Paradigm Securities was the Underwriter for the Cudeco A$63.1m Fully Underwritten Rights issue which has just closed and the stock is relisting today.
Beer & Co from Melbourne has produced a commissioned report on the prospects of Cudeco now that it is in the final stages of commissioning.
The Beer and Co report values Cudeco at A$1.08.
A recent aerial view of the plant showing the very sophisticated circuits to recover native copper, gold-copper sulphide concentrates, cobalt-iron sulphide concentrates and heavy media magnetite concentrates.
DOWNLOAD RESEARCH FROM BEER & CO
Disclosure: Paradigm Securities was the Underwriter of the A$63.1m Rights Issue and holds shares in Cudeco.
Contact me 02 9222 9111 or bdawes@paradigmsecurities.com.au
11 May 2016
DOWNLOAD RESEARCH FROM BEER & CO
Disclosure: Paradigm Securities was the Underwriter of the A$63.1m Rights Issue and holds shares in Cudeco.
Contact me 02 9222 9111 or bdawes@paradigmsecurities.com.au
11 May 2016 
When the ASX 300 Gold Index is rebalanced from June 2016 let's try to ensure that it is an index that reflects the Australian gold industry, not just a motley collection of non representative ASX 300 companies.
An apology is due over the ASX Gold Index share of All Ords Turnover shown in last month's Dawes Points. The graph was wrong. The numerator was rising strongly but incorrect denominator data was used. Share of turnover is around 4% now (and not the 14%!). Here is the updated version.
The conclusion is the same but not as enthusiastic as I thought the strong rises in NCM, NST and EVN on big volume were making it seem.
The Index has moved up but it still has a long way to go to the upside.
I still expect the Gold Index here to be close to 6000 by year end.
Gold will be higher again soon and gold stocks will outperform. Are you on board?
The many other projects being developed by our tenacious local resources sector managers are there too in copper, lead and zinc and others and also in the new materials lithium and graphite that feed into the global technology markets. The magnitude of the major iron ore, LNG and coal projects crowded most of these projects out but the underlying demand for most of their resources remains robust.
The China Steel Industry naturally gets most of the attention for the Resources Sector and the `falling demand from China' theme has been seen in the sliding iron ore price since 2011 and more recently with the industrial metals. The major companies BHP and RIO have suffered in their share prices. Global Crude Steel Production was down 2.8% in 2015 to 1623mt and consumption in China was down almost 5% but China exports were running over 100mtpa into growing markets in Asia and Africa so China crude steel production has held up well. But note that China's GDP and consumption does not include utilisation of Chinese steel and manufacturing items applied to Chinese construction projects in so many other parts of the world.
Interestingly the historic volatility in monthly annualised Crude Steel Production in China is narrowing and the impact of Christmas/China Spring Festival over December/February seems to be steadying. Also the rate of change suggests an upturn in output is now coming.
Demand for imported Iron ore into China, far from declining, is still rising and recorded a massive 1,133mpta import rate in December to take imports to a new record of 957mt, up 2.2%.
Domestic iron ore production (all magnetite) fell a reported 130mt in 2015 (now operating at about 45% capacity) and did what we all thought it would but just came a couple of years later. Iron ore production in China is, like so many industries there, highly fragmented with numerous small operators. Total iron ore demand was down reflecting lower crude steel output but the imports were at those new highs.
The impact on Australian iron ore producers was just a lot more exports (up 7% to 767mt and likely to be up a further 13% in 2016 to 860mt) for the low cost majors and shutdowns for all the rest. An estimated >250mt of global iron ore supply has been shut down or deferred in this recent low iron ore price environment.
It is clear that steel mills in China have had quite low iron ore inventories and with the increased reliance on imported iron ore these inventory ratios suggest inventory rebuilding is likely in 2016.
Whilst much has been made of the conversion of China's economic thrust from investment to consumption-related focus there remains the US$1,000bn currently being spent on the One Belt One Road Project. China's strategic horizon has always been westward looking. Adding the 2,000million inhabitants of Asia to China's own 1,400m gives a 3,400m consumer market and adding Europe gives China access to 4,500m. This project is massive and will link China to Singapore, India and Myanmar, The Gulf region and most of the`Stans then Europe. Highways, fast trains and shipping channels and it is already underway. The Asia Infrastructure Bank is already set up.
