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Jun 2014 - Market Bottomed?

Has the Resource Market Bottomed Yet ?

The question as to whether the resource market has bottomed yet (or not) has occupied most of the conferences that I have attended so far this year (2014). At all of those conferences (RIU Freo in February, RIU Sydney in May and Symposium Broken Hill in May), the "mood" has been upbeat.

At Freo (Fremantle) some delegates were commenting that they were seeing signs in the past week (then) of business slowly picking up, while others said it was still quiet.

The attendance numbers were higher at Sydney RIU although the room area was downsized which resulted in a more "cosier" atmosphere. And the mood was definately upbeat following Indonesia deciding that its raw products had to be refined in Indonesia, which put a "rocket" under the nickel price and nickel producers. Although the Australian nickel producers had been steadily rising on the back of exploration results or being completely oversold (after all what was Panoramic doing trading at ~23c in mid-February 2014).

Indonesia had stated one or two years' ago that they intended to prevent raw ore being shipped and wanted the products to be refined, but the market was in complete denial that Indonesia would continue to go through with it - whereas if the producers had embraced it (eg Newmont - Batu Hijau), they could have built such refineries, or process plant extensions. It was only when "the ruling" actually occurred, that the metal and stock prices increased.

At Symposium's #RIS2014 at Broken Hill, the delegate numbers were significantly lower. However, Kerry's Symposium conference attracts a different group of investors and there were a number of "new" delegates that had never been there before. There were still attendees from London and new "HNW" attendees such as from Tasmania that had made their way to Broken Hill (you do have to go out of your way, although there is a bus/mining tour lasting 2 days from Sydney).

As Rick Valenta of Chesser commented it was the first time he had attended the Conference and had a booth and had been surprised that his booth regularly had someone interested in Chesser (CHZ.ax) in it. What was more was that many people asking questions of him had the word "Investor" under their name label and they were thinking of investing in his company!

The Symposium conference was definitely into "party mode" with their annual dinner again setting the scene. This year the theme was "rock star" with Don Walker of Cold Chisel, Kerry's opening entrance being a pillion ride on the back of a Harley (the ride on the camel at the first conference 4 years' ago is not expected to be repeated), and Convergent (CVG.ax) setting their usual high make-up/dress standard (this year as KISS) as shown inset in Figure 1.

Joanne Warner of Colonial gave the Key Note opening to RIU Sydney stating that it was only the media that has decided that a lower growth rate in China is negative for commodity demand - they were missing the numbers. China's numerical GDP is still growing as shown inset in the Figure, China hasn't stopped consuming, it is still consuming all what it did last year and another 7.3% or 7.5% this year on top of that. Yes new supply has caught up with demand and inventories were rising (temporarily?).

Two of the notable Key Note speakers at the Broken Hill Symposium were Leigh Clifford (Chairman of Qantas, ex-RIO), and Hon Ian MacFarlane (Minister for Industry). Ian MacFarlane commented that when overseas he had been approached and asked what is Australia doing overtaxing its golden goose (its even cooked the egg), as it has resulted in mining investment going to Canada (especially as Canada simultaneously reduced its already low mining taxes to further attract investment).

Ian MacFarlane stated that the current Federal government would not be doing anything to detract investment in the mining industry, if anything they would try and help it (such as eliminating the carbon tax farce). It has to be said that (in general) the Australian Govt does not understand minerals or mining, as we saw with the MRRT fiasco and Labor's consideration that Australia should be doing its global environmental duty and storing all the world's waste uranium products in Central Australia (ie effectively have its own Chernobyl/Fukushima area).

Alas the Govt has viewed the mining industry as a "gravy train" and to tax it as much as possible, without realising that when mines become unprofitable, they close and the surrounding community gradually closes too. One only needs to look around Broken Hill and Kalgoorlie to see the impact of a weaker resource industry in closed businesses, houses for sale, workers being laid off and not replaced etc, as shown inset in the Figure eg "Barrick..for sale". And yet the WA Govt is still considering increasing the "gold" royalty, perhaps it expects the gold price to rise and wants to have the legislation already in place.

At the Sydney RIU conference, the BNP presenter from China (Xingdong Chen) stated that China was slowing into 2nd stage growth, but still has a current target of ~7.5% growth. If anything, China was disappointed with the world growth rate and wants to speed it up, in order for China to achieve its growth rates. If China still wants to achieve ~7.5% for 2014 BNP thought that they would have to stimulate China's economy up towards ~8%pa, and hence thought that China may only achieve a growth rate of ~7.3% to 7.6% in 2014.

During 2013, numerous construction JVs were signed by China with almost every country in the world to improve worldwide distribution especially between China and the west and from central Africa to the coast. But such projects will still take time, even at China's pace of construction.

At the China Mining Conference in November 2013 it was stated that China expected to have possibly 9 months or until the third quarter of 2014 in which to still be able to acquire resource projects cheaply. After that the US and Europe should be recovering and demand from those countries begin to increase.

