable pressure and Goldman analysts believe those in that camp in the US, Russia and Indonesia would respond with production costs.

Current prices should be sufficient to keep the market well supplied and meet modest growth and Goldman expects prices around US$83-86/t for 2014-16. India is considered the biggest wild card. There is significant latent requirement for electricity and domestic coal producers are unable to maintain enough supply, so coal must come from more expensive imports. Still, economic growth is slowing in India and the weaker rupee will affect demand for imports priced in US dollars.
 

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article 3 months old

Does Potash Have A Future At BHP?

- Global potash oligopoly smashed
- BHP's Jansen project now in question
- Brokers see a reduced commitment
- Subsequent cashflow lift a positive


By Greg Peel

For many years BHP Billiton ((BHP)) sold iron ore to China based on a one-year contract price, and for many years BHP tried to shift away from contract pricing towards spot pricing, but this was never going to happen unless Rio Tinto ((RIO)) joined in the push. A change in CEO at Rio finally brought the company on-side, and today while a quarterly contract price system still exists, more and more Australian iron ore is being sold to China at spot.

A few years ago BHP took an unusual detour as part of its then mega-project expansion spree by moving into Canadian potash. How does one reconcile fertiliser alongside iron ore, coal, copper and oil? The connection is that potash is mined, just like any mineral, and in potash, then CEO Marius Kloppers saw a diversification opportunity.

The global economic downturn and subsequent fall in commodity prices has since seen BHP, Rio and international peers rapidly backpedalling on significant capex and offloading non-core assets. BHP decided to stick to a collection of tier one assets, one of which is Canadian potash. The company failed in an attempt to takeover Canada’s Potash Corp, settling instead on spending big on its Jansen project, adjacent to Potash’s major operations.

Shareholders have never really been convinced.

The global potash industry has been dominated to date by two cartels representing 70% of trade. They are the Belarussian Potash Company (BPC), made up of Russia’s Uralkali and Belarus’ Belaruskali, and Canpotex, made up of Canadian companies Potash Corp, Mosaic and Agrium. Despite being two separate organisations, the two have operated as a form of uneasy oligopoly in the style of OPEC. But as always been the case with OPEC, cartel members have sometimes broken from their production and price agreements.

Having tasted success in breaking down the longstanding iron ore contract system, it was always BHP’s intention to elbow its way into the global potash market and break the cartels, forcing the industry into a spot pricing framework. It was a given that such a strategy would lead to a lower potash price, but it would also allow BHP the chance to sell more product and thus increase cashflow from its Jansen operation.

Be careful what you wish for.

In December last year the Belarussian president stepped into the fray and cancelled the exclusive rights of BPC to sell Belarussian potash. China has recently invested US$12bn in Laos potash production. China is a major customer of the cartel, but this latest investment means China could be 60% potash self-sufficient by 2017, UBS notes. UBS also notes Potash Corp recently decided to renege on a promise to its Canpotex partners that it would manage volumes to provide price support for all.

All of this leads us to Uralkali's decision on Tuesday to leave the BPC and go it alone. Uralkali has apparently agreed, notes JP Morgan, to sell potash to China at US$350-360/t. The previous cartel price to China was US$400/t but China’s domestic production traded at US$350-360/t. Clearly as China shifts towards greater self-sufficiency a 400 price is unsustainable.

So now it’s game on. Uralkali has shattered the BPC cartel and if the Canpotex cartel wasn’t already shattered by Potash Corp, it probably is post Uralkali’s move. The global potash industry has played right into BHP’s hands, as pricing will now move to spot without any “elbowing” required. Uralkali has signalled it is prepared sell product as low as US$300/t.

So it’s good news, isn’t it? Maybe not.

In 2011, BHP committed a further US$488m investment in Jansen, taking its commitment to US$1.2bn. Add in further neighbouring Saskatchewan acquisitions and the company is now into potash for US$2bn, UBS notes. All committed funds have now been spent, and BHP was due to make a decision this month about committing further funds. The problem would be convincing sceptical shareholders, who have watched Marius Kloppers’ mega-plans subsequently written down in value (including a big blunder in US shale) and the same happening over at Rio. In a low commodity price world, shareholders want to see cashflow out of BHP’s remaining tier one assets, and subsequent distributions, not more quixotic capex investments and lack of share price appreciation.

