Tag Archives: Agriculture

article 3 months old

Incitec Pivot Can Blast Through

-China raises fertiliser export incentives
-Incitec Pivot sensitive to fertiliser prices
-Fertiliser market may be negative
-Explosives market looks robust


By Eva Brocklehurst

China has increased incentives for fertiliser exports and dealt a bit of a blow to the likes of Incitec Pivot ((IPL)). The Ministry of Finance has announced its new fertiliser export policy which has increased incentives for fertiliser producers to sell product into export markets. This may be the thin edge of the wedge. Citi sees it as immediately negative for IPL, given the impact lower tariffs are likely to have on global fertiliser trade and pricing of urea, diammonium phosphate (DAP) and monoammonium phosphate (MAP). Moreover, the broker sees risk from the possibility that lower export tariffs on glyphosate and explosive grade ammonium nitrate may be forthcoming, given the Chinese government's apparent focus on promoting exports. This would also put IPL's sector bedfellows, Nufarm ((NUF)) and Orica ((ORI)), under scrutiny.

IPL earnings are highly sensitive to global fertiliser pricing, notes Citi. Citi estimates that each US$10/mt movement either way in DAP and urea affects IPL's earnings by 2.5%. Citi cites current consensus estimates for 2013 DAP (US$535/mt) and urea (US$410/mt) compare to current trading prices around US$500/mt and $410/mt respectively. So there's little upside factored in for prices, although Goldman Sachs notes the recent rally in soft commodities, improving farmer terms of trade, and robust phosphate demand skews the risk to the upside. The broker notes DAP pricing is below its current FY13 DAP price assumption for IPL of US$550/mt. Moreover, a 5% change in Goldman's average FY13 realised DAP price assumption would result in a 5.2% change in its FY13 profit forecast for the company. Goldman's FY13 urea price assumption for IPL is US$400/mt FOB, largely in line with recent spot pricing.

Two key changes to the Chinese fertiliser tax regime are likely to pressure global prices. These are lower off-peak tariffs -- that which allows exports during periods of low domestic demand -- has been lowered from 7% to 2% on urea and from 7% to 5% on DAP/MAP, and the lower tariff window, which will extend from 4 months to 5 months (16 May to 15 Oct). The export window on urea is unchanged from 2012 and peak season tariffs (110%) have not been changed. Citi notes, in the 10 months to October 2012, China exported 3.8mt of urea. Citi analysts forecast urea exports from China of 5-5.5mt for the full year. Whilst China's DAP exports are tracking around 10% below 2011 levels, an extension to the export window in 2013 is supportive of increased exports and lower international pricing.

However, most brokers reviewing the stock are not overly worried about the tariff change. Even Citi says the tariffs just add another headwind to an already tough outlook and retains its Hold rating. Goldman rates IPL as still a Buy, noting DAP pricing was unchanged at US$502/mt (FOB) in the week to December 14. This is in line with prices last observed in April and 12% below prices through September. Goldman notes North American DAP inventories (as at the end of November) rose 36%, or 130,000t, on the prior month while inventories are 11% below 5-year average levels for this time of the year. So inventories are building but remain at low levels.

Deutsche Bank also reviewed IPL, which held its AGM this week, but maintained a Hold rating and $3.15 price target. This broker noted the company has a positive outlook for the medium term with a strong balance sheet and each of its businesses is in a sound position. Deutsche expects conditions in the Australian and North American explosives markets will have improved in the December quarter, granted the fertiliser markets have deteriorated. The Australian explosives market has benefited from improving commodity prices while the North American coal market is improving, given higher coal and gas prices as well as seasonal impacts. Metals markets remain firm while quarry and construction activity is steadily improving. However, Deutsche believes IPL's business will be impacted by a deteriorating urea price with fertilisers affected as traders are reluctant to take on risk ahead of year end.

Macquarie notes fertiliser remains a good business and one which IPL aims to build on. The broker believes the Chinese decisions are marginally negative for DAP markets but observes IPL has not been exporting DAP in the last 2 months due to a sulphuric outage. Global DAP and MAP values generally remain under pressure in what is a seasonally weak time of year, Macquarie contends, and a vigorous return from Latin American and other non-US buyers will be needed to fuel a rebound. Macquarie does see IPL earnings as close to bottom of the cycle, following big earnings downgrades over the course of 2012. The broker forecasts 7% like-for-like earnings growth in FY13, increasing to 20% or more in FY14 and FY15, driven by the ramp up of its Moranbah ammonium nitrate plant and a US recovery. Macquarie has rating the stock a Buy and raised its target price to $3.38 from $3.33.

IPL has a consensus target price on the FNArena database of $3.37 in a range of $3.05 to $3.60, with five Buy ratings and three Holds.
 

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article 3 months old

Treasure Chest: December Should Be Positive For Commodities

By Greg Peel

China's new regime is now in place. It will not be settled in until into the new year so there is no expectation of any fresh stimulus measures just yet, however the transition has been sufficiently smooth to remove uncertainty, the analysts at ANZ Bank suggest.

Meanwhile, the mid-year interest rate cuts provided by the outgoing regime appear to having an impact, with China's manufacturing PMI now back in expansion territory and housing numbers improving. Markets have spent 2012 anxiously watching the Chinese economic slowdown but fears of a hard landing have been allayed, suggesting a more confident tone as we move into 2013. Stronger Chinese demand for commodities is expected, and this should provide sufficient offset to US fiscal cliff-related fears as we approach the January 1 deadline, ANZ believes, albeit the combination of the two may lead to choppy conditions.

ANZ expects a resolution to the fiscal cliff by the deadline but warns the market will continue to second-guess all the way up to the death.

The mood of global commodity investment funds turned more positive in November, with commodity index positions rising by 7% or US$21bn in November following a US$20bn reduction in October. The US commodity futures market has been a little more cautious, with positions in copper and oil reduced while many agricultural positions remain long. 