However, little focus was then being made on India, but with the change in power following the recent elections and PM Modi's stated intention to improve infrastructure, India could have significant demand for commodities.
In the Symposium Conference, Tim Goldsmith from PWC (who apparently visits China regularly, possibly at least once a month) stated that it was the industrialisation of the world that drives the global economy. Each time there is a new entrant, there is a new surge in mineral demand.

China is of course the big one, in 1978 ~20% of its population lived in cities, now ~50% live in cities, and the target is ~80% in cities (including the Tier 2 cities). Yes the population movement has slowed down, it's now only ~15million people moving to cities per year.

Every year for the past ~12 years people have been saying China will or has to fail, but it hasn't, instead it has established a track record of meeting its targets. China does have bubbles (as does everywhere else) but China tries to target its approaching bubbles and deflate (not pop) them before they get too big, having identified them at least 12 months' ago. It has to be recognised that China's banks have at least 35 years' experience.
Comments are often made about China's debt, but China's debt is all internal - as in it's to other Chinese, it's not external, like the rest of the world. There are more than enough funds in China to cover any possible shadow banking default.

Tim Goldsmith thought that with the change in power, India could become China 2, the next 100 years was expected to require material industrialisation throughout the world, with good and bad news, but periodic jumps in industrialisation fuelling "huge" metal demand. In PWC's view, staggering building appears to be occurring outside of China (mostly driven by China) and the world seems to gradually be coming out of a depressed year.

China has looked inside its crystal ball and can see what appears to be coming and the need to control its own resources so that if necessary it can specify the prices that it pays for them, in order to achieve its goals over the next 50 to 100 years. China does not operate on a 3 to 5 year time-frame.

With nickel having "had a run", surely copper should be next and then zinc, according to the usual base metal "cycle/rally" in which nickel is usually first, and zinc last. Copper has remained above ~US$3/lb with China's consumption steadily continuing. At Symposium's Broken Hill conference, the unlisted CBH gave a presentation on their expectations for the zinc price (using Wood Mackenzie's forecast) such that demand exceeds supply during 2014 and the zinc price gradually increases to almost double an average ~US$3800/t in 2016.

Hedley Widdup of the Lion Selection Group showed their renowned "Boom and Bust" chart at the Broken Hill Conference as shown in the background of Figure 1. Hedley commented that the mining cycle is driven by liquidity, and when it's on, it's on (and vice versa). Hedley thought that the worst was behind us, redemption selling, secondary raisings into any window etc, and that vast sums of money were on the sidelines "watching", looking for the catalysts of M & A, exploration discoveries and commodity prices. In his opinion "on the LSG clock", we are at the early transitional stages of the "boom period".

At the Symposium conference Prof Ian Plimer launched his "not for greens" book, which in his own words states on the first page "This book is deliberately offensive". The book is packed with facts, and even has a foreword by Patrick Moore (the co-founder of Greenpeace). "not for greens" covers what an achievement and complicated process has been undergone to produce a stainless steel spoon, as well as probably the main culprit behind climate changes - namely volcanic eruptions (even the smaller ones).

As for the rest of the market, Dr Stephen Wood from North America of Russell Investments at the Stockbrokers' Conference in Melbourne at the end of May 2014, stated that he thought 2014 would be the "year of validation" in which the share prices achieved by North American stocks in 2013 had to be validated by the earnings achievable in 2014.

Stephen Wood hence expected the main US market to have a slow but steady upward grind (a bit like running in army boots on a sandy beach, slow, but getting there in the end) with a growth rate of ~2.5%pa for the next 2 to 4 years based on the US achieving a growth rate of 0.5% to 1.5%pa, against the background of a flat Europe (trying to pretend that there isn't a problem).

The basis of the US growth rate was the US being self sufficient/independent on energy, which alas had a body blow the next day when the EIA downgraded the Californian Monterey oil-shale reserves (that comprise 2/3 of the US' oil shale reserves) by ~96% from the estimated 13.7bnbbl down to 600mbbl as the geology was more complex than previously thought. At the last China Mining Conference the US stated that China would not be able to achieve material oil-shale reserves because China's geology was more complex than the US' - apparently now about the same.

The Australian fund manager John Addersley gave a similar expectation at an APTA (technical analysts) presentation in Sydney in early June 2014 for the main Australian market to be a steadily upward, low growth, top down grind, and hence he was focusing on resources.

Last year in 2013, the gold/resource market ran one month early, as in fell in April and recovered in July (after the tax-loss selling to the 3rd week of June), instead of the usual fall in May and recovery in August.

This year (2014) the gold / resource shares have fallen in April again, so a rally could be well underway by Diggers in August 2014, and if so, may theoretically continue.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. Main Picture : The Lion Selection Group "Clock"

  • Written by: Keith Goode
  • Sunday, 01 June 2014