No doubt BHP envisaged a slightly slower transition to global spot pricing for potash, not a sudden 25% price slash, as appears to now be the case. Uralkali has effectively started a potash price war, and intends to pump its production into overdrive. Citi believes the war could last 12 to 18 months, and such disruption tends not to be very beneficial to fellow producers in the interim.

Citi suggests Uralkali’s move is a “game-changer” for Jansen. The broker’s valuation for Jansen within the BHP portfolio assumed US$16bn capex in total to reach full expansion at 8mtpa, a long term potash price of US$500/t and a subsequent net present value of US$7.2bn. At US$300/t, this NPV becomes minus US$2.2bn. Citi is now assuming BHP will not move forward with Jansen.

Citi also believes this would be positive for the stock.

UBS believes BHP may reduce its Jansen capex, rather than shelve it altogether. A lower commitment, combined with reduced capex on US onshore oil & gas, could reduce the company’s net FY14 capex guidance by US$18bn thus, as the broker suggests, “increasing the perception of increased returns”.

Macquarie notes that if Jansen were to run at capacity it would represent around 15% of global production, and the same pricing outcome now triggered by Uralkali would have been reached anyway. On that basis, Macquarie suspects management was already assuming a sub-400 price in assessing Jansen’s economics. It will be hard to convince shareholders, but Macquarie thinks BHP will continue to drip-feed capex into Jansen to keep the option open. In light of this immediate potash price adjustment, the broker has removed expectation of full-scale capex and subsequent forecast cashflows. The reduction in net asset value equates to 97c, but the flipside is that the reduction in capex thus lifts the company’s net fee cashflow by US$3.7bn, implying a 5.3% free cashflow yield in FY14 and 6.8% in FY15.

The bottom line is that no FNArena database broker has yet changed its BHP rating or target as a result of the potash bombshell.

With respect to Incitec Pivot ((IPL)), which was yesterday sold down by association as a fertiliser producer, Deutsche Bank suggests there are few direct implications. Incitec produces diammonium phosphate (DAP), not potash, and that market is more fragmented and less cartel-controlled. Margins are also much lower, and the broker was already forecasting lower DAP prices as it was. The only risk, says Deutsche, is that much lower potash prices encourage fertiliser consumers to switch their preferences.
 

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article 3 months old

Material Matters: Metal Prices, Palladium, Zinc And Wheat

-UBS likes platinum, uranium, alumina
-Vehicle increase supports palladium
-Zinc market surplus prevails
-A record year for wheat exports to Indonesia?
 

By Eva Brocklehurst

As we embark on the September quarter, UBS reminds us it is a particularly weak trading period for commodity markets. It features de-stocking of supply chains and widespread production cuts. This is being exaggerated this time by a staged withdrawal of fiscal and monetary support in China and [possibly] the US. Demand has held up in key markets such as iron ore, coal and copper but these are overwhelmed by even stronger supply growth. Almost all commodity markets have therefore witnessed price falls this year with the greatest being in those exposed to speculators - the metals markets.

So where are the preferred commodities? UBS favours the platinum metals (PGM), uranium and alumina. Platinum and palladium are preferred on a short and medium term basis. Supply issues in South Africa, coupled with stable demand in China and the US make it a tight trade and at odds with the macro weakness. Uranium's spot price is close to the marginal cost of production and now carries upside risk, given the gradual re-start of Japan's nuclear power generating capacity. Alumina is a potential beneficiary of an imminent ban on Indonesia's unprocessed mineral exports which will force China to lift alumina imports.