ANZ suggests those commodities currently underweighted in fund portfolios should enjoy the greatest support heading towards the new year as fund managers preempt commodity index rebalancing at year's end. Agricultural commodities will see mixed results depending on their 2012 performance, with South American weather-watching still critical at this point. ANZ is looking for strength in crude oil (West Texas), coffee, cotton and sugar with offsetting selling likely in the year's outperformers corn, wheat, soybeans and natural gas. 

ANZ expects support for base metals in general but cautions that near-term liquidity issues for Chinese traders suggest caution with regard to the bulks (iron ore, coal). China's power and steel industries were unseasonably strong in October and probably followed through in November but December may see weaker imports.

Looking outside of China, US economic data have been clipped in November due to storm impact but while this effect should subside into the new year, the typical Christmas slowdown means an immediate rebound is unlikely, says ANZ. The Europe story has been uneventful over the same period while Japan is still suffering from Chinese boycotts related to territorial disputes and these are yet to subside.

Northern hemisphere energy demand typically picks up in the winter but may not have as great an impact in 2013, ANZ warns, given high levels of Chinese coal stocks and increased US domestic oil production dampening the effect. China has also spent the year stockpiling grains, oilseeds and sugar to record levels, which has supported prices. ANZ believes grains will continue to be supported but oilseeds and sugar levels now look sufficient.
 


 

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article 3 months old

Australian Stocks: What Happened Today?

By Max Ludowici, Equities & Derivatives Advisor, 708 Capital

The XJO put in a solid day of trade following positive leads from the Street overnight as Cliff talks once again stole the show. Both Obama and House of Reps. speaker Boehner said they were optimistic that a deal could be struck over the budgetary issue. The XJO finished the day on its highs up 30 points or 0.7% to points on better than recent volume of $3.5B despite trailing the futures by 10 points for most of the day.

You must now have observed that this is a nightly saga where equity markets around the around the world are totally dictated to by mere words from individual US politicians. This type of weak headline-driven price action makes trading markets incredibly difficult so for those traders out there trying to make sense of things, don’t be too hard on yourself because this is as tough as it gets.

Take some solace from the fact Goldman Sachs chief Lloyd Blankfein described Obama’s fiscal cliff plan as “very credible”, we all know brokers have a vested interest in injecting confidence into markets but this is actually a pretty important development. Both because it means Obama actually has a plan and also because it shows Republican support for the Democrat’s plan. Obama taking the stage to confirm they were actively working on a ‘plan’ may be the next step to putting the issue to bed. Don’t expect the volatility to end before there a signatures on paper though.

On the data front, Aussie Q3 Capital Investment data showed capex had risen by 2.8% q/q (in real terms) in Q3 ahead of expectations of a 2% rise. More importantly total nominal capex in 12/13 was revised 3% lower from the previous estimate. The peak of the mining capex cycle is beginning to bite, BHP Billiton ((BHP)) chief said it was even behind us at the BHP AGM today, so don’t be surprised to see this number decline going forward. Anyone care to bet on an interest rate cut next Tuesday?

Mining services took a beating today following NRW Holdings’ ((NWH)) profit downgrade and sell off yesterday which has now fallen 28.9% in two days. Mining consumables (far more resilient than pure services and capital equipment suppliers) company Bradken ((BKN)) got sold down 7.1% to due to worsening sentiment in the sector. Other players in the space: Cardno ((CDD)), Macmahon Holdings ((MAH)), Ausdrill ((ASL)) all ended the day lower.

Otherwise it was a strong day for across the board with stocks in the defensive and cyclical sectors both ending the day well.

US futures closed the overnight session up 80 odd points then reopened intraday down 5 or so points. They are now tracking up nicely and are currently reading in the green up 18 points
 
(For a more comprehensive summary of last night’s market action see FNArena’s Overnight Report.)

This article produced at the request of and is published by FNArena with the expressed permission of 708 Capital.

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article 3 months old

Material Matters: Metals, Oil And Fertilisers

 - Subdued outlook for industrial commodities
 - Zinc warrant cancellations a bearish indicator?
 - Copper may be in surplus in 2013
 - NAB updates commodity forecasts
 - Fertiliser outlook updated


By Chris Shaw

Macroeconomic data continues to show modest improvement, but in the view of Citi the outlook for industrial commodity (metals, minerals ex gold) consumption remains subdued as a lower growth environment is likely to continue for the medium-term.

While there will be re-stock and de-stock phases in metal markets, Citi sees broadly flat industrial commodity prices in 2013. Given such an outlook, the broker suggests the value trap on equities in the sector is persisting, particularly as earnings are yet to bottom out. 

Spot commodity and foreign exchange prices indicate consensus earnings forecasts for 2013 for industrial commodity companies need to be cut by around 25%. Such changes to forecasts would leave the sector trading on a multiple of around 11.6 times forward earnings on Citi's analysis. 

Despite this, Citi estimates the sector is currently trading at a small premium to its historical trading range. Such a premium makes outperformance unlikely in the event of any overall market rally, while significant underperformance is likely in the event of any market decline.

Early new year earnings reports in the sector are likely to disappoint on costs, capex, cash flow and dividends in Citi's view, so the broker continues to select stocks it sees as better placed among the global players.

Among Australian-listed plays these include BHP Billiton ((BHP)) and Aquarius ((AQP)), while Citi remains more cautious on Rio Tinto ((RIO)). 

Standard Bank points out zinc LME inventories have seen another increase in warrant cancellation activity. The percentage of cancelled warrants as a proportion of total inventory now stands at 49.3%, exceeding the previous high in early 2006.

Standard Bank suggests a key difference between now and 2006 is six years ago the market was tightening, so an increase in cancelled warrants helped push the zinc price higher. In general, higher levels of cancelled warrants are a positive for prices as they signal a significant portion of metal units in warehouses are being readied to be removed and consumed.

In 2012 the market is somewhat different however, as Standard Bank points out there are high levels of absolute LME zinc inventory and the practice of using the metal as a financing vehicle is more common. This makes the high level of cancelled warrants more of a bearish sign as it indicates demand remains poor.

