2017 Year in Review #73

January 3, 2018 | Dawes Points |

Key Points

  • Global economic boom confirmed
  • Global equities surging to new highs for many markets
  • Resource sector commodities performed strongly
  • Copper, Iron Ore and Oil reached strong levels at year end
  • Consumption data indicated more record highs for metals in 2017
  • Peaking of the bond markets
  • Gold breaks 2011 downtrend and readying for strong 2018
  • The surge in EVs and their raw materials
  • Resources Sector market outperforming again
  • Capital flowing again to the resources markets

Call me to discuss ways of participating bdawes@mpsecurities.com.au +61 2 9222 9111

2017 was the year the where many in the world woke up to the sunshine of the global economic boom unfolding against a dark sky of gloom promoted by the defensive economists (see below) and their fellow travellers in news media.

The markets had been indicating better times ahead for some years now as has been emphasized by Dawes Points in the past 70 odd editions and now investor interest is finally catching up.

The economic data has been quite positive for some time and both OECD and IMF have upgraded their historic GDP figures and forecasts. Nevertheless their commentary is still that it won’t last into 2019. (But really these are just more bureaucrats!) I expect further upgrades throughout 2018.

These numbers seem to Dawes Points to be quite robust and clearly underpin the strength of equity markets.

The equity markets have done well with focus on the US.  DJIA 30 was up 25% with Nasdaq Comp up 29% and S&P500 up 19%.

The best of the others was Hong Kong with the Hang Seng up 36% in 2017 and the Indian Nifty Index up 28%.

On a two year view the DJIA was up 42%.

The strong performances by the Asian markets reinforces the long term Dawes Points view on the rise of 3300 million people seeking a better life.

The Australian All Ordinaries was woeful with just 7% but the Resources Sector in contrast did very well.  The recent break upwards through 5800 and then through 6000 was resources driven.

The bigger resources stocks outperformed the S&P 500 in 2017 and all stocks did vastly better over the past two years.

The ASX Small Resources Index was up 36% in 2017 and 114% in two years.

As pointed out previously, the so called Small Resources Index had 38 stocks in Dec Qtr 2017 with a market cap of around A$45bn with almost a third with market caps over A$1bn.

Not truly representative of what was really happening with smaller stocks in 2017.

The broader small resources market was somewhat of a lottery but many very strong gains were seen, especially in the Electric Vehicle raw materials stocks in lithium, cobalt and graphite.

The Dawes Points of 5 September (Global Boom Well Underway #69)  picked this up nicely:-

In the longer term focus, should stocks break higher from here then the move could be quite sharp and rapid.

 If this view is correct then there could be 3,-4,000 Dow points added by year end.

Just snuck through with 3010 points gain. (Who could have thought a 3000 point Dow Jones 30 gain in four months possible?)

This channel analysis is quite useful.

Everyone would be familiar with the FANG stocks and technology but this graphic on US banks is highly relevant and very useful.  This sector has just broken 14 years of underperformance against the S&P500 and is doing so at a time of rising interest rates.  Very encouraging.

The housing market is also very significant and with this index making strong new highs and the housing shortage building up then the US should be stronger for much longer.

The resources sector did very well in 2017 and is positioned to do even better in 2018.

The industrial LME metals in particular performed well reflecting record consumption levels and limited inventories.

Average gains in US$ were around 28% (net of tin) in 2017 after 27% in 2016 (including tin). Cobalt was a star again and at US$75,500/t that is a great money maker for the few producers and also an aspiration for the newcomers.

The two year gains averaged 54% but these prices are yet to be adequately reflected in Resources Sector stocks.

Precious metals had steadier time with significant volatility and palladium hit a major new 17 year high and rose 75% in 2017.

The Dawes Points Composite metal price Index of monthly closes on LME broke its downtrend as noted in August 2016 and now seems on its way to new highs. Probably before 2020.

The individual metals provide their own interest.

Note how steady lead has been and how it will certainly rise further from here.

Copper and zinc have been strong but aluminium is looking to move higher from a low base and nickel should be following soon.

The inventory position whether it is LME or Shanghai is very low with massive drawdowns experienced in the past two years in aluminium, copper tin and zinc.

It has been fascinating to note over the past few years the steady weekly drawdowns in LME inventories for most metals then observing large increases as some trading group delivers a significant tonnage (against the current relatively low stock levels!) of metal across the warehouse. These have nothing to do with production or consumption. Nor mining or refining. Just some speculative inventory. Once these large positions are gone then these metals will be super tight.

The MPS LME Inventory Index is dangerously low at just one week.

The inventory position of metals on LME (and to a lesser extent on the Shanghai Futures Exchange) is now very low leaving no buffer at all for any increase in user inventories.

In any upturn it is typical for users to increase stock throughout the inventory chain such that DEMAND exceeds consumption. This should be expected to cause sharp rises in prices of metals.

This is already happening in zinc and copper will be following.

The rise in cobalt reflects rising consumption demand, limited supply sources and no inventory.

Consumption numbers for most metals show new records each year and the 3.35% pa CAGR has been remarkably resilient since 2009. The numbers suggest that growth rates will be ACCELERATING over the next few years.

Where will the metal come from?

Dawes Points has considered for quite some years that the industrial metals are far too cheap relative to their intrinsic value.  This value is not just conductivity, strength, casting abilities, coating properties or coverings.  The ever expanding uses of high performance alloys or specific metals based chemicals make them truly valuable materials.

