Denial is not a river in Africa …

PERHAPS there’s nothing to get excited or worried about – the commodities ship may be languishing in the doldrums. The Outcrop by Robin Bromby.
Denial is not a river in Africa … Denial is not a river in Africa … Denial is not a river in Africa … Denial is not a river in Africa … Denial is not a river in Africa …


Staff Reporter

Now, where were we? Oh, yes, as of last Friday gold was finished, platinum headed for the rocks, silver in free-fall. But base metals were steadying, some parts of the iron ore sector needed reminding that denial is not a river in Africa. China’s outlook was so-so – and so on and so on.

Commentators – and, no doubt, most mining executives – have been turning themselves inside out in recent weeks (and months) trying to keep on top of where the metal commodities are headed (and, naturally, what the Fed really means, which seems to change from month to month).

So here we are almost a week on. Gold is back over $US1220/oz, silver is leaving its recent lows behind, and both palladium and platinum put on $16/oz overnight. Sure, the base metals are down, iron ore and coal are no-go areas for many investors at the present.

China remains iffy – the latest HSBC data shows a good leap in service industries activity and subdued growth in manufacturing – but that’s already been built into most calculations (the general view being that at some stage China’s economy had to begin maturing and become a more “bought in China” than “made in China” proposition). The US economy is actually looking quite positive: unemployment is falling and job creation is looking perky.

The main issue at present is the uncertainty about the currency markets (and, of course, commodity prices as a result). Until that settles down, many investors may elect to remain on the sidelines.

Then there are events that can throw out our calculations. A note this morning from the Commonwealth Bank on the London Metal Exchange’s winning an appeal in Britain that will allow it to impose new warehouse rules (and which should reduce delivery times for metals and potentially lower metal premiums) argues that “aluminium markets will likely be most impacted by the changes given the volume of aluminium in LME warehouses and that most buyers purchase the metal at the LME price plus the aluminium premium”

Perhaps we are just going to muddle along at around this level. A little up one day, a little down the next. No great surges in precious, base or ferrous sectors; a gradual but non-dramatic weeding out of higher cost producers, some mines being mothballed until things pick up again, exploration proceeding on the more exciting targets but lack of interest in anything too speccy.

But who knows? I suggest it’s a case of no one really knowing where we are headed, but just hoping for the best.

Outcrop has always been a little skeptical about analyst forecasts but, with that in mind, a couple of notes out this week suggest that things are not looking too bleak.

Michael Lewis at Deutsche Bank makes the point that, typically, bull-runs in the US last for six years and the trough to peak is around 40% in magnitude. “Since the current upswing began in July 2011 and the US dollar trade-weighted index has rallied by around 18%, this would suggest we are only halfway through the current cycle,” he concludes.

But it will be muted: a rising US dollar would mean commodity returns underperforming equities, with precious metals particularly sensitive to a stronger greenback.

Deutsche remains bullish on base metals, particularly nickel, zinc and lead.

Stephen Briggs at BNP Paribas is taking the view that, so far as base metals generally are concerned, mounting supply constraints and respectable demand growth will provide increasing price support in 2015. He less keen on copper but bullish about zinc.

So here are BNP’s 2015 price forecasts (average for the year):

Aluminium $2060/t

Copper $6500/t

Lead $2365/t

Nickel $22,100/t

Tin $24,000/t

Zinc $2560/t

But hold on to your hats for 2016 – then BNP reckons that lead will be $2850, nickel $27,300, tin $27,500 and zinc $3100.

But, again, who really knows?

The best we can hope for is boredom with no major collapses but with prices remaining around where they are at present. Yes, it would be great to have another breakout bull run, but that seems a remote prospect at present.

The sector could be in a lot worse places than adrift in the doldrums.