Is it already time to start picking up the pieces? You can start sweeping up the glass and salvaging bricks to rebuild with once you’re sure that all the destruction is over. Or, if you prefer the economic term for it, industries ‘rationalise’ after the woolly-bully expansions that take place in a boom.
“The global mining industry will undergo mega deals of as much as $US10 billion ($15.38 billion) this year as the economic downturn presents once-in-a-lifetime acquisition opportunities,” reports today’s Age. It refers to a report by Ernst and Young in which the firms says it expects, “niche deals to increase and a number of smaller $US2 billion ($3.08 billion) to $US10 billion ($15.38 billion) megadeals involving the mid-tiers.”
The consolidation makes sense. But it doesn’t really help you figure out which resource is bullish or which firm is ripe for the taking. There is also the matter of the US$172 billion in loans outstanding held by resource extraction companies. The need to roll that over makes some firms vulnerable.
The EY report claims that draw downs in global commodity inventories, coupled with $2-3 trillion in global stimulus programs geared toward metals-intensive infrastructure programs is, well, bullish. That’s probably true, but not in a way in which you could make accurate guesses about how much more iron ore or coal or zinc demand these plans will generate.
OPEC agreed not to cut oil production again until it meets later in May. That’s a bit misleading, though. OPEC said it wouldn’t cut production even though global oil inventories are high. But the friendly cartel members admitted they still haven’t cut production down to the levels they agreed on with the previous cut.
Thus the nature of the cartel. It’s in everyone’s interest to cheat just a little bit by over-producing to make more money. Bloomberg reckons OPEC is producing about 800,000 bpd more than its agreed quota. “The crude oil production target for 11 OPEC members bound by quotas is 24.85 million barrels a day, while actual output from those countries averaged 25.715 million barrels a day in February.”
For the arm-chair oil analyst, or just the casual observer of global petroleum markets, it’s going to be an interesting ten years. OPEC still produces 40% of the world’s crude oil each day. And its member nations control the lion’s share of the world’s proven oil reserves. Check out the table below.
Source: U.S Department of Energy, Energy Information Administration
On paper, you can see that just 17 countries control 1.2 trillion barrels of crude oil reserves. The ten OPEC nations on the list account for 924 billion barrels, or about 72% of total proved reserves. True, the Saudi proved reserve figures haven’t changed in years, and are just as unaudited as all the gold in Fort Knox. The Saudi Oil Kings, like America’s private bankers, refuse to let the public, or an independent third party, verify that they have what they say they have.
But let’s not quibble. After all, Canada’s reserve figure is based on the economic production of oil from the Athabasca Tar Sands. With the crash in oil prices, Canadian reserves are not looking so proved. You might say the same for some of the difficult-to-produce reserves in Russia.
Anyway, our point? It will be intriguing to see which falls faster in the coming years…actual production figures…or proved reserve figures. Actual production is falling because some of the world’s big fields are in depletion. The proved reserves? Who knows what’s going to be economically producible in the coming years? Look for more on the oil story later this week.
“There’s no safer investment in the world than in the United States.” Barack Obama’s press secretary told the world, and especially the Chinese. He was speaking about U.S. Treasury notes and bonds. China owns around $700 billion in U.S. Treasury bonds, which is not only a lot, but more than any other foreign country.
Last week, Chinese Premier Wen Jiabao rattled some cages in Washington. He told a press conference in Beijing that, “We have lent a massive amount of capital to the United States, and of course we are concerned about the security of our assets. To speak truthfully, I do indeed have some worries.”
About 696 billion and counting, we reckon.
Is it possible the Treasury bond bubble has already burst? It is possible! If stocks can’t sustain their rally from last week, then the institutional rush into bonds might resume. We wonder if people have quite given equities up for dead. But the chart below suggests that the move into bonds-at least U.S. government bonds-may have already come and gone.
Did the Bond Bubble Already Pop?
The chart shows the performance of a Barclay’s ETF that tracks U.S. Treasury bonds of 20-years maturity or more. What you see in November is huge spike in prices as the stock market crashed and investors panicked.
What you see since then is a decline to lower lows and now, a period of indecision. “Should I stay or should I go?” It would be normal for institutions to keep cramming into bonds even as bond prices fell and equity prices climbed a wall of worry. But just because bond prices may have topped out does not mean we’re giving the all-clear to get back into stocks. More on that tomorrow.
for The Daily Reckoning Australia