From the stainless steel cladding of the NY Chrysler Building, ancient and modern bronzes (copper and tin), copper roofing in Hamburg, zinc roofing in Paris, lead sheet in London, brass (copper and zinc) door knobs to the feel, texture and shiny look the real value of metals is long lasting and true.

This channel graphic on copper gave us the targets of US$3.25 when copper was around US$2/lb in 2016 and it now gives US$3.59 in March Qtr 2018 and US$6/lb further out.

Producers of metals had a difficult five years from 2011 and those bringing on new high capital cost capacity treating low grade ores felt it worst. With oil prices likely to move higher again to push up bulk mining costs and power costs up on comminution processing the long term attractiveness of such new mines becomes difficult.

All this should only be resolved with higher prices.  And possibly much higher.

The global steel industry did well led by China but India is catching up and should be the world’s second largest producer by end 2018.

Iron ore achieved the Dawes Points forecast US$95/t in the March Qtr and after a pullback seems on its way to reach US$100 in 2018.

Energy rebounded in 2017 and also just reached the Dawes Points US$60/bbl for WTI at year end.  The demand side has been stronger than the consensus and inventories have been drawn down.

Despite the improved oil price and the debacle in Australian East Coast gas policies the ASX smaller oil stocks were surprisingly friendless.

Weakening Bond Markets

Dawes Points has highlighted the topping of the bond markets and the long length of their bull markets. Long term trends attract large volumes of complacent capital which in turn need long term bear markets to unwind.

From the 1942 lows in US bond yields to the highs in 1981 (39 years) and back to new lows in 2016 (35 years) are long term trends. Where will 35 years take bond yields? New highs?

The 30 year T Bond is now precariously positioned.  The fall will be quite sharp when it comes (likely to be quite soon now).

The 10 Year peaked almost five years ago and is showing danger is at hand after the most recent breakdown. Accelerating breakdown says it pretty well.


The direction of US T bonds will probably determine the fate of the US$ and the decline underway is possibly answering that question now.

The US$ Index is useful but not perfect and the channels suggest a re-entry to the 1984 downtrend is possible but the US$ is oversold.  The next few months will show us.


The A$ had a reasonable year and a break above US$0.81 will see it heading toward parity and beyond.

Gold Market

Gold kindly popped over US$1300 to welcome 2018 with some enthusiasm.  The four year fighting in the trenches in that US$200 band below US$1370 is still on but the breaking of the 2011 downtrend is encouraging the bulls like us. There had certainly been some false starts in 2017.

The short term technicals showed the breaching of the 2011 downtrend line and a series of retests of this line and the pick up of a two year uptrend. Text book performance I think.

This short term break is only part of that bigger picture that is indicating a very strong gold market for many years. It seems Wave 2 is just about finished and Wave 3 is getting underway.

Electric Vehicles (EVs)

I declare my hand as an unbeliever in AGW because the empirical data does not show it, the relative percentages are infinitesimal and so much of the presented data is fraudulent. (Dawes Points has done much due diligence on this so stands on its research findings)

So the surge in EV excitement is based on a false foundation.  Nevertheless, the world likes the idea of clean electric vehicles so lets all enjoy it.

EVs will capture a large share of motor vehicle sales by 2030 but with around 1000m current vehicles and 1500m by 2025 EVs will still be less than 10%.

The impact on oil consumption is likely to negligible against 110mmbopd consumption by 2025.

Taxes on fuel are very high in most countries so the revenues losses on gasoline and diesel will probably need to be made up by taxes on electricity somewhere. And someone will need to pay for roads and infrastructure.

Battery efficiency and cost will need to make substantial improvements and we all know they will.

And at the end of the day the increased demand for grid power to recharge these batteries will put enormous strain on distribution infrastructure and will need more coal and gas fired ( plus nuclear) power stations to charge the batteries.

But for now cobalt and lithium are in bull markets that have strong fundamentals as new gigafactories and EVs are built.

Performance of these stocks in 2017 has been very strong and volatile.

Expect more in 2018.

And in 2018 numerous new Battery Metals stocks will have the market caps to be hitting the various indices and adding spice.

Resources Sector Performances

As noted above, the performances of the resources indices have been excellent.

The chart performances look outstanding and suggest a major further rerating is immediately ahead.

10 Years XMM Metals and Mining   breaking through a neckline and soon to break a downtrend

10 Years ASX S&P 200 Resources XJR   On its way higher

10 Years ASX S&P 300 XKR Resources  Recent new breakout

10 Year S&P Small Resources  XSR  Break out with sharp acceleration coming

10 Year S&P All Ords Gold Index XGD  – Massive breakout about to start after 18 mths consolidation.

Capital Flows

Capital is flowing back into the resources sector with vast volumes raised by small companies after years of drought.

The larges caps are reporting strong earnings and dividends are flowing and many more companies are reporting earnings and dividends from new projects started in recent years.

Many opportunities and most with management that has seen tough times for over a decade.

Capital is flowing from cash deposits which are large and sufficient to stoke the markets for years.

Market liquidity in these smaller companies is rising and is probably the best in a decade.

Summary

Yes it was a true watershed year with the long term bearishness that continued into early Sept Qtr seeming to be dissipating by New Year’s Day.

The data was strong, the markets were improving and many stocks had great years.

The peaking of the bond markets at a time of surging equities is good and the commodities and gold are lifting off nicely.

It is really only just starting and there is so much more to come.

Barry Dawes BSc F AusIMM (CP) MSAFAA

 +61 2 9222 9111
bdawes@mpsecurities.com.au

Dawes Points #73
3 January 2018

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