How much steel and copper will be required. Can we even conceive the amount of raw materials required for this? The Chevron-Shell-Exxon Gorgon 15.6Mtpa LNG project in WA has cost about US50bn and been Bechtel's (and the world's!) largest single project to date so US$1,000bn on far less challenging projects will use a lot of steel and copper.
Be aware of these infrastructure developments. The impact could be massive.
The current improvement in iron ore prices should be seen in this light and the usual market cycle should be expected. Some mills will rebuild inventory, the Dalian iron ore futures market with its huge turnover should see more short covering, more mills will rebuild inventory and when higher steel demand comes through there will be strong buying. How much higher will iron ore prices rise? Don't know but I am sure it will be more than we expect.
Iron Ore Price basis 61% Fe
Source: IRESS
BHP, RIO and FMG will clearly benefit. All these stocks should be bought. Keep in mind balance sheet matters are always the key issue at times of low prices but as prices and cashflows improve the market focus goes from fear to greed.
These US$ price charts are suggesting major lows have been achieved for all three.
BHP RIO
FMG
Iron ore and steel will be leading the way here but copper and the industrial metals won't be far behind.
Consumption has been robust with many metals having record consumption figures. Additional supply has been significant but not as much as much commentary would suggest.
The big picture gives record consumption levels for almost all metals over the past six years.
Importantly, the inventory levels on LME have been in reasonably consistent downtrend for about four years and whilst LME inventories aren't all inventories, they are a good proxy for readily available metal. It has been fascinating to watch the daily decline in almost every metal and then the sudden appearance of 20,000t or 50,000t being marked across a white line in a warehouse over one or two days. Clearly no mine, smelter or end user has 50,000t of metal just sitting around (50,000t is a big for any lead, zinc, copper or nickel mine/smelter/refiner!).
The composite now shows just 1.80% of annual consumption is available on LME. Less than one week.
The individual metals tell the story as well.
What happens when purchasing managers decide to build inventory again rather than reducing?
What happens when real end use demand picks up?
Demand will be well in excess of consumption.
Copper might just be telling us something now. A rally to US$2.70/lb is likely.
The 10% move in the week ending 4 March was telling us that shortcovering is coming. The strong moves in the big resources stocks are reinforcing the view that the inventories of resources stocks held by major money managers are low. Short covering coming here too.
This can be seen here in the Metals and Mining share of All Ords turnover with the past two weeks exceeding 14%.
Quite often market commentaries are all about `the Fed' and its policies and how they will affect the world. I have deliberately avoided comment here because it is clear that it is rare for any two commentators to draw the same conclusions on what has actually been said. So often, however, the commentary has been that the Fed policies on raising interest rates will slow a fragile economy.
What if this interpretation is just wrong?
What if rises in Fed interest rates are helpful for the economy?
It is clear that Bernanke policies of QE to push trillions of cash into the banks did not produce inflationary pressures because the banks just kept the money. They had a zero cost of funds, it improved their own balance sheets and they then lent it back to the Fed to make a risk free margin. Nice work. For hundreds of billions.
The raising of the Fed Funds Rate means that US banks now actually have to lend the money to some other parties to make a margin. Lending it to businesses and consumers.
US Fed data shows the Excess Reserves held by Financial Institutions reached over US$2.5tn post the 2008 GFC after being far less than US$20bn for decades. These reserves are now plummeting as banks begin aggressive lending again. Pumping another US$1-2tn into the economy might now be inflationary.
This is the data.
An implication here is that it should boost the volume and the circulation of money that could become inflationary. Credit to Stewart Thomson of Gracelands here.
The US Banking Index suggests technical support has been achieved and will now move higher.
You know my views on the global bond markets but I consider that bonds would certainly fall in this environment. Sale of bonds to central banks will add to liquidity and the exit of funds to equities and commodities.
So the macro is bullish, the financial markets are bullish, the demand and inventory data are bullish and so many of our micro factors for resources sector corporates are bullish.
But most people are still fearing the Worst and have built up huge reserves of cash – A$1779bn here in Australia.
The Best is now coming.
The 146% in 15 months for the Dawes 2015 Gold Stock Portfolio is a start. The 47% gain in two months for the Dawes Points 2016 Gold Stock Portfolio is also good.