At present Standard Bank expects the refined zinc market will remain in surplus through at least 2015, but with the current LME warehousing structure allowing for spare supply to be stored profitably this material has found an alternative home rather than weighing on the market, so depressing spot prices and forcing some capacity to be closed.

In terms of how this excess in inventories can be unwound, while higher interest rates could help Standard Bank argues the market still needs demand to grow and exceed supply. Any such change in the market balance appears some time away, so the bank sees little upside for zinc prices in the medium-term. 

Turning to copper, Citi notes while Chile's Codelco has reported a 4% decline in year-to-date copper production relative to last year, production in 2013 is expected to increase by around 10%. This supports the view copper looks to be entering a near-term period of oversupply, market forecasts suggesting copper mine supply will grow by around 8% in 2013.

On Citi's numbers copper supply growth will exceed demand growth of 3-4%, so putting the copper market into surplus next year. This surplus is expected to continue in 2014. This implies a flat outlook for the copper price, Citi forecasting prices of US$7,965 per tonne for both this year and 2013 and US$7,775 per tonne in 2014.

For the base metals in general, National Australia Bank notes prices have generally given back the gains that followed the announcement of further monetary stimulus by central banks in September. Base metal prices in aggregate were 2% lower in October on NAB's numbers.

Over the past month, underlying demand fundamentals for metals appear to have strengthened marginally though prices continue to suffer from ongoing global economic uncertainty. On a positive note, NAB notes the Chinese economy appears to have stabilised and is showing signs of improvement in the final quarter of the year. 

From a demand perspective NAB notes political tensions in the Middle East, the US fiscal cliff and the European debt crisis continue to limit upside, even as China is showing signs of am improvement in growth.

On the supply side, NAB points out there have been signs of China restocking in copper in recent months, which is having the effect of limited spot demand. There remains a glut of supply in aluminium, while nickel production also exceeded demand in September according to International Nickel Study Group figures.

With supply and demand fundamentals expected to evolve differently across the different industrial metals, NAB expects price activity in each of the metals to be driven by respective fundamentals. This is a positive for copper but more of a negative for aluminium.

In general, NAB is forecasting an increase of 3.25% in the NAB Base Metals Price Index in the December quarter, following a fall of 2.4% in the September quarter. For 2012 overall base metal prices are expected to be broadly unchanged, while a rise of around 1.5% is forecast for 2013.

Oil prices gained in November thanks to both the Gaza conflict and improving data out of China, but NAB notes December quarter demand growth expectations have been revised lower to account for ongoing weakness in Europe and the impact on US demand of Hurricane Sandy. 

Price moves have been limited by a number of competing influences such as Obama's re-election and the US fiscal cliff, factors NAB suggests on their own would have had a greater impact on oil prices. 

Looking forward, NAB points out US data indicate any near-term demand growth is unlikely, while improvements in Chinese economic data has not yet been matched by stronger oil demand as existing stockpiles continue to be unwound. 

To reflect this NAB has made only minor revisions to oil price forecasts. For 2013 the bank expects Brent crude to average US$113 per barrel, while West Texas Intermediate (WTI) is forecast to average US$99 per barrel.

While fertiliser application by growers has always been seasonal, incentive pricing by producers has meant demand has tended to be fairly evenly spread throughout the year. But increased volatility in fertiliser prices and the global debt crisis have seen this trend break down, with growers now less inclined to pre-buy material.

As Citi points out, agricultural fundamentals are strong at present, with global grain output expected to be down 4% this year and weather conditions still quite challenging for farmers, helping create tighter markets. At the same time, there remains significant incentive for the maximising of farm output, which implies strong demand from growers.

This leads Citi to suggest once Chinese and Indian growers sign fertiliser contracts, which is expected early next year, strong demand should follow. This suggests while the price outlook is broadly flat for both urea and potash, materially higher volumes should be a positive for the fertiliser names and drive strong cash generation.

From an Australian perspective, the FNArena database shows respective Sentiment Indicator ratings for Incitec Pivot ((IPL)) and Orica ((ORI)) of 0.6 and 0.8. 


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article 3 months old

Which Miners? Which Commodities?

-Maturing mining boom more complex
-Established producers preferred
-Pure long strategy won't bring the returns
-Investors need to be choosy and nimble


By Eva Brocklehurst

The past decade marked a mining resurgence but will it continue? Are the boom times over? This was the question posed at a recent forum organised by BlackRock Investment Institute and the participants - BlackRock portfolio managers, six industry executives and two experts from research firm Wood Mackenzie - suggest investors need to delve a bit deeper to gauge whether a miner of the glorious past can still perform.

BlackRock suggests the boom is not completely over - just more tricky to negotiate. Supply from new mines is still hitting world markets and metals inventories have been building up in the face of weak demand, with copper the exception. BlackRock expects most metals will likely be in surplus for a while, pressuring prices. However, eventually demand will return, especially from China. Wood Mackenzie expects a turnaround in 2016, when demand for copper, zinc, lead and nickel will start outpacing production from existing mines.

Citi expects a rebound in commodities demand, possibly by the end of 2013. It believes some markets will tighten more quickly than others but as demand rebounds, along with increased growth, prices are unlikely to to move sharply higher. Moreover, the broker believes a pure, long-only strategy will not bring the returns that occurred in 2002-2008. Winners and losers will depend on the supply/demand balances for individual commodities. It'll be complex to navigate. The broker sees seasonality increasing, particularly in oil and agriculture, amid volatile macro economic conditions. This will create new long-short strategic opportunities and new ways to invest across asset classes -such as combining commodities with foreign exchange as well as equities. It's what Citi describes as the 'new normal'.

