Australian Market Notes – 13 November 2006

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MELBOURNE AUSTRALIA, 13 November 2006 – It was a miniscule rise for the All Ordinaries last week. A miserly 0.2%. Perhaps there was just too much happening for anyone to really know what to do. Inflation numbers out of the United States. Jobs numbers at home. Another interest rate rise. A Japanese horse winning the Melbourne Cup.

Maybe we should all just cash in our stock market chips and buy the chips that Crown Casino serve. Put everything on black and hope for the best?

Looking at the profits that Publishing & Broadcasting (ASX: PBL) make from the Crown Casino operation, that is clearly not a good idea. Buying PBL shares on the other hand may be the way to go. If only they can flog off the rest of Channel Nine.

Perhaps this week will spell happier tidings. Wall Street had a better week adding 1% and keeping its head above the 12,000 point level following a dip below that level the previous Friday. However, it still does not look convincing. We all know that stock markets are generally influenced by interest rates and earnings. At the moment Wall Street seems happy to believe that interest rates are not rising any further and in fact the next move may be down.

But what can be said about earnings? Higher commodity prices must surely bit one day. So far companies seem to have weathered the storm.

Speaking of commodities we stumbled across the latest edition of the London Metal Exchange’s ‘The Ringsider – Metals 2006’ yearbook over the weekend. We have no idea how long it has been gathering dust on your correspondent’s desk, but we would think it only a matter of days.

Given our penchant for most things resources, it behooved us to see what the venerable LME had to say for itself. Now, without being cynical, it is a reasonable assumption to suggest that the LME prefers to stand on the bullish side of the metals market. It is in their interests for metals prices to rise as it encourages more trading and more interest in the market.

So, we scan at some of the stories contained within the ‘Metals 2006’ yearbook to see the following headlines. Headlines that will make many an Australian mining CEO sleep soundly.

“Robin Bhar suggests new highs for copper could be experienced this year;” “Lead Looks East: Supply is set to rise next year but Angus Macmillan believes there may be further price hikes.”

Or what about this, “Anthony Warwick-Ching believes there is still plenty of upside for nickel.” And, “Full Steam Ahead: Peter Richardson says the outlook for zinc remains positive for this year and next.”

Wow! That should put the commodities grizzly bears in their place. The yearbook even has a spot for BHP Billiton’s Chip Goodyear.

Let’s take a look at zinc. For a start, who is Peter Richardson? He is a metals economist at Deutsche Bank (NYSE: DB), so we hope that he should know what he is talking about. According to the figures he quotes, zinc consumption is estimated to outstrip supply for at least this year and next. He doesn’t produce figures for 2008 so we can either assume that there isn’t any, or that forecasting more than a year out is too meaningless.

Whichever the case, it must surely add an element of uncertainty to the zinc market. As with most markets, uncertainty generally leads to higher prices as those with the demand for the product buy-up now to make sure they either have the product, or that they are long the contracts should supply remain tight.

The average USD zinc cash price is forecast to be USD$2,903 for 2006, more than double the 2005 level and nearly three times the 2004 average price. During the same time LME warehouse stocks have fallen from around 700Kt to around 150Kt.

Richardson says that, “consumption increased by 10.3% to 1.5Mt in January-April 2006. Chinese consumption growth formed the lion’s share of this increase, rising 8.7%.” He goes on, “Chinese consumption growth alone accounted for 72.1% of the aggregate growth in global consumption during this period.”

We know the latest edition of Outstanding Investments has plenty to say about the resources sector and our take on the Australian market is that there are still some great looking opportunities out there. Nickel, copper, zinc and lead are sure to be among them.

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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