Metallurgical coal should get some price support heading into the fourth quarter after being hit hard in the second quarter, while buoyant iron ore prices are increasingly exposed to a correction on seasonal weaknesss in the steel sector and an Australian-led supply surge. Meanwhile, longer-dated and deep downgrades have been incurred in nickel and metallurgical coal prices and recent cuts have been made to gold and silver price forecasts. What matters at present for UBS are the low cost assets of the diversifieds. Line up BHP Billiton ((BHP)) and Rio Tinto ((RIO)) as well as Glencore. Among niche metals the broker likes Paladin Energy ((PDN)) and Alumina ((AWC)).

The platinum group also features in Macquarie's current thinking. More cars than ever before were sold in the first half of 2013, the latest data shows. This is supportive of PGM demand, especially palladium, as well as many other commodities, such as aluminium and steel. But the year-on-year growth rate has been relatively modest, as strong US and Chinese sales were offset by weakness in many other key markets, especially Europe. China continues to be both the largest and fastest growing market, with 8.7m units sold. China remains almost entirely a gasoline engine market so it's an important source of palladium demand.

Further support for PGMs should come from tightening emissions legislation. Beijing imposed stricter standards, equivalent to Euro 5 standards, on cars earlier this year. Meanwhile the US has performed more strongly, with light vehicle sales up 7% in the first half of the year. Monthly sales are at their highest since before the 2007-2009 recession, which Macquarie notes defies some predictions that these levels would never be seen again. This is positive for palladium, which has now almost entirely displaced platinum from US gasoline vehicles. The two technologies that would radically change this picture such as diesel vehicles, which use much more platinum, and electric vehicles, which use no PGM, pose no immediate threat.

ANZ Bank analysts look ahead to some emerging signs of a bottoming to prices. That doesn't mean they're set to rally. The analysts believe upside will be short-lived. Blurring the picture is the passing of a peak in seasonal demand and lack of clarity over China's near-term growth outlook. In addition, the perception and eventual withdrawal of US dollar liquidity from global financial markets will likely generate some uncertainty for commodity markets. The analysts have downgraded commodity price forecasts by an average 4.5% in 2013 and 5.5% in 2014, adjusting for weaker Chinese demand and, in some areas, inelastic supply response.

Selling by investment funds has also prompted a lower short-term price outlook, particularly for the precious metals. The biggest downgrades in the analysts' forecasts have been for precious metals, down an average 8% over 2013/14. In most cases, prices are expected to decline further in the coming quarter, before recovering later in the year. Other big downgrades to forecasts are in coal and nickel, down an average 7% over the next two years.

While the debate about China's reported zinc mine output continues, another year of increases in the official statistics must add to worries over the outlook from a fundamental perspective, in Macquarie's opinion. More mine output means more metal production. If mine output is rising more rapidly than demand for zinc, it's a surplus market, since there is no shortage of smelting capacity. Macquarie expects that zinc concentrate prices as well as the miners' price share could fall further as a result of surpluses.

Zinc smelter inventories are reported to be rising as production has increased but deliveries have dropped, in part due to customer worries over falling prices. It appears that China can fulfill its demand for zinc concentrates entirely from domestic sources.There will probably still be a certain volume of imports into China under long term contracts, encouraged in some cases by more flexible payment terms. Secondly, some traders will probably continue to import concentrates on a speculative basis at the right price. Nevertheless, Macquarie warns investors should not lose sight of the likelihood that increased mine output in China will contribute to a resilient market surplus.

The CIMB Australian Junior Coal Index continued its downward trend in June, shedding 7%. It's not getting easier. India's move to allow utilities to pass on higher costs associated with using more imported thermal coal has the ability to open up imports but the monsoon season should keep this subdued for the moment. Supply could then tighten up in the next six months and push the prices higher.

The coking (met) coal market continues to struggle in the face of weak steel markets, with spot prices now below US$150/t FOB for premium hard coking coal. This has flowed into the quarterly contracts, with third quarter contracts settled at US$145/t. This price is a reduction of US$27/t from the second quarter price of US$172/t and is the lowest settlement since the quarterly price system was introduced in April 2010. With prices now cutting into the industry cost curve, there will be increasing pressure on producers to cut production. To that end, CIMB observes some signs this is starting to happen.