BlackRock notes shareholders, however, are clamouring for dividends and share buybacks rather than increased capital spending, and hence favour companies which have the assets and the management skill to satisfy both. Overall, the strategists believe greenfields projects are too risky as many of the most promising areas are in unstable countries with little infrastructure. Countries such as the Democratic Republic of the Congo have rich deposits but it's going to take a long time to get them up to speed with the lack of power, infrastructure and political stability. BlackRock also suggests production will be hampered by depleting mines, falling ore grades and other challenges and new projects and technologies will need to materialise to fill this gap.

For example, the world will need 25.1 million tonnes (mt) of refined copper annually a decade from now, Wood Mackenzie estimates. Existing mines are expected to produce 18.7mt in 2022, suggesting a supply gap of 6.4mt. New mines could close this gap, but we could be disappointed too. The industry's capex tripled in the five years ended 2008, but is likely to stay flat the next three years, according to consultancy McKinsey and investment bank Macquarie. Projects are starting to be mothballed and capex budgets are being scrutinised. This trend, if it persists, will bring down supply and boost prices in the long term.

So, if investors have to rake through miners with a fine-tooth comb looking for the performers what about the commodities themselves? Are there any overall trends to follow? Not really. Prices for bulk commodities such as coal and iron ore used to be agreed upon quarterly or even annually, thereby making them more predictable. These days, much is priced daily on the spot market and this can create a disconnect between long term supply planning and demand. BlackRock says iron ore can be prone to volume wars because deposits are plentiful, so it is all about the cost of production for this metal. Copper, zinc and thermal coal are depleting resources, deposits are not ubiquitous and the cost of getting a foothold in these mining areas can be steep. Nevertheless, lead, zinc and thermal coal, on average, give the best return on investment and risk, according to Wood Mackenzie.

Citi notes energy commodities, with the exception of US natural gas (up 24%) and West Texas Intermediate crude (down 14%), have returned to the levels of the beginning of the year. Base metals have also been essentially flat, although nickel has declined around 15%. Precious metals have risen significantly, with gold up 9% and silver up 17%. The biggest movers have been softs on the downside and grains on the upside. Wheat has risen around 30% while coffee and cotton are down 20%. Citi estimates that for the energy commodities most investment flows occurred early in 2012 and since then both investment in energy and agricultural commodities have faded. Only base and precious metals net investments are relatively stable.

So, what to take from all of this? Citi suggests commodities are still an attractive investment for a wide array of portfolio managers, as no other asset class provides such an opportunity to profit from wild cards. Citi says big miners look favourable in an environment where commodity prices are likely to be flat and volatile. The best bet in both mining and oil is to look at the players at the low end of the cost curve.

BlackRock suggests equities with natural resources emphasis are good value because of looming supply gaps for most metals. Low cost iron ore miners and copper producers are attractive but zinc, aluminium and nickel are less so. BlackRock also suggests focusing on those miners that are already producing. Globally diversified miners tend to have the best assets and management, in BlackRock's opinion. 
 

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article 3 months old

Material Matters: Coal, Zinc, Mineral Sands and Fertiliser

-Coal production cuts yet to make a mark
-Indonesia coal shut-downs
-Chinese zinc output may be overstated
-Mineral sands outlook weak
-Challenges for urea


By Eva Brocklehurst

For coal, production cuts by miners are yet to make a mark on supply/demand metrics and it may be up to a cold US winter (demand) or wet Australian summer (supply)  to get prices off the floor, according to JP Morgan. Thermal coal stocks are historically high and US as well as Chinese utilities are not actively signing long-term contracts. Meanwhile, the broker has never seen utilities more active in the spot coal market. A pick-up in Chinese steel production should help coking coal, but there's been no significant recovery in the price as it continues to bounce along the bottom at around $153/t.

Hence, JP Morgan is lowering its price forecasts for 2013-2014 for both thermal and coking coal, believing that, without a robust pick up in demand, supply cuts alone will not lift coal prices. The broker has cut coking coal forecasts by 6% and thermal by 13%. Coking coal should recover as Chinese steel rebuilds inventory and JP Morgan expects Chinese steel production to grow by 5% in 2013. Chinese thermal coal remains well supplied but there may be near term support from seasonal factors.

Over in Indonesia the broker notes junior miners are shutting down operations and volume from the small miners could decline by 20% in FY13. The larger miners are facing a re-pricing threat as, at the current spot price, about 40% of their volume is loss-making. So, maybe even deeper production cuts are needed to underpin Asian coal prices. A factor that may have an impact is whether US producers continue to export coal into global markets. Excess US thermal coal was sold into global markets in the first half of this year, depressing prices. Now, US exports seem a little too expensive to price internationally but JP Morgan believes miners are still motivated to maintain markets. Meanwhile, India's outlook hinges on the outcome of the central government's proposed restructuring of debt from distribution companies and state agreement on sharing the burden. The broker believes this will be resolved and it should result in sharply higher Indian thermal coal imports by 2014.

Macquarie expects zinc demand to improve next year. After attending the Antaike conference in China the broker notes most delegates expect the Chinese economy has already bottomed out, with potential for acceleration in demand at the end of this year and continuing into 2013. Reasons cited for the improved demand are continuing investment in the infrastructure sector and expectations of modest recovery in the construction sector, which has been struggling from lack of confidence among property developers. In general, market expectations for 2013 are still cautious, especially for zinc as a result of the rapid and substantial ramp-up of zinc mine output.

Here's where it gets a bit interesting. Macquarie notes discussion at the conference was focused on the increase in zinc mine output reported this year in China. Most delegates believed zinc mine output had been overstated by upwards of 40,000-50,000 tonnes per month for contained zinc, attributed mainly to an overstatement of output in the Inner Mongolia and Guangxi provinces. Macquarie notes this could be because provincial governments were striving to reach economic growth targets, as well as possible mishandling of data on a gross-weight basis, for which estimates of contained metal may be erroneous.

