Dawes Points: Important Commodity Price Low Here

Reported strong global economic growth data is totally at odds with the current prices and market moods of commodities and resources equities and these sentiment responses are typical of major lows being formed.   Most commodities have not deserved the current ratings and it is time to Ring the Bell again to BUY the LOWS. Even oil is suggesting the worst is over. The activity in the resources market is still fragile but it is picking up and astute investors and geoscience professionals have been delighted with recent earnings results in the Gold Sector and even more pleased with some recent exploration achievements.  The smallest end of the market in quality plays is now very active and resilient.  Dawes Points rang the Gold Sector bell in the last note and is now ringing it for resources generally and for oil and gas.

Look at these two long term graphics:-

The CRB Index for general commodities (with a heavy weighting in hydrocarbons – not my favourite commodity Index – I preferred the now discontinued CCI version) is closely watched and the most recent lows took the Index back to 1999 and even to 1974 levels.

The S&P Materials Sector sentiment readings are at full pessimism.  Awaiting that banking sector failure in the US that is going to be even worse than 2008 – or so we have been warned!  And of course the collapse in China!  And Greece!

I didn’t expect to experience in my lifetime, with so much data about, that the market place perceptions would be so at odds with reality.  Fear abounds. Yet the world’s largest economy (US) reports 3.7% June Qtr GDP and the world’s second largest (China) reports GDP growth of 7%pa in June Qtr (oil consumption in China was up 7.3% in the June Half of 2015 for those who think it is all faked), so the US markets have a short panic and Harry Dent and Co are now screaming the Greater Depression is upon us!   The correction in the Shanghai market was just reflecting a 150% index gain in less than a year after 65% decline in a seven year bear market.  And these economy figures are nothing like any recession I have noted.  More like a boom really.

 

2013

2013

2014

2014

2014

2014

2015

2015

US GDP

Sept

Dec

Mar

June

Sept

Dec

Mar

June

% over pcp

3.0

3.8

-0.9

4.6

4.3

2.1

0.6

3.7

Extraordinary!  We therefore have to presume it is simply human nature at work.

James Dines of the Dines Letter (he calls himself the original Goldbug, Internet Bug, Rare Earths Bug and now Cyber Security Bug – I have been a long term subscriber) wrote a few years ago about murmurations of life forms whereby birds (especially starlings), fish, wildebeests, bison, lemmings  and humans can act with a society-intuitive combined instantaneous movement.

 

And it would seem to me that some humans, especially those cautious souls associated with the financial markets, have charged headlong and mindlessly into cash and bonds for safety. Yes The End of the World has been flagged since the Subprime Crisis in 2007 and the GFC in 2008. The world now has about US$90 trillion in bonds priced for zero inflation and stable global politics for the next decade.   Good luck.

Of course if the US equity market does weaken it is worth noting what happened after the US peak in 2000 from whence it fell over 40% and resources with BHP as a proxy just kept rising.

SPX and BHP

BHP vs SPX

Well anyway, I recently attended and presented at the Territory Resources Week Conference in Darwin.  It was my second attendance there and was pleased with what I saw and heard after being most impressed with last year’s event, particularly on the oil and gas side.

Darwin is only 3300km from Singapore and 4300km from Hong Kong so it really engages with Asia far more than SE Australia.  Sydney is 3151km from Darwin.

So the first slide focussed on this map.

Try to imagine Asia as centred around the Himalayas and the China Tibet Plateau with aprons of vast coastal flood plains from Pakistan, around India, Bangladesh, Myanmar, Thailand, Malaysia, Indonesia, Vietnam and to China.  This is of course idealised and not strictly true but it does give an idea of what we are really looking at. The northern aprons into Russia, Kazakhstan and Siberia are too cold to support any large population so we will exclude them here.

Most of Asia’s 3300 million people live along this coastal fringe and just think of the trade between every river entrance port.  Almost every river has a river mouth power station ( usually diesel or fuel oil), port and shipping facilities, construction, engineering shops, clothing,  food production (from dried fish to noodles, fruit etc) and so on.

This way it becomes easier to think about trade boosting GDP growth in ways that Western city dwellers can’t imagine.

So focus on these population numbers, then think of low but rapidly growing personal disposable incomes.  Every year people are becoming marginally more wealthy.

3,300 million people, all improving their incomes and wealth with official data still indicating 6-8%pa growth. (IMF data presented here.)

Think of the energy demand and just note that oil consumption in China grew by 7.3% in June Half 2105.  The aggregates start to look very interesting as this BP data shows. Who is running and winning this race? Certainly isn’t old Western economies.

Non OECD is now 58% of total global energy consumption and with the higher growth in Non OECD it is clear that total global energy demand is therefore accelerating!

I hope I have made this clear enough.

It is incredibly important to understand the medium and longer term implications for energy (coal, oil, gas and nuclear) and especially for the global LNG trade and Australia’s massive onshore shale gas potential.

Bringing the two together says energy consumption is now accelerating. And note this updated graphic below:-

When I first published these Energy Consumption by Fuel Type charts about ten years ago China had 70% of its energy from coal and just 2% from gas while global averages were around 28% and 22% respectively.  The massive opportunity in gas was obvious and it is now 6% of a total figure 97% higher so that is an increase of 375%.  Coal in China has been reduced to just 66% so it has only increased 100% in oil equivalent terms.  Hydro is higher but oil’s share has actually fallen.

China wants to go more into nuclear and gas.

The issues in the Middle East with ISIS and Saudi Arabia are not going away and the oil market place might just be telling us that US$40/bbl for WTI is going to be low enough to be the end of the decline.   As noted, oil plays a big role in the  CRB Index and that is certainly suggesting a low is forming

Now also think of steel.

China’s steel production is still looking for as much as 2014’s 813mt even though over 100mt will be exported but India will be higher and ASEAN still needs to import over 60mtpa for its rapidly growing >80mtpa requirements.

Iron ore is still a matter of >300mtpa of high cost Chinese domestic magnetite production and the level of inventories.  It is far more complex than just the new supply from Australia and Brazil.

And for industrial metals it is again look at China.  It typically takes about 50% of most metals so China demand growing at 1% still adds 0.5% to global demand whilst 5% is 2.5%.  For copper, 2.5% is almost equal to half of a 0.9mpta Escondida in additional capacity.

The key points made in my presentation (The Australian Resources Sector Presentation ) were these ;_

The resources industry has re invented itself after the costs surges of 2010-2012 and normality is returning to those fortunate to have operations and or exciting exploration activities.

Be sure to participate.

And also just keep in mind this graphic and that its character is global.

A$1,717bn with savings accounts now up $340bn since 2010 to over A$700bn.

Barry Dawes

Executive Chairman

BSc F AusIMM MSAA MSEGFollow me on Twitter @DawesPoints

I own ABU, NST, TBR, BLK,CGN, SBM, MLX, STO, S32

Edition #40

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