ANZ analysts are talking about wheat imports to Indonesia, the world's second ranked importer by volume. These are set to accelerate sharply. The analysts forecast Indonesian wheat imports to jump 15% year on year, implying volume growth of around one million tonnes over the next 12 months. For Australia, this should mean another record year for wheat exports to Indonesia, hitting 5mt per annum for the first time. Factors driving this growth include: a widening disparity between the price of rice and wheat, curbing of flour imports, high food (non-cereal) CPI and fuel inflation and new Indonesian flour milling capacity.


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article 3 months old

Why Won’t Commodities Rise?

- Commodities have surprised to the downside in early 2013
- Q2 should see higher prices, but no fireworks should be expected
- Supply levels still too high (for the most part)
- Europe represents major downside risk

By Andrew Nelson

It’s been a funny year so far for commodities, which as a group are continuing to struggle to post any sort of sustained price gains.

Commodity analysts at  Danske Bank note that, even before this week's sell-off across the spectrum, energy, metals and grains prices were lower than they were at the start of 2013, begging the question: when will commodities begin to perform?

Danske sees three main reasons for this underperformance and while the pressure is expected to ease starting over this quarter, the bank doesn’t expect to see commodities catching up with equities any time over the course of the current half year.

Firstly, the slow improvement in China has not been very commodities intensive. There was also quite a bit of hope pinned on an increase in buying once the Chinese Lunar New Year holidays were in the rear view mirror, but it never happened.

At the same time, while US growth may have shifted into a higher gear, a soft patch is coming (or may even be here) given the heavy federal budget cuts that have been brought into play by this sequester nonsense. As a result, commodities have not seen the positive demand backdrop that is needed to lift prices higher.

Next on the list is everyone’s favourite topic, Europe. First we had Italy and its inability to choose a government, be it pro-bailout or anti. Then the Cyprus crisis followed right on Italy’s heels. Suffice it to say confidence in a European recovery remains at fairly low levels. Tied directly to this is speculation as to when the Fed will pull the plug on current easing.

These issues not only bring about the investor’s worst enemy, uncertainty, it has also caused a steady decline in the EUR/USD. This in turn has weighed on commodities from a denomination perspective, which is compounding the whole uncertainty/risk theme.

Danske does note an interesting phenomenon that all this has brought about. Speculators have moved though crude, copper, gold and corn of late, and they are cutting a wide swath. The good news here is that Danske sees this setting the stage, with not much now in the way of bullish news needed for prices to start recovering.

Lastly, there’s the biggest enemy of commodity prices, too much supply. Like in oil, where OPEC prices keep nudging higher despite the supply being added by US shale production. The Saudis have cut production, but they’re not the only guys out there with oil and everyone else is churning it out. OPEC supply is still running above 30mb/d.

Copper production has continued to lift on the wide held belief the Chinese would accelerate imports. But it hasn’t. LME stocks have surged to post-crisis highs and future supply prospects are way too promising. Nearer-term, the International Copper Study group now expects the copper market to move into surplus this year. It remains debatable whether this remains the case following Rio Tinto's ((RIO)) production disruption in the US.

The bank has moved across its forecast universe and pretty much trimmed forecasts across the board. That said, Danske still expects to see a lift in commodity markets through the current quarter, as the underlying cyclical outlook continues to improve. Europe will be the key to this. If the ECB goes for a rate cut, or if Italy remains without a government, or even worse, if the debt crisis resurfaces, then say goodbye to you near term commodity hopes, says Danske.

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article 3 months old

Time To Cotton On

By Jonathan Barratt

Cotton has had a really turbulent time over of the last 24 months and so have the producers who at some stage have been producing the commodity at a loss. Cotton has had a high of US219 (March 2011) and low of US69.10 (June2012) and more recently hit US69.50 in November. The market over the last week has bounced off significant support at US69.50 and with it now trading at US81.00 we feel that a low of importance has been made, or rather the range of US219 to US66.50 has been confirmed. For those that have been reading the Bulletin for a while we have been long cotton (Ticker LCTO) and with the trade close to being breakeven it is worthwhile revisiting the market and new developments. On the trade our timing was off, however the choice of product was correct, as we have been able to hold on. In this Bulletin we will refocus on the fundamental and technical side to the market, which will hopefully confirm our feeling that a low is in place and it is ripe for the “picking”.