Reported zinc mine output was up by 18% year-on-year (Jan-Sep) at 3.67mt contained zinc, according to the latest available data. However, Antaike estimates that production has probably risen no more than 12% and forecasts total output for the year to be 4.7mt. Antaike's forecast of refined production, by comparison, was around 4.8mt, which would be around 8% lower than in 2011. Macquarie says this would leave China with little need to import zinc concentrates and, although arrivals are down year-to-date, the total has not fallen far: evidence of a surplus in the market for zinc concentrates and why many are cautious about the price potential in 2013.

It's also not looking so good for mineral sands. Zircon will remain in oversupply as tile manufacturers reduce use, according to Goldman Sachs. Following a period of scarcity and high prices, ceramic tile manufacturers have learned to live with a lower amount of zircon. Based on industry sources, Goldman believes that the process of substitution (e.g. mixing zircon with alumina) and demand destruction (e.g. removing zircon from the tile body) is structural, and the zircon market will be oversupplied for an extended time. The outlook for titanium dioxide feedstocks is relatively better. Goldman expects demand to contract in 2012-13 but the contraction is likely to be milder and shorter relative to zircon demand. Again, China should account for most of the expected demand growth, and this will drive demand for sulphate grades in particular.

This doesn't augur well for Iluka ((ILU)), the largest zircon producer globally. Goldman says Iluka has to take the lead in reducing production to balance the market. The broker expects it will take a year or more before there is a substantial return to previous production levels of around 450,000t per annum. In the case of high-grade feedstock, Goldman expect the price of rutile and synthetic rutile to fall to reflect the “value-in-use” in comparison to chloride slag. Thus, Iluka's production and sales volumes for these products should recover moving into FY14. Goldman has derived its target price ($7.33) on a more heavily weighted near-term earnings multiple and moved the stock to a Sell. It's not just Iluka, the broker has lowered the expected 12-month returns on all the minerals sands producers and developers.

Macquarie also moved Iluka to Sell (Underperform) this week, balancing the five Buys and two Holds otherwise unchanged in the FNArena database.

Evy Hambro, chief investment officer of BlackRock’s natural resources equity team, has taken a much longer-term view of resources companies. He believes that many people underestimate the scale of demand in China that's here to stay. "In the face of even modest assumptions around demand, supply may struggle to keep pace, especially as mining companies defer growth plans," he noted."Indeed, looking forward a few years, it is possible to see deficits opening up in some metals markets. This is a sector that is rife with investment opportunities." Mr Hambro suspects current mines will be unable to meet global demand after 2015.

Citi has put the spotlight on the challenges facing urea producers in SE Asia. First, in India there's been a decision to cancel the planned 1.4mmt urea project in Kalol as the organisation could not secure commitments from the government for access to natural gas. Second, one of Pakistan's largest fertiliser companies, Fatima, is looking to Africa to build new urea plants, given challenging feedstock availability in the country. The two countries account for around 23% of global urea consumption. These developments should benefit producers in the Middle East and China, Citi maintains. Global fertiliser markets are weakening and seasonal pressure is likely to remain through the end of the year. Citi also notes a lack of certainty regarding potash contract signings is keeping pressure on prices. Trade publications report that China is pushing for a potash contract below $400/mt CFR (last contract was $470/mt), as domestic prices have fallen nearly 15% since the start of September. Citi prefers exposure to nitrogen, citing ample incentive for US farmers to plant another large corn crop in 2013, which is supportive of fertiliser and seed companies. 
 

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article 3 months old

Next Week At A Glance

For a more comprehensive preview of next week's events, please refer to "The Monday Report", published each Monday morning. For all economic data release dates, ex-div dates and times and other relevant information, please refer to the FNArena Calendar.


By Greg Peel

Everyone knew the fiscal cliff was coming, and while there may have been hope of a Republican sweep in the election from early in the year this was far from a given. The truth is Wall Street has gained 60% in the first four years of Obama's presidency, and until the election was up 16% in 2012.

So we can't really say it's an “Obama thing” that we have seen a sharp negative reaction to the election result. Indeed, had Romney won with the Democrats retaining a Senate majority, which they most likely would have, commentators have argued there would be no reason to feel any better about things than is the case currently. It's simply about the cliff, the associated uncertainty, and a dash of Europe to boot. The rally from June seems almost to have been one of “blind faith”, or at least faith in QE alone, given the fiscal cliff was always going to be there.

Right now the US indices (and Apple, as good as an index by itself) are breaking down through technical levels, which sets off computerised tea leaf readers. It's a bit of a snowball pullback at this point – one which those looking to buy at better levels will allow to roll for a while to gain maximum value benefit. Commentary is split between those confident no US government will allow a true plunge over the fiscal cliff, and those who believe the two conflicting mandates – a president who promised tax increases for the wealthy and a House which promised no tax increases of any sort – suggest no compromise could ever be reached. Grab your parachute.

It all simply boils down to uncertainty, and now we await the next round of headline flow. Thank God the Melbourne Cup always signals the beginning of the Silly Season in Australia, because now we can all just go to Christmas lunches and drinkies and flip the bird at the rest of the sad world.

What's happening next week? I mean really, who cares? There may or may not be headlines out of the US, Europe and perhaps even China to drive market sentiment. In the meantime, the following won't really carry much weight.

Next week begins with a half-holiday in the US on Monday in which banks and bond markets close but stock and commodity markets remain open for the odd skeleton who pulled the short straw. Thereafter, inflation, retails sales and industrial production data will be released along with the Empire State and Philly Fed manufacturing indices.

Australia will see housing finance and investment lending, NAB business confidence and Westpac consumer confidence. The local bourse will see another million AGMs along with a mini agri/explosive reporting season including results from Graincorp ((GNC)), Orica ((ORI)) and Incitec Pivot ((IPL)). Dulux will also paint us a full year picture.

Japan and the eurozone will both offer up September quarter GDP results.

Have a good weekend.
 

