Sunday, December 27, 2015

Mining in 2016: Six reasons to be cheerful

Mining in 2016: Six reasons to be cheerful
In our look back at 2015 we called it mining's annus horribilis.
In stead of the hoped for rebound in metals and minerals prices, just about everything from copper to crude and coal to diamonds lost more ground. Those that were calling a bottom on the commodities market in 2015 where sorely disappointed and anyone making a bullish casewere shouted down.
Capital Economics, a research firm frequently quoted in these pages, in a new note outlines its outlook for commodities in 2016.
Some metals prices already appear to have found a floor following the announcement of large cutbacks in production and new investment
Julian Jessop, Head of Commodities Research at the London-based firm, with admirable understatement says it has been "a difficult year for those, ourselves included, who have had anything positive to say about commodities."

Nevertheless, Jessop found six key drivers and themes that should help prices to recover over the course of the next year:
  1. China gears up: "The bulk of the slowdown that many still fear lies ahead has, in fact, already happened; we estimate that actual growth was only 4.5% or so this year, and expect economic activity to pick up pace again during 2016."
  2. Dollar damage done: The strengthening greenback "has both lowered the dollar price that (non-US) consumers are able to pay and allowed commodity producers with revenues in dollars and costs in local currencies to maintain supply at a high level," but the "bulk of this move should now be over too".
  3. Inflation returns: "Underlying price pressures are finally starting to pick up – notably in the US – and headline inflation rates should rebound in the coming months as the biggest declines in the cost of oil drop out of the annual comparisons. This, in turn, could revive demand for inflation hedges including commodities, with gold in particular likely to benefit."
  4. More easy money While the Fed will continue to raise rates in 2016, it would be because of a stronger economy and higher inflation, keeping real interest rates low. Europe and Japan will continue or  accelerate its quantitative easing programs while the People's Bank of China also "has plenty of room to ease further, via cuts in interest rates and reserve requirements, without the need to resort to a big fall in the renminbi."
  5. The flipside is that there is plenty of room for money to return to the sector
  6. Supply cuts: On top of better news on the demand side, "a recovery in the prices of many industrial commodities will probably require further evidence that supply is being tamed by the previous sharp falls. Some metals prices already appear to have found a floor following the announcement of large cutbacks in production and new investment."
  7. Investor interest: While investor sentiment towards commodities are still at record lows "the flipside is that there is plenty of room for money to return to the sector. Indeed, commodity prices may look increasingly attractive relative to the high valuations of equities and (especially) bonds. We would not expect investor demand to trigger a rebound in prices on its own. But speculative flows could support any recovery driven by the underlying fundamentals of supply and demand, just as highly negative sentiment has compounded the recent weakness."
Click here for more analysis from Capital Economics on the commodity sector.

These Are The Top 20 Companies By Market Cap Over The Past Decade

There are many observations to be made about the dramatic shifts shown in the chart below which demonstrates the top 20 companies by market cap over the past decade, but what, to us, stands out the most are two things:
  1. after a decade of being either the world's biggest or second largest market capitalized company, Exxon has tumbled to 5th spot, something it did not do even during the peak of the financial crisis; and
  2. after five years of being in the top spot, it is time for someone to finally dethrone the world's most popular smartphone maker.
These Are The Top 20 Companies By Market Cap Over The Past Decade