The cotton market, like most commodities, is subject to the rigors of supply and demand. The main producers (in 000’s metric tons) are China 6 641, India 5,530 and US at 3,942. When it comes to consumption China is the largest at 10,015, then India at 4,355 and Pakistan at 2,323.  As you can see, China has a deficit of 3,374, which comes from either the US, India, Australia, Uzbekistan or Brazil. The US is the largest exporter at 3,135.  Apart from who is buying or selling cotton the market also has to deal with the fact the China controls 46% of the world ending stocks, or so we are lead to believe, and so it has been difficult to get accurate reports on what they actually hold and how this overhang will affect the market. This has partly been one of the reasons as to why the market has dropped. This move we feel is over and we expect prices to be well supported on any dip or at least to US 70.00 and will look for a further 20% gain on top of the gains we have already seen this year Why?

The 2012 crop year was terrible for cotton: not only did the price fundamentally look sick, we saw that global inventories were expected to grow to record levels. It made sense as with prices around US 200 farmers flocked to cotton production. The result was that more and more acreage went to cotton. This in it self-does not provide a good incentive for cotton trading higher for 2013, however for exactly the same reasons as it went down we feel it will go up. This year we see supply being down and demand up, which is a recipe for a strong market.

Firstly, the overall low prices have actually made it a very marginal crop to produce, at US70.00 a pound we are at around the marginal cost of production. Any downgrades at harvest would put the grower at a loss. This means that there is a likelihood that the growers will turn to other more lucrative crops such as soybeans. Further, it is anticipated that the new crop as a result of the low prices will see acreage under cotton drop by about 30% in Australia and Brazil, the world's number 3 and 5 exporters. Fewer exports onto the global market will put a low in place. As it stands we anticipate that we may fall short on production for the first time in four years. In addition to this we have not looked at expectations that the weather will play on the market. The US drought is continuing and if this persists, which our forecasts are telling us, then we will see crop abandonments in the US at a lot higher rate than forecast. We just cannot turn a blind eye to the weather as it so volatile these days. So supply is looking dodgy.

Secondly, on the demand side, world inventories as we are aware are already high, however as we mentioned before China is about to embark on an expansion phase. Although it is the largest producer it is also the largest consumer. Any uptake in consumption from China will not only reduce their current stockpiles but also apply additional pressure on those regions that supply China with cotton. The concern is that these regions will not be producing as much, ie Australia and Brazil. If the US follows suit whilst demand from China is strong then prices will rise. Let's face it, we are all looking for an economic recovery this year so expect demand to remain strong.

So the fundamental picture for cotton looks good at these levels. What does the technical side look like?

Technically the market is in a range US200 to the top and US65.00 on the downside. As we can see there is more potential for the upside from these levels. This is one reason we like trading commodities, as support and resistance are at extreme and can be relied on. So when we see a solid bounce we can be pretty comfortable that a change of trend is on the cards. Momentum indicators on the weekly basis have turned, dailies look a little overbought so look for a dip to buy. Stops can go in at US65.00 or US75.00. Our first target is US100.
 

 
Edited by Jonathan Barratt, Barratt's Bulletin is a weekly subscription newsletter that provides expert analysis of commodity markets, global indices and foreign exchange movements. Click here to take a no obligation 21-day trial to Barratt's or to learn more visit www.barrattsbulletin.com. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).