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article 3 months old

Material Matters: Bulk, Base And Precious Metals, Oil And Softs

- Commodity markets volatile
- Bounce in Chinese economy a key
- Gains most likely in energy and base metals
- Bulks cheap, softs highly priced


By Eva Brocklehurst

Commodity markets are expected to remain volatile as we head into 2013. The forecasting debate is dominated by whether the economic softening in China has levelled out and what that means for bulks - iron ore, coal -- in particular. The undercurrents creating uncertainty in the US and European economies play out across a range of products and will continue to do so in varying degrees in the new year, analysts suggest. National Australia Bank analysts suspect China's economic slowdown has found a base, although a rapid recovery is considered unlikely. They expect the US economy to strengthen in 2013, but at a glacial pace, while Europe is still negotiating its minefield of debt.

ANZ Bank analysts expect commodity markets to generally improve in the coming months. However, don’t expect strong gains. There's enough uncertainty to hold back the nervous nellies in the investment community. As has been the case for some time, performances will vary. Gains are most likely to be seen in those commodities which have been heavily sold - such as base metals and energy. The potential for softness is in the higher-priced agricultural markets. ANZ notes bulks look cheap, but an overhang of supply will likely cap iron ore prices and slow any seasonal improvement in coal prices. It appears investment funds liquidated about US$20 billion or 6% of total commodity positions in October, mainly in oil and metals.

The big volume moves were in iron ore over recent months - Chinese traders imported 65 million tonnes in September, the second highest level on record, according to ANZ. The iron ore play may have a way to go before the trend is well established. ANZ and NAB see the question being whether this volume of imports is accounted for by re-stocking or an underlying improvement in demand. Rising bulk freight rates over the past six weeks suggest the bullish trend will have flowed into October but if it's restocking, rather than a material improvement in demand, that trend will slow in November. NAB notes spot iron ore prices have bounced back almost 40 per cent from lows in early September and appear to have settled around US$120 per tonne (CFR), consistent with the level where marginal Chinese production is thought to become unprofitable. Economic indicators suggest that demand conditions in China, and other parts of east Asia for that matter, have started to improve and NAB expects re-stocking may pick up again this month ahead of the winter. These factors should help support iron ore prices over coming months.

ANZ suggests most of the recovery in iron ore is coming from opportunistic arbitrage trading and steel mill re-stocking. This is where iron ore and coking coal price movements diverge on the journey to the steel mill. Coking coal pricing has been a lot less positive than iron ore, despite operating in the same end-user market. ANZ suggests lack of liquidity in the coking coal swaps market has meant investor interest has been much lower. Moreover, trade data shows Chinese coking coal imports falling by more than half in the past three months compared to a 10% increase in iron ore imports. Along these same lines NAB believes a convincing recovery in coking coal prices is being hampered by uncertainty over steel demand and conditions in the steel market are expected to remain subdued for some time.

Oil prices are expected to lift, having been pressured as the markets became concerned about the potential impact of Hurricane Sandy on demand. ANZ also expects firming prices in the next couple of months as a pick up in seasonal demand and a less volatile US equity market convinces funds to re-position on oil. ANZ notes crude looks cheap compared to other commodity markets, haven fallen an average 5% over October.

While urging caution over base metals because of heightened volatility, ANZ expects to see copper prices head back towards September’s highs near US$8,400 as the market pre-empts a bounce in China's economy. Aluminium is likely to remain choppy for the rest of the year and ANZ sees near term risks of prices testing down towards US$1,870 a tonne, and possibly lower, as the market contends with over-supply. By the very end of the year the analysts believe prices will start to push towards US$2,160. Nickel also has some scope to test lower levels, but less so than in the case of aluminium, and ANZ see a firm floor under the market at US$15,500 a tonne.

US dollar strength, particularly against Brazil's real, is likely to remain a negative factor on several agricultural fronts. Brazil is a major supplier of sugar, corn and soybeans and this creates a strong incentive for local producers to sell aggressively into global markets. ANZ notes Brazil’s October export volumes broke monthly records for corn and sugar and, with high prices existing for these commodities, any rationale for a rally is hard to find. Even with the 10% correction in grain and oilseed prices in recent months, prices are still 30-40% above levels of just six months ago. At present, Brazil sugar stocks are at a seasonal peak and are estimated to be around 5-year highs.

In the cut and thrust of demand and supply fundamentals gold retains its safe haven status. NAB and ANZ agree that continued central bank buying, and a weak longer-term dollar outlook, are likely to support prices. ANZ expects gold will end the year at US$1,780 an ounce and peak late in 2013 at around US$1,890 an ounce. Morgan Stanley, meanwhile, has posed the question of why, with the price of the precious metal well supported, are gold stocks so weak? The broker flags an opportunity for gold equities to close the 20% discount to the gold price that has opened up over the past nine months. The gold miners, as represented by the All Ords Gold Index, are down 21% over the past 12 months. By contrast, the spot gold price in US dollar terms is down just 2%. 

In Morgan Stanley's view, there have been several factors involved in creating this disparity, including operational underperformance from the miners which has contributed to a migration from equity to physical (ETFs) exposure. Also, many of the gold miners are mid and small caps, which are considered more risky propositions in the current conservative environment.The broker does highlight a high correlation between operational stability and the gold price movement, citing Regis Resources ((RRL)) and Silver Lake ((SLR)) as examples where a positive gold price correlation may indicate stability.
 

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article 3 months old

Wheat: A Developing Story

By Jonathan Barratt
 
The wheat market has been amazing since mid Q3 as it has just been trading sideways, frustrating many traders as it oscillates around the machinations in the corn and soybean complexes. Both corn and soybeans have suffered from weather related issues whether it is in South America or in the US. The primary impact to these markets has been the US drought, which has been the worst since 1956, and as a result we have seen a significant reduction in yields to the extent that it has put pressure on world ending stocks for both commodities. The US is the major exporter of both these commodities so any impact here will affect global supply. All appears to be calm at the moment however, for wheat we feel we are just at the beginning of a journey. Why?

