Articles in Category: Commodities

Are We Headed For The Middle Ages?

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Commodities, Global Trade

I read a fascinating article the other day by Ambrose Evans-Pritchard for the Sunday Telegraph The Sunday Telegraph (the slightly stuffy Sunday edition of Britain’s best quality paper the Daily Telegraph). My father worked for them for 20 years and banned the reading in our house of any other newspaper  — a rule that still holds sway to this day. Anyhow, the article was regarding the gold price and where the true value should lie. Mr Pritchards’ suggestion was that due to a combination of steadily dwindling world production, rising consumption and the flight to a safe haven as governments devalue their own currencies by flooding the world with cheap money we may be heading for a Gold price closer to $3000/ounce. Apparently this was the price of gold for much of the Middle Ages, adjusted in real terms, only falling when Spain began to flood Europe with gold plundered from the Inca and Aztec civilizations. Since then, at least for much of the 1800-2000’s it averaged $630/ounce in real terms.

Gold has been one of the hardest of the metal prices to call during the last 2-3 years. It has clearly benefited from the relationship the commodity funds put between oil and gold, typically buying 35% gold for every 65% investment in oil. As oil has been bid up so has gold.Needless to say not everyone supports Mr Pritchards’ ideas (tongue in cheek as they are) UBS’ John Reade suggests gold is overvalued by some $150/ounce but that in itself doesn’t mean it will fall. Over the short term it is driven by sentiment not fundamentals.

And just to show how the best research departments can get it wrong Goldman Sachs advised clients in November to short gold following which it moved up $60/ounce! So while a return to the Middle Ages is unlikely, consol yourself with the thought that it would appear that even the best minds in the business can’t agree on where gold will be heading next.

–Stuart Burns

A wise colleague once told me the first time you hear something, it’s a data point. The second time you hear it, it’s a line and the third time you hear it, it’s a trend. Said differently, the demand for the world’s precious raw materials is going to increase and so too will the prices.

Though we stand by our 2008 metals predictions (including copper) – the fact remains the underlying data may be pointing to a very different financial picture long term. Consider the following:

  • Tata Motors just unveiled their $2500 car for the Indian (and other) markets
  • Examining per capita “consumption rates” as recently published in the The New York Times by noted professor and author Jared Diamond, “The estimated one billion people who live in developed countries have a relative per capita consumption rate of 32. Most of the world’s other 5.5 billion people constitute the developing world, with relative per capita consumption rates below 32, mostly down toward 1.” But, “China’s catching up alone would roughly double world consumption rates. Oil consumption would increase by 106 percent, for instance, and world metal consumption by 94 percent.” And we haven’t even talked about India or any other developing country.
  • According to a March 2007 article quoting Sanford C. Bernstein, an investment management firm, a hybrid car, “costs US$4,500 to $6,000 more to build than a conventional vehicle.” Some of this cost is due to the added metal content for a hybrid vs a regular car. For example, there is more copper used because of the electrical motor and the larger the motor, the more copper required. In addition, more nickel is also used in hybrids than in conventional cars. And, according to this same article, the automotive industry accounts for 5% of global copper usage.

And the data goes on and on…though the metal content of cars has historically been dropping as a % of the overall content of a car (and electronics has risen), metals consumption overall will increase exponentially as more of the lesser developed world purchases cars.

Of course all of these data points examine the demand side of the equation. We’ll come back to the supply side in another post. But consider this odd trade agreement as reported in The New York Times between Chile and China hint: Mandarin lessons were part of the accord. China is busy brokering long term raw material, in this case copper, supply arrangements. The long term writing may be on the wall.

–Lisa Reisman

Compounding changes to the China import/export tax and VAT rebate schemes in July of 2007, additional changes were announced on December 14 for implementation on January 1. With help from Jason Zhang, our metals expert in China, we review these changes and offer some early insight into the likely effects.

Broadly, there are three different changes that have been made or are taking place that will affect the markets going forward. These changes specifically include: import duties, changes in export duties and changes in the RMB/USD exchange rate. Read more

Back in my Andersen days (yes, that Andersen), the firm had  the motto “think straight, talk straight.” Not that we always did, but that certainly was the goal. My boss at Andersen, a wonderful guy named Jim Broering, had an even better motto: “Don’t make them yawn.” You laugh, but it had profound ramifications on what came out of people’s mouths or onto their powerpoint slides. Jim was the “so what” guy. What did the finding, the factoid, the news bit mean to the person receiving the information? That was the question he always pushed me to answer. And so I can’t help but feel that publishing New Year’s predictions, though perhaps helpful to some, may actually just be a yawn if there isn’t something more tangible for the reader.