This report is not, and should not be construed as, an offer to buy or sell, or as a solicitation of an offer to buy or sell, products, securities or investments. This report does not, and should not be construed as acting to, sponsor, advocate, endorse or promote products or any other products, securities or investments. This report does not purport to make any recommendations or provide any investment or other advice with respect to the purchase, sale or other disposition of products, securities or investments, including, without limitation, any advice to the effect that any related transaction is appropriate for any investment objective or financial situation of a prospective investor. A decision to invest in securities or investments should not be made in reliance on any of the statements in this report. Before making any investment decision, prospective investors should seek advice from their financial advisers, take into account their individual financial needs and circumstances and carefully consider the risks associated with such investment decision.


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article 3 months old

Material Matters: Iron Ore, Coal, Copper, Aluminium and Sugar

-Bulk prices converging on support
-Iron ore price vulnerable on downside
-Copper price risk skewed to upside
-Aluminium price to edge up
-Sugar tussle between India and China

By Eva Brocklehurst

Bulk commodity prices are converging on cost support after a wild run in 2012, observes Goldman Sachs. Iron ore prices are expected to remain strong with China's current restocking having further to run. Seaborne iron ore is now slightly above the broker's 2013 forecast of US$144/tonne and is considered fairly priced. The broker assesses cost support for iron ore at US$140/t, with metallurgical coal at US$180/t and thermal coal at US$90//t. Cyclone Oswald, which brought flooding to Australia's eastern seaboard, is expected to only have modest impact on export volumes. Probably around one million tonnes. Goldman expects the metallurgical market will become more balanced this year as marginal producers gradually exit. The forecast for second half metallurgical prices is US$185/t.

ANZ sees iron ore prices vulnerable to downward pressure heading into Chinese New Year. ANZ analysts expect the Queensland floods could convince traders to short iron ore, to offset margin loss by steel mills from a spike in coking coal prices. ANZ thinks prices should trend down to US$140/t by the end of this quarter. The analysts note the sharp drop in Baltic Capesize freight rates in December, which flags a substantial drop in Chinese iron ore imports in January after record highs in December. Supporting prices, ANZ notes iron ore port stocks continue to fall but the analysts warn that a tighter supply backdrop is not necessarily indicative of better prices. ANZ thinks spot will ultimately be range bound between US$130 and US$150 per tonne for 2013, which doesn't seem too different from the price forecast at Goldman Sachs.

In terms of the floods, CBA thinks the key to coal production is the closure of the Blackwater-Moura line. Mines that use these lines contribute 22% of world PCI coal exports, 10% to semi-soft seaborne supply and 9% to global seaborne premium coking coal markets. Assuming a 2-week delay to production and shipment, CBA estimates 3.5mt of exported coal, both thermal and coking, will be impacted. However, this is still a much smaller supply cut than during the 2011 floods. A spot price rally may be the result, but CBA analysts suspect it will not be extensive, given Chinese buyers are likely to reduce interest ahead of their break (Feb 9-15).

In copper, UBS sees the market close to balance. The analysts note the price is vulnerable to small trading shifts with just a 200,000 tonne variation in the supply-demand outlook delivering up to US$1,000/t shift in the average annual price for 2013-14. The analysts have modeled several scenarios. For upside, this includes labour disputes and project delays resulting in a balanced market in 2013 and small surplus in 2014. This would deliver prices of US$8,500/t and US$7,000/t respectively. The downside scenario involves faster ramp-up and release of China's inventories. This would result in US$7,000/t for 2013 and US$5,500/t for 2014. The analysts find risks to the forecasts are skewed to the upside, mainly because the risk of supply disruption is greater than a positive surprise on the production side. If copper's price holds above the analysts' forecasts then those equities most exposed in Australia include Oz Minerals ((OZL)) and Sandfire Resources ((SFR)).

On the aluminium front, JP Morgan expects modest increases in cash prices over the next two years. This is despite projecting global surpluses in 2013 and 2014. This conundrum reflects the accumulation of inventory in Asia, leaving physical metal more scarce in other regions. Moreover, the analysts do not see the large scale culling of output in emerging markets that OECD producers hoped for. They project that China will add another 2.2 million metric tonnes in output this year, with production gains in India and the Middle East as well. The current forecasts for LME aluminium cash prices are US$2,213 per metric tonne on average in 2013 and US$2,363/mt in 2014. These are 10-15% above the current forward curve and this suggests to JP Morgan that consumers should layer in hedges, ahead of a recovery in manufacturing demand.