Wheat so far has managed to dodge the onslaught of the driest summer in the US -- why? --  simply because it is a winter crop unlike corn and soybeans. Close to 75% of the total wheat production in the US is classed as winter wheat. It is sown in the September-October period and harvested by July. 70% of the production is related to weather so it stands to reason that if we have a volatile weather this will affect yield. In corn and soybeans we have seen close to 50% gains in the commodity as a result of volatile weather. However, so far the market has been reluctant to price the same in wheat. The main reason for this is that it is not yet visual. As we come to an end of the corn harvest, wheat is sown and at this time we see the seedlings starting to sprout, at this stage of their development they requires sufficient rain to tap into the subsoil moisture before going dormant for the winter. Here lies one of the problems, the winter crop like the corn crop has been essentially planted on low soil moisture profiles. If no rain occurs at this stage then the plants' ability for strong growth is undermined. Yields will be low. The drought in the US is still with us, it has not broken, subsoil moisture is low. 71% of the current winter wheat fields remain in drought and with this year's winter weather outlook tipped to be similar to last year's the ensuing lack of moisture will present a problem for production. The crop needs rains and it needs them now. The US is the largest exporter of wheat, selling 35.4 million tons. Its closest rivals are France at 19.2m, Canada at 17.5m then Australia at 13.5m. 

Ordinarily, the world can cope with poor harvests in one place or the other; however, with world ending stocks already tipped to be lower by 10% this year further weather disturbances are likely to put further crimps on supply. This is already happening in the global wheat markets. In the Ukraine the government announced that it did not have sufficient wheat for exports. The Ukraine is the 6thlargest exporter of wheat and closed its doors for sales. We can sense that Russia, which is the 8th largest exporter, is already experiencing supply tightness and many are suggesting that it too will close supply to the global market. Then we have Australia, which as mentioned is the fourth largest exporter of the commodity, and is anticipated to report a 25% drop in WA production due to dry conditions. Add to the fact that the current US crop is at its worst condition since 1985 then the issue is becoming real and needs to be monitored.

Is there potential for a food crisis similar to that of 2007-8? This is the question that needs to be answered. If a 15% fall in the production of corn in 2012 in the US is responsible for 50% gain in the price then the potential for wheat to go beyond US10.00 and even US12.00 a bushel given the current scenario is real. One of the gauges we focus on in the agricultural markets is the stock-to-use ratio. This ratio is an important predicative tool that we use to gauge movements in the wheat market. Basically it’s a reading of grain supply minus consumption divided by consumption. In 2007-8 the ratio dipped to 19.6% and this sparked a rally that saw prices move from US500 to US1250. The current reading is 24.6% and with production down already and looking to go lower the vulnerability of further tightness in wheat market is real, so if rains do not come we can expect a move higher. This is why we are seeing prices tracking sideways totally ignoring the machinations of the geopolitical environments and purely focused on demand and supply. It is just a waiting game at the moment and the market is cautious.

Technically, as mentioned at the beginning of this Special Report, it has been remarkable to see the price action. The nervousness in the market is clearly defined by the price action. We have seen large moves in the soybean and corn complexes however wheat it has just tracked sideways. This type of formation is typical of markets that are getting ready for a large move to the topside. It is very hard to trade via momentum indicators and these should be ignored for the time being. The key to this move is trading the break to the topside. Trying to pick the low just doesn’t work. At the moment the top-line trend resistance comes in at US890 then US920, so if we get a daily break above these levels then we can suggest that the move is on.

We remain long wheat (US879) and will look to add to positions on a break of the above levels.
 

Wheat Daily:


Wheat Weekly:
 
 
 
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

Investing In Commodities: A Mini-Guide

By Rudi Filapek-Vandyck, Editor FNArena

Legendary investor Jim Rogers is now an old man who likes to chat about the joys of two growing up daughters and about his adventures when he was traveling around the world, twice; once on a motorbike and once with a modified beaming yellow sports car.

But when Rogers shows up at investing or mining conferences, the audience is more anxious to hear about his views and predictions for the world, for opportunities and investments and, most likely, for investment opportunities in commodities.

After decades of (literally) fame and fortune, Rogers' all-encompassing view today comes down to one simple, straightforward prediction: global governments have become addicted to the apparent virtues of their money printing presses; they will use it more and more, and more, and more.

It's the ultimate political heaven: in the short term it looks like all evils and wrongs are being dealt with, while the real effects won't be known for a much longer time but by then, such is the dynamic of democratic government, there will likely be another government in power instead.

Rogers' active investment career spans many decades, during which he became a wealthy man. Yet, today, he does not own one single government bond, not one single share on a stock exchange and no investments in real estate. He put all his money in commodities. He never sells, only wants to buy more.

Because of his macro-view, Rogers is convinced the last investment asset left standing will be hard assets; commodities. Under a worst case scenario, he believes, commodities will lose less of their value than shares and bonds and paper currencies and properties. Under a best case scenario, commodities are yet to experience a genuine rampant investment bubble.

Guaranteed outperformance, that's how Rogers sees it. Both his daughters speak fluent Mandarin and already have their own investment portfolio which contains of -you guessed it- 100% investments in commodities.

Rogers admits he also has some shorter-term positions in a handful of currencies, but only for a limited time. Ultimately, he believes, all paper currencies will suffer from the loss in confidence that will come, at some point during this process.

For investors looking to build up their own commodities investment portfolio, Rogers has one piece of advice: pick the five that are the furthest away from their all-time peak in price. Then start your research. Pick the three that are most likely to move back up again.

His current favourite is sugar. Do you know sugar is currently priced some 75% below its all-time peak from the 1970s, he lectured the audience at a recent mining conference in Singapore. And guess what's in the pockets of his jacket: a silver coin, a few gold coins and a handful of sugar sachets from the coffee table in the back of the room.

Take a few for yourself, he tells the audience. It's free!

Rogers' tongue-in-cheek investment advice lays bare the counter-intuitive truth behind successful investing in commodities: big profits are made from bottoms but most investors only get interested closer to the top.

