maverick
26-06-2008, 07:03 AM
Metals: The Second Era
Energy. There’s too little of it. And that’s what will drive the next wave in commodity price gains, particularly metals.
The American industrial revolution had oil to burn. The British version had coal. There was more energy than those countries needed. Oil traded for 10 cents a barrel in the early 20th Century.
But China isn’t in the same position. There’s no new cheap, plentiful fossil fuel hiding around the bend. We haven’t invested enough in the ones we do have, or the alternatives.
Oil’s hawking at US$137 in New York this morning, dear reader. Natural gas is trading at almost US$13 per unit, over double what it was a year ago. Coal, (the other base-load source of electricity for countries that have avoided nuclear development) , is US$163 per tonne in Newcastle.
Where does that leave China? It hasn’t reached the end of the boom yet, as we suggested yesterday. Nor is it close. The IMF ranked China 99th in the world in terms of GDP per capita last year.
The average Chinese worker adds around US$5,000 to the economy each year. If you’re an average Aussie you make that in a couple of months. Chinese incomes are still third-world. They have a lot of growing to do.
So here’s our hypothesis. Scarce energy mixed with ongoing Chinese growth is bullish for base metals prices. You’ve probably seen a lot in the media about constricted demand for metals. Mostly US demand. But from where we’re sitting, few people seem to be considering the supply side of things.
Smelting is becoming an expensive business. It takes a lot of heat and electricity to melt down aluminium, nickel, and other metals. As you saw yesterday…this is colliding with low prices for base metals.
We don’t expect this situation to last for long. It points to a very different market to that of the last 12 months…falling inventories and rising prices. Smaller metals producers without a foothold will probably drop out. The medium sized players building low-cost operations should have more of the market to themselves.
In other words…while the first stage of the metals boom was about demand, the second will be about supply.
Rio Finally Locks in Iron Contracts…at 97% Gains
Is that a ceasefire we smell? Is the iron hostility over? Rio Tinto rubber-stamped 80-97% price increases in its iron contracts with China’s Baosteel. The stock grabbed a 4% gain yesterday. That’s how big an issue this is. It takes more than a crowbar and some elbow grease to shift a diversified monolith like Rio 4%.
Hold on though…why would Rio jump up and announce this before BHP? We discussed the issue yesterday with our research team here in Melbourne. The consensus was that it Rio probably getting the jump on BHP because of the hostile takeover. There was one other possibility though…
And yes…today, the truth was revealed…BHP was too busy sneering at the whole deal. Because it hasn’t brokered anything.
“(Rio’s deal) doesn't cover the full $40-50 difference on freight,” said BHP’s ferrous and coal unit head Marcus Randolph yesterday. It’s still after that freight premium.
Holding out for more? Interesting. BHP’s a lone sentinel in the iron war now. It’s a big gun for sure. But it’s not quite the 12-foot flak cannon of Rio Tinto. And certainly not the long-range ballistic missile of Vale. Both have retired their firepower for the year, taking big new contracts.
That leaves a question mark over BHP’s sway over the Chinese. It might not get the triple-digit raise it’s after.
Not from contracts anyway. The alternative is selling ore into the lucrative Indian spot market. BHP might have to settle for making more money on the open market instead of in private contracts. Boo-hoo.
Energy. There’s too little of it. And that’s what will drive the next wave in commodity price gains, particularly metals.
The American industrial revolution had oil to burn. The British version had coal. There was more energy than those countries needed. Oil traded for 10 cents a barrel in the early 20th Century.
But China isn’t in the same position. There’s no new cheap, plentiful fossil fuel hiding around the bend. We haven’t invested enough in the ones we do have, or the alternatives.
Oil’s hawking at US$137 in New York this morning, dear reader. Natural gas is trading at almost US$13 per unit, over double what it was a year ago. Coal, (the other base-load source of electricity for countries that have avoided nuclear development) , is US$163 per tonne in Newcastle.
Where does that leave China? It hasn’t reached the end of the boom yet, as we suggested yesterday. Nor is it close. The IMF ranked China 99th in the world in terms of GDP per capita last year.
The average Chinese worker adds around US$5,000 to the economy each year. If you’re an average Aussie you make that in a couple of months. Chinese incomes are still third-world. They have a lot of growing to do.
So here’s our hypothesis. Scarce energy mixed with ongoing Chinese growth is bullish for base metals prices. You’ve probably seen a lot in the media about constricted demand for metals. Mostly US demand. But from where we’re sitting, few people seem to be considering the supply side of things.
Smelting is becoming an expensive business. It takes a lot of heat and electricity to melt down aluminium, nickel, and other metals. As you saw yesterday…this is colliding with low prices for base metals.
We don’t expect this situation to last for long. It points to a very different market to that of the last 12 months…falling inventories and rising prices. Smaller metals producers without a foothold will probably drop out. The medium sized players building low-cost operations should have more of the market to themselves.
In other words…while the first stage of the metals boom was about demand, the second will be about supply.
Rio Finally Locks in Iron Contracts…at 97% Gains
Is that a ceasefire we smell? Is the iron hostility over? Rio Tinto rubber-stamped 80-97% price increases in its iron contracts with China’s Baosteel. The stock grabbed a 4% gain yesterday. That’s how big an issue this is. It takes more than a crowbar and some elbow grease to shift a diversified monolith like Rio 4%.
Hold on though…why would Rio jump up and announce this before BHP? We discussed the issue yesterday with our research team here in Melbourne. The consensus was that it Rio probably getting the jump on BHP because of the hostile takeover. There was one other possibility though…
And yes…today, the truth was revealed…BHP was too busy sneering at the whole deal. Because it hasn’t brokered anything.
“(Rio’s deal) doesn't cover the full $40-50 difference on freight,” said BHP’s ferrous and coal unit head Marcus Randolph yesterday. It’s still after that freight premium.
Holding out for more? Interesting. BHP’s a lone sentinel in the iron war now. It’s a big gun for sure. But it’s not quite the 12-foot flak cannon of Rio Tinto. And certainly not the long-range ballistic missile of Vale. Both have retired their firepower for the year, taking big new contracts.
That leaves a question mark over BHP’s sway over the Chinese. It might not get the triple-digit raise it’s after.
Not from contracts anyway. The alternative is selling ore into the lucrative Indian spot market. BHP might have to settle for making more money on the open market instead of in private contracts. Boo-hoo.