What do you think my 2016 Nano Cap Gold Stock Portfolio is now? What will it be in a year?
What do you think the next few years Total Return will be with the Dawes Points Big Cap Resources Portfolio? Can you imagine the Dawes Points Nano Cap Resources Portfolio?
The ASX 300 Small Resources Index is now trending above 3% market share. Action here at last.
Join up and take the ride!
And don't forget this for A$ bears. If gold stocks rise, then so will the A$ against the US$. For 20 years from 1993 to 2013 this relationship generated an R2 of 0.92! It is catching up again.
Barry Dawes
BSc FAus IMM MSEG MSAA
I own BHP and a lot of gold and small resources stocks.
7 March 2016
Edition #46 
The XGD is barely above the levels of 2003 and PERs and yields are now very attractive for this sector. Also the buybacks of so many Australian gold mines from the likes of Barrick and Newmont is actually giving domestic companies a more significant share of Australian gold production again.
The A$ below US$0.75 has provided an average gold price of around A$1,550 so far in 2015 and helped a large build up in cash for gold producers.
Dividends are flowing again.
Gold production in Australia is increasing and several new important expansions should see further growth over the next several years.
Source: BREE and Paradigm estimates
The action in the gold share market here in Australia is strongly suggestive of the bottoming process being mature and the real long term uptrend in gold and gold stocks is resuming.
As stated, this market action is very constructive and an improvement is being noted in market breadth, smaller stocks are running and investors are taking up capital raisings again.
I actually have my first gold sector IPO sponsorship since 2007 now underway with A$4.2m for Golden Eagle Mining coming soon.
The market action is very encouraging with XGD's share of All Ordinaries market $ turnover now well over 2% again and looking to double from here.
The prospects for earnings and dividends is what drives stock prices and gold companies always have also had the option value of a higher gold price or increased resources. The prospects in recent years have been quite the opposite so all option value has been squeezed out and value is now substantial.
The prospects now are greatly enhanced but sentiment is still very poor so the opportunity has ''once in a generation'' status.
The XGD is still 70% below the April 2011 high when A$ gold was A$1408/oz. It is now A$1550.
As always, it is important to put all market action in to perspective and to consider what the markets are really telling us.
Again, the adage, `heed the markets, not the commentators' has helped so much.
The markets are also saying that the physical demand from India and China is strongly underpinning demand and that, in great contrast, the record level of over 300 futures contract ounces sold for each deliverable ounce registered on COMEX says a serious mismatch might just develop along the way.
The current market is not a just a random point in time but a manifestation of the long term global outlook but coloured by today's sentiment.
Returning to my previously published long term themes we can note that the oil price bottomed at around US$10/bbl in Dec Qtr 1998 and then had almost 10 years of rising prices before peaking at US$147 in May 2008. The CRB index of commodities (itself highly skewed to energy) showed a similar rise.
The forces behind the commodity bull market were global growth and the remarkable entry of China and its voracious demand for raw materials. From the resource sector perspective, the rise of the steel industry in China to over 800mtpa and China being responsible for the consumption of around 50% of most industrial metals dwarfed anything in modern economic history.
Export volumes and market prices were very strong and the marginal increases in demand required marginal increases in output and often these marginal increases were from marginal projects.
So a slowing in demand growth created a change in the market momentum and sentiment and brought about a sharp fall in prices and over seven years of bear market since mid 2008.
The speculative blip was 2010-2011 but this has now been thoroughly squeezed out.
We can see this in the performances of the various resources indices in terms of price but we can see this even more painfully in the declining share of ASX market turnover.
Mining and Metals had 25-30% of turnover for 2007 to 2012 with spikes to 35%. Its down to just 13% now. Google, Apple, Tesla and banks have been far more attractive to investors.
But this downtrend has now broken and like the Gold Sector is attracting accumulation.
However, we should all note that the real reason for this improvement is what Dawes Points has been saying all along.
The Chinese economy is still growing and with the important One Road One Belt Silk Road concept the demand for raw materials will be maintained and will continue to grow.
Crude steel production has held up well against the calls for a major fall but surging steel exports to ASEAN and to the numerous China-sponsored infrastructure projects in many parts of the world have hidden weaker internal demand.
