Monday, 29 December 2014

Will 2015 be the Turning Point for Metals?


Summary
  • Commodities have been in a bear market for more than 3 years
  • Some possible catalysts for a turning point in metals in 2015
  • Some possible plays identified  - VALE, BHP, TCK, TGD


3+ Years Bear Market


  • Commodities have been in a bear market since the start of 2011 (See Diagram 1)
  • Amongst the worst performing metals are Gold, Silver, Copper and Iron Ore
  • Gold  (See Diagram 2)
    • Low of 1142 $/oz in November 2014
    • High of 1895 $/oz in September 2011
    • Peak to Trough of 39.7%
    • Current (26Dec14) – 1195.8 $/oz
  • Silver (See Diagram 3)
    • Low of 15.28 $/oz in November 2014
    • High of 48.70 $/oz  in April 2011
    • Peak to Trough of 68.6%
    • Current (26Dec14) – 15.77 $/oz
  • Copper (See Diagram 4)
    • Low of 2.81 $/lb in December 2014
    • High of approx. 4.6 $/lb  in Feb 2011
    • Peak to Trough of 38.8%
    • Current (26Dec14) – 2.81 $/lb
  • Iron Ore (See Diagram 5)
    • Low of approx. 66.8 $/dmt in December 2014
    • High of 187.18 $/dmt in February 2011
    • Peak to Trough of 64.3%
    • Current (26Dec14) – approx. 66.8 $/dmt
  • Apart from Iron Ore, the other metals mentioned above are attempting to find a base
  • Contrarian bullish view on the above metals in 2015 – possible catalysts for a turning point discussed below



[Diagram 1 – CRB Price Chart]


[Diagram 2 – Gold Price Chart]
Source: Kitco



[Diagram 3 – Silver Price Chart]
Source: Kitco


[Diagram 4 – Copper Price Chart]
Source: Kitco


[Diagram 5 – Iron Ore Price Chart]
Source: IndexMundi

Possible Bullish Catalysts

1) US Dollar Correction
  • UUP is up approximately 13% since May 2014 and 11% in 2014
  • Dollar strength has accounted for significant part of decline in metal prices, with the exception of Iron Ore
    • Since 30 Apr 2014, Gold is down approximately 7.2%, Silver 18.2%, Copper 9.1% and Iron Ore 41.7%
  • In fact, Gold and Copper have held up relatively well despite dollar strength
  • US dollar is due for a correction
    • US unlikely to maintain recent Q214 and Q314 growth rates which are above trend 
2) Oil price plunge to spur global growth and keep rates lower for longer

  • Lower oil prices to have net positive impact on the global economy (Gavyn Davies), and in particular China which is a net oil importer
  • Lower inflation expectations means policymakers to expand monetary stimulus or delay tightening monetary conditions (Europe and US, China, Japan
3) Supply destruction to push demand and supply to equilibrium

  • Mining capex has fallen significantly (See Diagram 6)
  • Mine closures and suspensions have been taking place; high cost miners burning cash
    • Iron Ore – though the big 3 (VALE, BHP and RIO) are still expanding production
    • Gold
  • New investments curtailed at current prices, providing the foundation for higher prices in the next 5 years
  • Admittedly, supply demand equilibrium might not be a 2015 event
[Diagram 6 – Mining Capex]

Source: Ernst & Young Mining equipment overview – June 2014

Possible Plays

  • Iron Ore – VALE/BHP
    • VALE is more exposed to iron ore while BHP is more diversified
  • Copper – TCK
    • TCK also has significant zinc and coal exposure
  • Gold – TGD
    • Small cap gold producer with little debt
  • Haven’t found a suitable play for silver yet.
  • I intend to do individual focus pieces at a later date. 

[Diagram 7 – Valuations]

Source: Reuters/Yahoo


Risks
  • Continued US dollar strength as divergence trade continues
  • China has a hard landing
  • Supply destruction takes longer as miners continue expanding production to generate cash
Disclosure: I am long VALE and TGD. This article should not be construed as investment advice. Investors are encouraged to do their own due diligence and research.

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