THE COM­MOD­ITY OUT­LOOK

The long over­due re­turn of re­sources doesn’t ap­pear to be any closer, writes Ron Derby. And the up­turn is prov­ing im­pos­si­ble to pre­dict

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f you be­lieve growth has reached sat­u­ra­tion point, then be­liev­ing that there is no longer an in­vest­ment case for re­sources has to be your next con­clu­sion.

But to be­lieve that you’d be ig­nor­ing the po­ten­tial from Asia, Latin Amer­ica and Sub-Sa­ha­ran Africa, economies that are still decades away from reach­ing the sta­tus of Europe and the US.

The down­turn in the re­sources space, whose im­pact has been ac­cen­tu­ated by the emer­gence of the dig­i­tal econ­omy and gi­ants such as Google and Ap­ple, has seen in­vestors be­come rather jit­tery about the prospects for the sec­tor.

Just when is the up­turn com­ing? That’s a very dif­fi­cult ques­tion to an­swer.

A se­nior ex­ec­u­tive at one of the ma­jor plat­inum min­ers once said that the metal, like some other industrial com­modi­ties, moved in six-year cy­cles. What he was talk­ing about at the time was an im­mi­nent re­cov­ery given that the year was 2013, six years af­ter the metal’s March 2007 peak.

Now it is 2015 and that about-turn is al­ready over­due — share­hold­ers are fast los­ing pa­tience or have done so al­ready.

Over­sup­ply still weighs on metal fun­da­men­tals. It has pro­vided ammunition for those in­vestors and fund man­agers who re­main neg­a­tive on re­sources and es­pe­cially the min­ers re­spon­si­ble for dredg­ing up the met­als from the bow­els of SA’s earth.

Ear­lier this year, rat­ings agency Moody’s changed its out­look for the global base met­als in­dus­try to neg­a­tive from sta­ble be­cause of “weak­en­ing” macro-eco­nomic growth. Slow­ing growth in China’s GDP, con­tin­ued weak­ness in Europe and fall­ing cop­per prices con­trib­uted to the re­vi­sion.

China, which con­sumes 40% of base metal out­put, slowed to 7,3% in the fourth quar­ter, near a six-year low for the world’s sec­ond-big­gest econ­omy. Ac­cord­ing to the Econ­o­mist, an­a­lysts at the World Bank, the In­ter­na­tional Mon­e­tary Fund and US bank­ing gi­ant Gold­man Sachs, have sug­gested that within the next two years In­dia’s econ­omy could be grow­ing faster than its Asian neigh­bour.

Af­fected by that Chi­nese slow­down, cop­per has fallen close to 10% since the start of the year. The fall is seen as a harbinger of fall­ing global de­mand. Liberum has down­graded cop­per and iron ore fore­casts by 19% and 9%, re­spec­tively.

“Although the US econ­omy is strong and con­sump­tion of base met­als re­mains ro­bust, it’s not enough to counter weak­en­ing global trends,” the agency said in its re­port.

While con­sump­tion may be ro­bust, min­ers are deal­ing with the sins of for­mer ex­ec­u­tives for over-es­ti­mated de­mand for their prod­ucts. Of the top ten listed stocks on the JSE, only three CEOs re­main from pre-2008.

How­ever, by look­ing to re­duce pro­duc­tion and in some cases even sell­ing some of their as­sets — An­glo Amer­i­can Plat­inum comes to mind here — there will come a point when the min­ing in­dus­try will have shrunk enough to stim­u­late prices.

In the con­text of SA, there’s no more im­por­tant a metal than plat­inum. Phys­i­cally, min­ers are run­ning out of mine­able gold re­serves, while plat­inum is the op­po­site and is just wait­ing for prices to come back in or­der to boost pro­duc­tion.

If there’s no dis­rup­tive tech­nol­ogy, “…min­ers (plat­inum) will have a fu­ture”, an an­a­lyst, who wished to re­main anony­mous said. “The in­dus­try has to con­tract and then when

Over­sup­ply still weighs on metal fun­da­men­tals and has pro­vided ammunition for those neg­a­tive on re­sources

prices go up, it will ex­pand… it’s a nat­u­ral cy­cle.”

