- US providing key market drivers
- Economy exhibiting great strength
- bonds prices seem ready for another sell off
- CPI and PPI heading above 3%
- Equity markets seem still robust
- China crude steel output may be heading for 1,000mtbpa in 2018
- ASX Resource Sector indices ready to advance strongly
- Global energy consumption accelerating again
- Gold sector pessimistic sentiment should fuel reversal
- Recommended stocks BHP RIO WPL OSH NST CYL
Talk to me about resources
+61 2 9222 9111
The Global Economy seems to be maintaining a strong growth mode with some impressive figures from the USA with its 4.1% June Qtr and some remarkable numbers from China
The Trump Administration is continuing to surprise conventional economics and the Establishment Bureaucracies with his efforts to reinvigorate the US economy and remove distortions in international trade. This latest tariff arrangement with the EU is a remarkable feat with the intention of zero tariffs and removal of non tariff barriers in the trade between the US and the EU. We can only expect more of this, especially with China, and perhaps the outcome will be just as positive.
The activity in the US is clearly positive with the formal data at new highs:-
US industrial Production
And indirectly with stocks related to consumer discretionary spending outperforming the S&P500 general index.
Additional confidence is being shown through the US Banking Sector Index which is performing well although not as strongly outperforming the S&P500 as in 2017.
The banks were the main beneficiaries of QE and are now lending out that capital.
US interest rates are continuing to rise and it seems that bond prices are lining up for another bout of weakness.
This is not surprising given that real returns on bonds are negligible to negative now that the CPI and PPI are creeping up.
The last two months (May and June 2018) have seen 2.72 and 2.80% yoy increases in the CPI and 3.9% for both May and June for the Producer Price Index.
With 2.9% yield on a 10 year bond and almost 3.1% on the 30 year then these are arguably negative real returns.
Importantly, the velocity of circulation of money (GDP/M2 money stock) is now strongly positive:-
So with the 4.1% GDP figure yet to feed into this formula it should now rise even faster.
The bearishness over the US equity markets still appears strong but I found this very long term (120 years) graphic worth looking at. The trend still appears to be your friend.
Whilst the current move up from 18,000 in 2016 might seem overstretched, the shorter term suggests this is probably not the case.
The strong steel production figures in China reinforce so much of the commodity bull market thesis that Dawes Points has been continually been presenting:-
The commentary on China’s vigour in improving air quality by maximising Fe units (1 unit = 1% = 10kgs Fe (iron) per tonne) in iron ores by severely discounting prices on lower grade ores is well known but it is also having stronger impact on its own remaining domestic ore production. China iron ore production is almost entirely lower grade magnetite ores requiring considerable beneficiation and often is accompanied by titaniferous magnetite(low grade ilmenite) and also some vanadium. Alumina and silica as impurities are also attracting larger demerits for China sourced Fe units.
Closure of these mines will make both low grade ilmenite and vanadium that much tighter markets.
China’s iron ore imports can only increase and with global freight rates on the rise again, Australia’s attractiveness for better quality iron ores can only improve.
BHP, RIO and FMG all reported strong June Qtr iron ore shipments to give record annual figures.
The pricing of iron ore is still robust although higher freight rates are eating into the delivered price into China ports.
The MPS commitment into Magnetite Ltd (MGT.ASX) with many billions of resource tonnes of high purity low mining cost magnetite ores remains firm although the timetable on achieving its merger has dragged on considerably.
The outlook for industrial metals remains firm despite the sharp falls during the Trump tariff issues.
The price falls appear to be now overdone and no impact is notable on the still-prevailing decline in LME inventories.
These graphics of the ASX S&P resources sector indices show that technical breakthroughs have been achieved, retests made and the uptrends should continue.
XMM Metals and Mining 2006 -2018
ASX S&P 300 Resources 2006-2018
ASX S&P Small Resources 2006-2018
The Mining Sector of the Australian Resources Industry is doing well but the Energy Sector has a very robust global backdrop.
The 3300million people in China, India and ASEAN have shown the world an insatiable demand for energy and now Non-OECD makes up 59% of global energy consumption. China has well exceeded the US in energy consumption and now takes up 23% of all energy.
Faster consumption growth by Non-OECD with 60% of total energy demand means global demand is now accelerating.
As has been pointed out on numerous occasions this graphic on energy consumption by fuel type gives a useful pointer to future energy demands.
The key features are the very small share from `renewables’, the massive future gas requirements of China and India (mostly LNG) and the renewed interest likely in nuclear energy.
The uranium market is now showing strong signs of a major demand surge, a tightened supply availability and much higher uranium prices.
Ask me about the opportunities in uranium stocks.
The significantly reduced universe of ASX Oil and Gas stocks offer outstanding value.
Oil is in excellent shape with record consumption at a time when OPEC is now capacity constrained and Iran and Venezuela have sharply declining exports.
Prices have rallied nicely and a period of consolidation is likely before oil prices move much higher in 2019.
Gold has been very frustrating for all but the CPI/PPI issues and the bond market positions could be the trigger that turns this market higher. Pessimism on some indicators is at near record levels as is the level of short positions held.
A sharp reversal is possible. Seasonally it is time but we just have to wait for the markets to confirm.
Northern Star (NST.ASX) made a new all time high last week and it is well on its way to probably becoming a 1mozpa producer by FY21. This stock has over A$500m in cash and remains a Strong BUY.
Our other favourite Catalyst Metals (CYL.ASX) is also up near its highs and is extremely well placed to make substantial new highs in the coming year.
It should discover another Bendigo (22moz past production) and current drilling north of Kirkland Lake’s extraordinary Fosterville (Swan Zone 1.16moz @61.2g/t within 1.70moz @ 23.1 g/t) is well worth closely watching.
Catalyst Metals’ extensive tenement holdings in Victoria.
- Excellent high grade results along strike from Bendigo.
- Greenfield gravity based drill targeting North and along strike from Fosterville (EL006507)
Technically, CYL looks very positive.
Barry Dawes BSc F AusIMM MSAFAA
+61 2 9222 9111
I own BHP RIO WPL OSH MGT NST CYL mentioned in this report.
30 July 2018