Nevertheless there has been a major drawdown of iron ore inventory on the part of the steel mills in China, a drawdown in the port stocks in China from over 110mt to under 90mt and all the major producers have run down their own mine and port stocks. Obviously the high cost exporters around the world have stopped and domestic magnetite concentrate production in China is falling sharply at last.
I had expected a short cover rally in iron ore in this half year as this inventory reduction is readjusted upwards but it hasn't eventuated.
Consumption of most metals however is still at record or near record levels and LME inventories continue their declines.
This is not the stuff of recessions and major declines in economic activity.
The GFC only spurred China onward but its 1,375m people have had a taste of a better life and this can only grow stronger.
China has also the long term goals of its westward-looking agenda that aims to link not only the 3,300 mi people Dawes Points referred to over the past few months but to Europe linking another 1,100m to East Asia.
In today's crisis with IS in the Middle East, the infrastructure quest through the `Stans might actually change the power base and outflank the extremists and lead to Islam's own Reformation. Who knows!
We still need to continually revise what we think of China. Those 1,375m people will be 1,400m very soon and the build of infrastructure will continue to change trade patterns.
The 
In my experience, all this is almost guaranteeing a return to robustly positive markets in the decade ahead.
In contrast, the market place is still extremely bearish and copper hit a six year low last week but some interesting things are taking place elsewhere.
Firstly here at home Australia is a major global producer of raw materials. The lower A$ has been very helpful in allowing A$ cost producers to recover and rapid changes have been made in the domestic cost structures as well. Some stocks are holding up well and like the Gold Sector, are leading the world out of the gloom.
On a bigger scale, the performance of commodities and the equities of those companies that produce and use them often give us clues to the sentiment of the market place.
Oil may be bottoming because major integrated oil and gas companies' stock prices and the US E&P indices are not confirming recent lower oil prices. Oil demand is still rising at 1.5mbopd each year and US tight oil output is declining.
We can look at Exxon, Conoco, Chevron, SHELL, BP and BG Group to show constructive market action and the S&P E&P (Exploration and Production) Index may be indicating its 60% fall in 18 months is overdone. In Australia, Woodside, Beach/Drillsearch and Origin look better and Santos after its capital raising might just get by.
Iron ore stocks FMG and Rio are not confirming a lower US$ iron ore price although BHP and Vale are weaker and are carrying the weight of the SAMARCO tailings dam collapse. (We might ask what the Brazillian bureaucracy was doing about the standards they had previously laid down.)
All this is against a global economy that hasn't fallen over and the US, China and India may just get stronger. Even Japan with its stagnant economy is still cranking out steel at full capacity of 110mtpa.
So the outlook is looking even more encouraging and for us in Resourcesland this graphic below is speaking volumes in clear data.
Our basic livelihood of emerging resources companies (XSR) is showing another clear break in the decline of market share of All Ords turnover.
The market for small resources is improving. This is hard evidence here but the signs are everywhere.
Interestingly, while the XMM and ASX200 Resources were breaking to new lows the XSR has been assisted by the XGD and has held up well.
Dawes Points also knows this from recent capital raisings for small resources companies.
So the US bond market is looking very toppy with the 10 year having its peak over three years ago. It is taking a long time to roll over but the result is inevitable. The downward adjustment could take place at anytime now and the raising of short term interest rates may be the trigger.
The world has invested almost US$90trillion in bonds.
Even a tiny flow into hedges could be massive in commodity and resources stocks.
More speculative plays are
I own DRM, NST,MLX, RSG, TBR, GOR, BLK, MML, TNR, TYX and PNR. STO, BHP, DFM, BPT.
Edition #43 
You can draw some very interesting conclusions here about sector rotation.
So when looking at Dongfang Modern here is what you find.
First of all I hope you expect that the Due Diligence carried out on this company is of a high standard. The Legals were overseen by Piper Alderman and the accounts were reviewed by PKF Lawyers. The accounts have been audited since 2009 by PKF Hong Kong so the data is reliable. The cash on the balance sheet is actually there!
I have made mention previously that this has to be the most impressive set of accounts I have seen in my +30 years.
This company was set up in 2005 and in 2008 the current Chairman injected about US$6m to acquire an 89% holding.
This was the last capital injection to the company. No more equity and no debt at all.