So thinking of Jim’s words of wisdom, we thought we’d profer not predictions but our sense of different sourcing strategies companies have used in various markets (up, down, sideways etc). Of course there may be wildly different strategies for sourcing raw materials or semi-finished products (e.g. sheet, coil, plate, tube etc) vs. more finished products (fabricated parts, castings, forgings etc) which contain some of those metals we wrote about the other day. Read more

In the face of a slowing US economy, a mixed position for the European economies and a still strong Asian market, it is a particularly tough call this year to judge where prices will go. Our call is the US will teeter on recession. Europe though restricted by high ECB interest rates will still enjoy some (if reduced) growth providing the Euro/US Dollar exchange rate does not strangle exports. Asia in general and China in particular are still enjoying robust growth. China may well drop from the double digit growth of the last 5 years to high single digit figures but that is still a very significant driver for the world economy and particularly the world metal markets.

So here are the 2008 predictions:

Read more

Before MetalMiner begins our short holiday hiatus, we would like to introduce contributing writer and associate editor Amy Edwards, who plans to write the occasional blurb and even in-depth features articles for MetalMiner. A graduate student at Northwestern University in Evanston, Ill., Amy looks forward to learning more about the metals industry and sharing that knowledge with MetalMiner readers. Feel free to contact Amy at aedwards (@) aptiumglobal (dot) com to suggest a future article topic.

Gold continues to make the news, as Lisa Reisman discussed this week in her post on selling gold jewelry to play the “price arbitrage” game. But many investors, as well as members of UK-registered JPMorgan Global Natural Resources Fund, are looking outside of the jewelry box and recommending that financiers pursue more minor metals, those lesser-known metals that still find their profits soaring. According to a recent Reuters article, Investors would do well to bet on firms with exposure to minor metals such as chrome and molybdenum as they are relatively cheap and demand is robust, a senior fund manager said on Wednesday. The article touts ferromanganese as one of the most potentially profitable metals, which is worthy of note after the recent announcement that ArcelorMittal plans to purchase OFZ, one of the leading ferro-alloys manufacturers in Central Europe. In addition to ferromanganese, chrome and molybdenum are also considered interesting in the Reuters article, according to Ian Henderson, manager of JPMorgan Global Natural Resources Fund. Many such commodities have not witnessed such a large run-up in prices, he adds, mentioning cobalt, tantalum and vanadium as other commodities that should develop a larger following.

These thoughts aren’t completely new, as Jack Lifton wrote last month in Resource Investor that minor metals are constantly developing as investment opportunities. His article offers a broad look at minor metals, and we would suggest a glance at the article for anyone hoping to study the opportunities some more. Minor metals, we’re beginning to see, may not belong in the minor league.”

–Amy Edwards

Could aluminum prices rise in the face of a recession?

Citing opinions from some 25 metal market analysts, Harbor Intelligence is predicting a better than 50% chance that the aluminum price will rise in 2008, hitting a peak of over $2600/mt in 2008 and over $2700/mt in 2009. At the same time that Morgan Stanley is predicting a full blown U.S. recession next year, the Harbor report cites four price support pillars that will see aluminum price increases next year. Read more


Almost everyone knows the age-old adage, Buy Low, Sell High, with the possible exception of a scoundrel trader for whom I used to work. He practiced a Buy low, but do whatever you need to sell strategy. Although buying low and selling high is a rather duh concept, I always get a kick out of hearing how XYZ company offloaded some old nickel or copper they purchased before the markets went crazy. So this article suggesting that now might be a good time to sell off gold jewelry purchased several years ago made me chuckle. Playing the price arbitrage game can work for buyers and sellers of all sizes.

I once met with the VP of global purchasing for a middle market manufacturing group who suggested that metals prices (we’re talking about the raw materials here) are similar throughout the world. But this couldn’t be any further from the truth. In fact, the arbitrage opportunities for buyers are probably more abundant as commodity volatility increases. Simply put, the more the prices for metals gyrate, the greater the opportunity to take advantage of arbitrage. Perhaps we can find an academic who would be willing to run some regression analysis for us to confirm that last statement. As an example, if the market is going down and a domestic supplier sets his price using a trailing three-month average, while a Chinese producer is using a spot price to set his price, a buyer can take advantage of an arbitrage opportunity (provided the product does not involve complicated tooling or high switching costs). Of course, there are many other variables, including the buyer’s required lead time, quality requirements, etc., but if the purchasing organization develops and creates multiple supply options for a particular category, there could be some savings or cost avoidance opportunities.

In the meantime, it is tempting to consider a little profit from those old gold necklaces!

–Lisa Reisman

The Dubai Air Show ended recently, and already the papers are announcing the massive sales secured by Airbus and Boeing — not just for their new offerings, the A380 and 787 Dreamliner, but for the stable stock in trade of A320’s and 777’s. Both makers have bulging order books with more than 1000 aircraft each on order. In addition, producers of smaller commuter aircraft like Embraer and Bombardier are also booming.

We see so many opportunities for the aircraft industry, but how does this affect the supply market feeding these production lines? After several years of sustained growth both in the West and Asia, the metals markets are already tight, particularly for the supply of semi-finished metals like plate, larger diameter bars, and the famous fasteners that have so delayed the Dreamliner. Read more

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