Sunday, December 13, 2015

Putin Orders Military To "Immediately Destroy" Any Threat To Russian Forces

Russian President Vladimir Putin has ratcheted up the rhetoric in what appears to be one step closer to the potential for direct conflict with The West. While not detailing 'who' he was focued on, amid the obvious Turkey-Russia tensions, Putin told a session of the Defense Ministry's collegium that "I order to act extremely tough. Any targets that threaten Russian forces or our infrastructure on the ground should be immediately destroyed."
During the meeting of the most senior defense officials, ITAR TASS reports that Putin also warned against "those who will again try to organize any provocations against our servicemen."
 "We have already taken additional measures to ensure security of Russian servicemen and air base. It was strengthened by new aviation groups and missile defense systems. Strike aircraft will now carry out operations under cover of fighter jets,"
Putin said that the Russian military have caused a substantial damage to terrorists in Syria, adding that the actions of the Russian Armed Forces are worthy of praise.
"The combined operation of the Aerospace Defence Forces and the Navy, the use of newest high precision weapons systems has caused a serious damage to the terrorist infrastructure, thus qualitatively changing the situation in Syria," the president said.
The president also ordered the defense ministry to coordinate actions in Syria with Israel’s command post and the US-led international coalition.
"It’s important to develop cooperation with all countries really interested in destroying terrorists. I am talking about contacts on ensuring flight safety with the command post of Israel’s air force and forces of the US-led coalition," Putin said.
According to the official, terrorists in Syria pose a direct threat to Russia and Moscow’s actions are carried out to protect the country rather than due to abstract interests.
"Our soldiers in Syria are, first and foremost, defending their country. Our actions there aren’t motivated by some obscure and abstract geopolitical interests or a desire to train our forces and test new weapons – which is of course an important goal as well. Our main objective is to avert a threat to the Russian Federation,"
As we noted previously, The Kremlin looks prepared not only to stay the course, but to ramp up the deployment. Not only is Moscow hitting terrorist targets with cruise missiles from Russia’s Caspian Fleet, but now, Moscow is shooting at ISIS from a submarine in what can only be described as an effort by Putin to use Syria as a testing ground for Russia’s long dormant military juggernaut (after all, you don’t really need to shoot at a group that doesn’t have an air force or a navy from a sub). 
On that note, we present the following update graphic prepared by Louis Martin-V├ęzian of CIGeography as post at The Aviationst. It documents the scope of Russia’s operation in the Mid-East and should give you an idea of just how committed Moscow is to the fight.
Putin Orders Military To "Immediately Destroy" Any Threat To Russian Forces

Wednesday, December 9, 2015

Chinese commodity demand: Crisis. What crisis?

Chinese commodity demand: Crisis. What crisis?
Tuesday was another bleak day on commodity markets.
The price of crude oil ($37.65) and iron ore ($38.80) dropped again and the globe's two most traded raw materials are now at levels prior to the word supercycle even entering the popular lexicon.
Similarly precious metals and industrial continued to drift lower with bellwether copper exchanging hands barely above seven-year lows ($2.04) and coal (thermal $51, coking $72) continuing its inexorably decline.
The world's major mining companies were trading even weaker than their products would suggest with stock valuations reaching decade or more lows.
On Tuesday billions more wiped off the market value of BHP Billiton (–3.7%), Rio Tinto (–8.6%), Vale (–6.3%), Freeport McMoRan (–5%), Glencore (–6.9%) and Anglo-American (–12.7%) in New York.
The fact that the mining and metals are being overwhelmed by negative sentiment and that sector investors are willing to shrug any positive developments were very much on display on Tuesday.
Commodity import volumes will increase further in 2016 due to an expected improvement in economic activity, a further lift from government policy support and an appreciation in the renminbi
Data released by Chinese customs early in the day showed the country's total import bill falling by 8.7% year on year in November. That was better than the 18.8% plunge in October but the weakness in the headline numbers gave bears an excuse to start selling again.

But the US dollar figure masks a significant underlying recovery in demand.
In volume terms, overall imports of commodities accelerated by 17% compared to the same month last year. It was the greatest jump for almost two years.
Chinese iron ore imports surged 22% in November year on year and 8.8% compared to October. Imports for the first eleven months were up just 1.3% compared to 2014, but last year was a record breaking year.
Copper shipments was just as strong with inbound shipments of refined metal rising 9.5% to 460 000 tonnes from a month earlier and racking up double digit gains compared to last year.
While year to date copper imports are down slightly, ore and concentrate imports rocketed  37% to a record 1.44 million tonnes compared to October and for 2015 imports of copper mine output  is growing by double digits.
As this chart from Capital Economics shows crude oil imports are picking up again and even the decline in coal seems to be arrested.
John Kovacs, senior commodities economist at the independent research firm expects that overall commodity import volumes will increase further in 2016 due to an expected improvement in economic activity, a further lift from government policy support and an appreciation in the renminbi."
"This increase in Chinese commodity imports in turn supports our forecasts for a recovery in prices next year," says the research note.