The plan was to acquire as many plantations as possible and by 2012 it was 9 plantations over 4500 hectares and by end 2015 it will be 19 plantations over 9,000 hectares.
That initial investment of US$6m in 2008 has probably provided the highest multiyear IRR ever recorded. After A$57m (A$ equivalent) earnings in 2014 DFM's June 2015 Interim showed Retained Earnings of A$216m. All done without additional equity capital and without debt.
These numbers are attractive and make interesting reading. 2015 and pre 2015 are PKF numbers and the forecasts post 2015 are Dawes Points alone.
The company is now probably the largest citrus grower/harvester in China with about 1.3% market share by revenue in a very fragmented industry. So many industries in China seem to be highly fragmented and the aggregation and consolidation process there has probably twenty years more to run. These are important business drivers and help to show another side of China.
Paradigm carried out major financial due diligence and modelling and made a site visit to several of the plantations.
Detailed forecasts were made based on all available published information and then some conservative assumptions were made.
Growing and harvesting citrus produce isn't all that far from something like coal mining.
You have a resource (trees) that should give a certain grade (harvest) with output of net fruit (grade) and at an expected recovery (yield). The selling price is the market price so revenue is saleable output time's price. Costs are roughly fixed so improved yields and productivity improvements can increase volume without fixed costs rising. Dongfang is hoping improve yields by about 4-5% pa for the next few years. So output should rise and costs rise less so.
Output will also rise as additional plantations are acquired.
Prices have been rising over the past few years too because demand has been stronger than supply and supply growth.
Dongfang's operating margin has been over 40% for the past few years and it expects to will stay high.
A study of future earnings for the next decade based on increasing tree volume through plantation acquisition, rising labour cost (which they are doing), modestly improving harvest yields and marginally higher product prices gave some quite astounding numbers.
Dongfang was #2 by sales revenue in 2014 with 1.2% market share after AIM listed Asiatic Citrus but the increased output to 230,000tpa in 2015 by Dongfang coupled with a couple of operational issues for Asiatic Citrus should now make DFM #1 with about 1.3% market share.
Market leader with 1.3% market share reinforces this fragmented industry concept.
Dongfang would like to go to 4-5% market share over the next several years so that implies organic and acquisitional growth
The numbers for Dongfang as assessed from public information by Dawes Points look like this with historic data in RMB and converted to A$ at historic rates or using the IPO Prospectus forecast of RMB 5:A$1.00.
This Valuation Matrix shows DFM's P&L and Balance Sheet in one and also gives a valuation target for DFM.
Note three years earnings history, the current year estimate and three years forecast for EBITDA on a product basis (note the very low D&A levels) and no interest cost.
Forecasts are deliberately conservative on prices, output, acquisition growth and costs but still show earnings rising steadily rather than surging.
The staff levels are low (only about 100 people) so administration expense is low and all harvesting is by contractors so EBITDA for each product is net cash. Note no tax is payable on earnings from agricultural food production and that almost all earnings have been reinvested, with capex mostly into acquisition of additional plantations.
The balance sheet is cash-rich without debt and EBITDA against estimates of sector assets gives a Return on Investment (on book value) of 30% overall and almost 100% for tangerines.
If we put each product division on 5x EBITDA, and add the cash, the appraised value for DFM is over A$500m and A$1.47/share compared to the IPO price of A$1.00.
Note that the forecasts have used 5:1 on the exchange rate, well above the current level, so A$ earnings would be higher with today's 4.62:1.
I expect over time that the market will give a much higher rating after DFM delivers on its plans.
Dongfang Modern is one of the largest China operations listed on ASX and shouldn't be the last.
If you came into the IPO, (and thanks for your help), you probably only came in in a modest contribution.
If you haven't, the hard work has been done so you should now be able to come in at lower entry risk to share the gains.
Barry Dawes
19 October 2015
I own DFM and Paradigm was the lead manager of the DFM IPO.
Edition #42 
This index has bounced from the bottom.
Try to keep in mind the time frames in these markets we have been following.
Commodities last bottomed in Dec Qtr 1998 and rallied for almost the next 10 years into 2008. The GFC gave a big selloff followed by a rally into 2011 with new highs for some metals but not for most. The recent lows give almost 7 years of decline.