When asked about his most favourite country to invest in, again that same base principle stands out as Rogers names Myanmar in Asia and Angola in Africa. The first one is a 70 million population in a resource-rich country previously known as Burma, that has for decades been isolated from the rest of the world because of a ruthless military dictatorship. The second is a former war-torn ex-Portuguese colony rich in oil and gas reserves, plus largely unknown quantities of metals and minerals. And oh yes, he likes North Korea too (big changes coming, he predicts).

Most investors are lured into the world of commodities via promises of strong demand growth. Taking guidance from the demand side can seem lucrative for short time-spans, but it has proved an ill-guided strategy for longer term horizons. Aluminium is an excellent example with strong demand growth in years past anticipated to be followed by ongoing strong demand in the years ahead, yet the price has hardly moved if we exclude the daily and seasonal volatility that is very much typical for commodities and worse; expectations are for relatively stable price averages in years ahead.

On the other end of the spectrum we find a thinly traded metal such as tin for which annual demand grows by no more than 2%, yet many experts continue to list tin near the top of their lists of sector favourites. Nobody favours aluminium over tin.

The enigma that is the price outlook for commodities is tightly intertwined with the supply side for each particular base material. Supply is not the only factor in the game, but it certainly has proved a more reliable indicator than any other factor over the years past. Global supply of aluminium remains abundant with China the key culprit while supply for tin continues to lag, easily explaining the differences in price outlook.

The (in)ability of the supply side to catch up with demand, growing strongly or not, is the reason why price action for commodities has diverged so much post the initial China rallies of some eight years ago. With all that talk about a Super Cycle and with mathematical models pointing towards truly mind-boggling statistics, investors were excused for thinking this was going to be a long-stretched uptrend of unprecedented proportions, but we have already seen the downside and it has caused quite some havoc for investment returns and asset portfolios the world around.

The euphoria from years ago is now gone, but what exactly does this mean? Gradually lower prices? Sharp price falls ahead? Mean-reversion to longer term averages? A multi-year sideways trend? One final blow-off top? Surely with the unprecedented rise of a new middle class in Asia, this time the underlying dynamic for commodities has to be one of this time really, it's not going to be simply the same as every single precedent from the past?

In my personal view, we will continue to see "accordion moves" for prices of commodities as demand and supply dynamics will continue to push markets into revolving deficits and surpluses. This will make price movements less universal and more market-specific. It will likely also translate into shorter-sharper price cycles in general.

Ultimately, it's best to view commodities through cycles of feast and famine, whereby each phase provides the fertile grounds for the opposite phase to follow next. During times of feast, high prices invite more investments and ultimately all that new supply will push the market into surplus thus causing a new period of famine for the producers in the market. This is when production is curtailed, producers go out of business and investments stop.

The emergence of "Chindia" will continue to heavily impact on the outlook for commodities, but it hasn't (and won't) change the feast-famine dynamic that is so characteristic and so obvious from the past.

There is one other key element that makes investing in commodities different from the past and that is the increasing influence of investors and speculators as more and more investment products become available, leading to a larger and more dominant participation from alien investment funds. Market researchers at CRU have tried to distinguish the various elements that have been responsible for the price settings of copper, widely regarded as the bellwether for industrial metals and minerals. Their study has delivered quite surprising outcomes.

What would the price of copper be without investors and speculators actively flooding the market? According to CRU's assessment, copper market fundamentals can explain a price for copper of around US$6000 per tonne via-a-vis an estimated marginal cost level for production of US$4500/tonne. The metal is currently trading around US$7600/t and CRU believes financial participants are responsible for the price gap ("premium") which in this case is around US$1600/t.

Copper's market fundamentals today look better than eighteen months ago, offers CRU, when the price reached as high as US$9000/tonne. Back then, market fundamentals only justified a copper price of circa US$5000/t which means investors and speculators at that time created an extra premium of no less than US$4000/t.

The irony from CRU's analysis is that while market fundamentals for copper have improved since, the price has fallen sharply because of a smaller premium priced in by investors and speculators. Go figure.

This easily explains why making accurate forecasts on commodity prices is such an incredibly difficult task. Apart from trying to predict the dynamic between demand and supply, forecasters now also have to consider what investors might decide to price in or out in addition, and for how long. Viewed from a different angle, this also shows the inherent sentiment-leverage built into commodity prices.

CRU's multi-year outlook for commodities is not expressed in terms of future price estimates, but merely as a barometer of underlying market fundamentals, ranging from hot to freezing cold. Shorter-term, money flows and sentiment from financial market participants do have the ability to distort or ignore the balance between supply and demand, longer-term there's no denying supply and demand will ultimately shape price and outlook for all commodities.

Here is, as a reminder, the most recent CRU update on commodities:





For companies operating in sectors that are no longer enjoying steady price gains, the challenge to continue creating additional value for shareholders will increasingly become more difficult. A recent study on Economic Value Add (EVA) by analysts at Citi highlighted just that with Citi projecting only four out of a total of 16 precious metals producers globally are likely to increase value for shareholders in the years ahead. The situation looks hardly more promising for miners in bulks and other metals and minerals.

Citi's study includes the market observation that, over time, share prices tend to converge with EVA, highlighting the challenge for investors seeking long term exposure through equities markets. This takes us back to commodities guru Jim Rogers who believes that "great stock picking" is a necessity to successfully exploit the Chindia theme through the stock market.

Of course, predictions for future value add and share price developments can vary dramatically according to price values entered in today's valuation models and there's little doubt Rogers would use higher projections than analysts at Citi, but this should not cloud the underlying issue that commodities will always be  commodities, Fed printing and Chindia notwithstanding.

(In late October I attended the inaugural Asian Mining Indaba conference in Singapore. This story was inspired by presentations at the conference. It was published in the form of an email to paying subscribers on Monday,5th November 2012.)

Good news for FNArena subscribers: colleague Greg Peel has just finished an in-depth market update on rare earths elements (REE) which has been published in e-booklet format, for FNArena subscribers only.

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)