Metals and Miners Tank, Euphoria Exhuasted


– The euphoria couldn’t last forever, and last week a certain amount of gloss was smeared from the All Ordinaries, especially the resources based stocks.  The All Ords lost 1.7% during another holiday shortened week.  Today sees the first full week of trading since the week before Christmas.

– On the resources front, the majors, BHP Billiton, Rio Tinto and Woodside Petroleum had a torrid time of it.  BHP lost 4.8%, and Rio and Woodside lost 5.7% and 6% respectively.

– Although the oil price took much of the headlines last week as it dropped to around USD$55 per barrel, it was the fall in metals prices that weighed most heavily on Australian resources companies.

– As Bloomberg News reported, “A measure of six metals traded on the London Metal Exchange, including copper and zinc, dropped 0.8 percent yesterday [Friday], falling for a fourth day.  Copper fell 2.4 percent.  On Jan. 3 the metal dipped below $6,000 a ton for the first time since April.  In New York, copper slid 1.8 percent to an eight month low.”

– Extraordinary, since it hasn’t been so long since copper was trading significantly higher than $7,000 a ton.

– But, the oil price did fall as well, and massively so.  John Kilduff, senior vice president of energy risk management at Fimat USA told Forbes magazine, “The primary driver is the abject lack of cold weather to date this season.  It’s taking a lot of the anxiety out of the market in terms of sufficiency of demand.”

– Interestingly, there was a differing of opinion about the future direction of oil prices.  Tina Vital, oil analyst at Standard & Poor’s told Forbes “We don’t think this [fall in prices] will last very long.”  While oil analyst Peter Beutel at Cameron Hanover told them that “In four to eight years, oil could trade as low as $20 a barrel.”

– That could be right, but would probably depend on a series of massive oil discoveries, a significant slowdown in the growth of China’s and India’s economies, or a miraculous development of a sustainable energy supply to replace oil.  From where we are standing today they all seem like long-shots, and we certainly would not be tempted to bet the family silver on either one of them happening.

– In comments about falling commodity prices, Comsec equities analyst Craig James told News Limited papers that “While these reassessments have happened intermittently over the past three years, there is a greater chance of a more lasting correction this time around as supply is finally responding to meet global demand.”

– Not surprisingly, the uranium miners are still coming along nicely as the realization mounts that nuclear power is the most likely solution for power generation.  And as the federal government ramps up efforts to convince the electorate of its green credentials, the environment minister Ian Campbell has heaped scorn on the West Australian government for its refusal to review its uranium mining policy.

– In an interview with ABC radio, Senator Campbell said, “It is really time for governments like the Carpenter Labor government in WA to  revisit this issue thinking about the greater good of the planet… we do need solar, we need wind power, we need energy efficiency, we need all of those things, but we do know nuclear can make a contribution.”

– Perhaps paradoxically, the biggest threat to finding an alternative fuel for oil could be the softening in the oil price itself.  Even though the price may be falling, it doesn’t mean that there is any more oil available today than there was six months ago.  It also doesn’t mean that demand is any less, in fact it is higher.  Yet the lower price of crude oil around the USD$50 mark could make the move to alternative energy sources a lot less urgent.

– Why do today, what can be put off until tomorrow!

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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