For sugar, the prospect of an even larger crop as Brazil's harvest finishes strongly continues to ease supply concerns, notes ANZ. Therefore, the analysts maintain that the dynamics in Asia hold the key to sugar prices this year. China and India rank in the top three for global consumption and production of sugar. Record imports in 2012 helped rebuild stocks in China and there are expectations of a sharp decline in imports over the next 12 months. However, ANZ analysts say the market may be in for a surprise here if it overestimates the pull back in China's imports. China may still be a major buyer. The analysts view is that India will be nearly self sufficient in sugar by mid 2013. So, for the first time since September 2010, it will not be a significant exporter. In summary, a return to a neutral position in India in the sugar trade will be critical to counteracting higher export availability stemming from weaker Chinese demand.

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article 3 months old

Sell Gold, Buy Timber

by Carl Delfeld, Investment U Senior Analyst
Thursday, January 10, 2013: Issue #1945

No question, gold has had a nice run.

It’s been up 12 consecutive years. And during this period, gold prices are up around 500%. This is probably why in 2012, 84% of new cash invested in commodities went into gold funds.

But these investors would have done far better if they had invested in another commodity that we use every day. One that beat gold by 567% in 2012.

While gold was up 6.6% last year… Timber was up 37.4%. And timber future prices were up 49%.

I’m not surprised.

I grew up around a lot of trees and vividly remember our annual family camping trips in the northern woods of Wisconsin. It seemed like millions of towering trees – some more than 200 feet tall – closed in on us from all sides, for miles on end.

But by a long shot, the best part of these trips were the pancake breakfast specials and all the stories about the lumberjacks and timber barons.

Fortunately, the cut and burn practices of the nineteenth century lumberjacks and timber barons have been replaced by a sophisticated, sustainable and scientific business model.

And this is why timber has proven to be a terrific investment over the years. Looking ahead, Jeremy Grantham’s GMO research team ranks timber the No. 1 asset class for expected returns over the next seven years.

Let’s look at the long-term record of timber – and why it is surging right now.
The Price of Lumber Outperforms the S&P 500

The price of lumber during the past century has gone up an average of 5% annually, outperforming the S&P 500, with the added bonus of lower volatility.

Since 1987, the Timberland Index is up nearly 15% per year. That’s against an annualized 9.6% return for the S&P 500. Timber also holds up well in bear markets and tough economic conditions. When stocks plummeted during the Great Depression, timber gained 233%. And in 2008, when the S&P 500 lost 38%, the Timberland Index gained 9.5%.

What’s driving timber and lumber prices right now?

One reason for this steady growth is that timber prices tend to follow population and economic growth. Emerging market nations like China and South Korea are key drivers of growing demand for lumber products. Another nice aspect of the timber business is, timber owners have the flexibility to slow harvesting rates when prices are weak, and expand as prices rise.

The improved housing outlook and sharp pick up in construction also provide wind at the back of the timber industry.

Supply has been hampered by regulatory burdens. Timber harvesting on public lands in California is down 90%, and 46% of its sawmills have closed since 2000.
Hedging Inflation

Timber also seems to offer a better inflation hedge than gold. Gold, on the other hand, seems to me to be more of a hedge on political or economic instability.

And since timber follows population and economic growth – plus has practical uses in construction and paper products – it isn’t prone to volatile cycles.

Academic research finds that timberland assets offer an excellent hedge on “higher than anticipated” inflation. This is backed up by timberland values surging an average of 22% a year during 1973 to 1981, when inflation averaged 9%.

No wonder institutional investors have poured over $30 billion into timberland investment management organizations (TIMOs), up from $1 billion in 1989.

So my advice is to sell some gold and add some timber to your global portfolio for 2013.

Good Investing,

Carl

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/2013/January/sell-gold-buy-timber.html

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