Seventeen years up and down cycle of sorts. I would expect at least another 10 years upward from here!!
The US economy seems to be strengthening (no Greater Depression there yet!!) with basic indicators such as housing and auto sales very robust, China is still doing 7% GDP growth and the Shanghai stock market seems to bottoming out OK despite the hysteria. India is off to double digit growth and all those 3,300m people in Asia are doing OK.
So much in fact that the LME metals decided to have a major surge last Friday in London.
So after all the media focus on Glencore and how its impending demise was going to bring everything down it seems that maybe things aren't so bad after all.
For oil, US crude production has begun what I consider will be a sharp decline of about 800,000bopd. It is already down 400,000bopd from the highs. The high decline rates accompanying shale oil wells are still applying and the number of new wells has dropped sharply. Significantly higher productivity per well including through the use of multiple fraccs and increased charges of proppants is helping but a gross US$50/bbl is not enough for profitable operation and the drilling of the next well. Those days of +100% IRRs on US$100 oil seem far away today.
Global oil demand has been rising with the lower oil prices and the market still needs about 1.5mmbopd new supply each year.
No wonder WTI has jumped up through US$50/bbl again.
The ISIS battles and aggravation in the Middle East are getting very close to the internal workings of Saudi Arabia. Oil purchases for inventory security are likely to increase despite the current high levels. I have always considered the last fall in oil prices as a correction in the bull market.
After almost five years of declining market interest in ASX gold stocks the trend has now clearly changed so the graphic above should show continuing relative strength as an underweight market plays catch up. Obviously initially in the leaders, NCM, NST, EVN, SBM and OGC but the smaller plays will provide exceptional returns as even modest new capital inflows to the sector just won't find enough stock.
My 30 stock ASX gold stock universe still shows an unweighted PER average of
The ASX Gold Index should now show a major increase in market share of the All Ordinaries turnover.
I will reiterate my views on the gold mining sector in Australia where I see new focus around Kalgoorlie and in particular the Strzelecki and Zuleika Shears. These gold bearing `structures' are proving to be strong continuity narrow high grade deposits that have low costs and are delivering handsome cashflows to the owners. The strike length of the Shears is tens of kilometres.
You need to know what NST is doing here and why EVN and Zinjin are so keenly interested.
From Northern Star:-
Kundana – A Corridor of Riches
And watch this too:-
A little company called Cascade/Torian is very active here too on tenements that stretch along over 40 km of strike. And its share price is up almost 100% since June.
You will need to get to know this map as well.
Discoveries here have been brought into production very quickly and local excess mill capacity means rapid cash returns and very high IRRs. As an example, Barrick found the indications of the 1.2moz 11g/t Pegasus deposit in mid 2013 prior to its sale of the East Kunduna JV interest to NST in March 2014. NST had subsequently proved a 750koz resource by Dec 2014 and began mining in Feb 2015 after upgrading it to 1.1moz @ 10.6g/t. It is now 1.2moz. Most of the 220kozpa EKJV output will come from Pegasus. I like NST, TBR and TNR here.
Also ask me about a Nov 2015 A$4.2m high quality gold mining IPO I am doing in this region. Might just be the first ASX gold IPO since 2013.
And while we are talking extensive mineralisation along strike have a look at our favourite Blackham Resources (BLK.ASX).
This is a good analogy to the Strzelecki Shear projects and BLK owns 55km @ 100%.
Oh yes, and BLK is fully funded to restarting gold production at Matilda through the Wiluna mill. Up to 100,000ozpa by July 2016 at costs under A$1000/oz AISC. That's A$60mpa net cashflow (EBITDA) for a company with a market cap of just A$45m. My numbers say PER
Blackhams abridged 25km of strike along the Wiluna Structure
The ASX gold index closed on Friday at 2819 which is a 72% gain from the low in November 2014.
Some very important technical issues actions suggest much more is to come and that something very special is about to happen.
Long term 
My view has been that Disbelief was 2000-2011 and Pessimism was 2011-2014. We are now finally into that Optimism Leg that should last at least as long as Disbelief (~10 years (say)).
This next leg will be driven by earnings and dividends and then by production growth and then by the US$ Gold price.
So there you have it.
I called the low in ASX Gold Sector in
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.
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 (