Iranian Reality Television and the Australian Commodity Bull

Ready, fire, aim! The first quarter was note entirely a wash for Australian investors. For the quarter (which ended on Friday) the ASX/200 was up 325 points, or 5.7%. Do that four times a year and you’re talking real money. But many of the quarter’s early gains were wiped on by the China-induced slump in March.

Where to from here? Merger and acquisition activity has been brisk. But can it continue? It certainly looks like the media sector could see some activity. Yet that hardly seems like the sort of economic activity on which to build a new share market rally. With the ASX and the ASX/200 both struggling to regain 6,000, a failure to confirm the new high means…well what does it mean?

Darned if we know. Bull markets are powered by the leadership of themes that the public and the media can get behind. “ASX 6,000!” is not a catchy theme. And lately, more ominous theme music can be heard in the background. Over the weekend we saw news that the first spit-balls were fired in a mini-trade war between the United States and China.

The U.S. Commerce Department slapped tariffs on Chinese coated paper. What exactly American policy is designed to achieve has never been entirely clear to us. Even if they are subsidized, cheap Chinese goods are a boon to American consumers, are they not? The net effect of slapping tariffs on Chinese goods will be to raise prices on goods for American consumers. This is also an effective way of getting people to stop spending, which you’d think would be bad in American economy that’s driven by consumer spending.

Commodities seem to have shrugged off the early warning signs of a trade war. Copper was up nearly nine percent in the first quarter, and closed Friday not far from US$7,000 per metric ton. The big driver behind the recent rise is renewed demand from China and forecasts that Chinese copper demand could grow by 12-14% this year.

Oil, of course, is doing its own thing near $66. The Iranian government seems to have found a new reality TV show, ready-made for Western cable-news services. It’s called, Coerced Hostage Confessions Daily (CHCD). In the absence of an unexpected and sudden resolution to this dilemma, oil prices (and energy stocks) should keep creeping upwards.

And then there is corn, which has rapidly become “the other oil” the way pork briefly became “the other white meat” a few years ago. Corn futures plummeted on Friday as traders noted U.S. corn plantings were at their highest level since 1944, before the end of World War Two. Corn is a major ingredient in ethanol production. And high ethanol demand is a response to the increasingly unpredictable future of Middle East oil supplies.

Will ethanol get cheaper when next year’s corn crop comes in? That’s what you’d expect. Of course, by then the oil fields of Iran may still be on fire, following U.S., British and Israeli air strikes. In which case, corn prices might have turned up. Or…everything will be fine and oil will be back down around $40.

The truth is, we have no idea what will happen. About the only things we know for certain are that we are having a chicken parma for lunch and the Reserve Bank of Australia will probably raise interest rates later this week, further driving up the Australia dollar. In the category of “less certain but highly probable” we’d concur with the headline in today’s age that suggests renewable fuels are here to stay. According to the article, “Half of Australia's electricity could be supplied through renewable energy by 2040.”

That’s the good news in all of this. While energy shares rally, investment in alternatives and renewables will grow too, hopefully faster than conditions in the Middle East deteriorate. Stay tuned…

Dan Denning
The Daily Reckoning Australia

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