Copper’s collapse into the $US2.50 per pound range this week means it can be added to a list that already includes iron ore, gold and oil.
What made the addition of copper to the list of the fallen particularly interesting is that it was occurring as the price of some types of coal continued a slow recovery which has been taking place in the background for the past few weeks.
Whitehaven Coal, the most closely watched of Australia’s independent miners, reported that it expects a stable to gradual increase in the price of its thermal coal over the next year though difficult markets make precise forecasts impossible.
Those comments came as a few other slivers of light bolstered confidence, however mildly, that coal prices have hit the bottom thanks to production cuts across the industry and steady demand from the Asian power generation and steel industries.
A deal in Canada added to the brightening mood, even if it was evidence of “bottom fishing” or bargain-basement buying by a speculator prepared to snap up cheap assets in the belief that at some time in the future they will become more valuable
The Canadian deal saw Foresight Energy Partners, which is part of the group controlled by coal bull, Chris Cline, acquire the Donkin project in Nova Scotia from Glencore and a local co-owner, Morien Resources.
Cline has a long track record of buying when rivals are at their gloomiest, a move which made him a billionaire after a coal-asset buying spree in the US State of Illinois at the start of the China-driven resources boom in 2002.
Whether Cline has got the timing right again will be interesting to watch though what The Hog finds more important today is unravelling the wider commodity question because it really does seem that there are forces at work which go beyond conventional supply and demand in trashing so many different commodities.
Coal might not be part of this wider issue. It appears to be a victim of its own success with strong demand triggering an initial mine development boom to feed China’s power stations and steel mills, followed by over-development based on too much faith being put in the “stronger for longer” case for commodities – or a foolish belief that “this time it’s different”
As we all know now it’s never different when it comes to supply and demand for commodities which have moved in a sort of perpetual motion circle of one chasing the other into periods of over and under-supply, with high prices followed by low prices.
But – and this is the point of today’s thoughts from the sometimes unbalanced mind of The Hog, there really does appear to have been a second big factor at work in the busted resources boom – curious financing deals which are unravelling at a dazzling pace.
Coal certainly had its share of interesting financing deals with Whitehaven at the centre of one of the most controversial when it was targeted by one-time high-flying entrepreneur, Nathan Tinkler.
Fun and games with Whitehaven looks like small beer when it comes to other complex resource financing deals which are falling apart at a much faster rate than might be expected from simple changes in the forces of supply and demand.
According to some theories about the wider resources complex banks and rich private investors might have taken speculative positions valued at up to $US20 trillion in assorted resources and, more worryingly, resource derivatives such as through futures contracts, exchange-traded funds and hedge funds.
That money is now trying to flee the scene as China’s growth slows and the normally manageable problem of falling prices caused by excess supply meeting sluggish demand growth is magnified manifold by “out-of-the-money” resource derivative deals, some of which were done using ultra-cheap money generated by government stimulus programs.
With the spectre of higher interest rates looming in the US a move out of resources by highly-leveraged investors has caused a logjam in the doorway with some punters prepared to cut and run, taking a loss now because they fear something far worse when rates do move up.
Coal, fortunately (believe it, or not) is not directly caught up in the resource investment leveraging game to anywhere near to same extent as copper and iron ore, but it is exposed to oil-leveraging because oil prices generally set the pace for all energy commodities.
Coal’s real problem is a simple case of over-supply meets under-demand, a glitch which is self-correcting, although painfully.
Is the end nigh? Yes, and while the real recovery will be delayed until the oil crisis has passed the groundwork is being laid now for a sustainable upward move over the next few years – which is why people like Chris Cline are buying seats at the coal table for a future financial feast.