In its quar­terly met­als re­port re­leased last month, HSBC has a long-term price tar­get for plat­inum of $1,725 an ounce, 48% more than its Fe­bru­ary 20 price, based on “ro­bust” mar­ket fun­da­men­tals.

The Bri­tish bank sees im­prov­ing auto de­mand and tight­en­ing of Euro­pean emis­sions leg­is­la­tion lead­ing to strong au­to­cat­alytic growth in this year and next.

“Jew­ellery de­mand re­mains ro­bust with strong growth from In­dia and con­tin­ued up­take from the mega-mar­ket in China.”

Some 70% of the plat­inum ev­ery year ends up ei­ther in jew­ellery or in cat­alytic con­vert­ers that con­trol emis­sions from cars. Ac­cord­ing to John­son Matthey, a Bri­tish sup­plier of cat­a­lysts, Europe ac­counts for 25% of all plat­inum use from its ve­hi­cle mak­ers, which are the big­gest source of de­mand be­hind Chi­nese jew­ellers.

Since the price of plat­inum peaked in March 2007, the metal has lost about 48% in its value as there’s still a lot of the metal sit­ting above ground. The JSE plat­inum in­dex over the same time has fallen 73%. It should come as no sur­prise, given its labour is­sues in re­cent years, that the fall is led by Lon­min.

What has derailed a re­cov­ery story since the globe’s fi­nances came un­der pres­sure has been the world econ­omy’s rather un­even re­cov­ery since. And Europe, the world’s most im­por­tant and pre­mium con­sumer, has re­mained at the cen­tre of the slug­gish­ness. A sus­tain­able and broad-based eco­nomic re­cov­ery in the old con­ti­nent is cen­tral to any re­cov­ery not only in plat­inum but in the over­all com­modi­ties mar­kets.

To take the plat­inum ex­ec­u­tive’s six-year the­ory fur­ther, In­vestors Monthly looked at the per­for­mance of plat­inum and its min­ers in the six years lead­ing up to their re­spec­tive highs. For gold min­ers, we stretched it back to the start of gold’s more than decade-long bull mar­ket that be­gan at the turn of the cen­tury. The growth achieved over the pe­riod still far out­weighs the losses ex­pe­ri­enced since, and by a sig­nif­i­cant mar­gin.

If you were a buyer of An­glo Amer­i­can for its plat­inum busi­ness in June 2002, you’d have seen your in­vest­ment triple in the six years to its record high reached in June 2008, with the share stag­ing a 212% rally. Un­til its May 2008 peak, its sub­sidiary — An­glo Amer­i­can Plat­inum — gained just un­der 200%.

In the pe­riod since those highs, An­glo has de­clined 61% to its cur­rent val­u­a­tion, while its plat­inum unit has given up 73%.

In­vestec Se­cu­ri­ties has An­glo as one of its picks for the year, but not for its plat­inum ex­po­sure, but rather di­a­monds through its own­er­ship of De Beers.

As a sign of a world set for a pe­riod of low oil prices, the bank’s least favourite miner is BHP Bil­li­ton, which has been by far the best per­form­ing miner over the past six years. The miner only peaked last July, but has since fallen about 25% on fall­ing Brent crude prices.

Oil has dropped 56% since end of June to its low this year. It has staged a luke­warm re­cov­ery, break­ing through $60, if not only for a mo­ment. In his col­umn for Bloomberg View, A Gary Shilling, au­thor of “The Age of Delever­ag­ing: In­vest­ment Strate­gies for a Decade of Slow Growth and De­fla­tion”, sees oil fall­ing to $10 be­cause of growth con­cerns.

Im­pala Plat­inum, the world’s sec­ond-big­gest miner, ap­pre­ci­ated more than five­fold in the six-year pe­riod to its March 2008 peak, and has lost 79% since that high to its cur­rent val­u­a­tion. Lon­min, the third-big­gest plat­inum ex­trac­tor, gained over 260% in the years lead­ing up to its July 2007 peak, los­ing over 90% since.

So those in­vestors who have been brave enough to stick it out since 2002 in plat­inum and not move out into re­tail shares (which have been ma­jor ben­e­fi­cia­ries from the shift out of re­sources), have been kept in the money by the sec­tor. And up un­til 2008, div­i­dends flowed in hand­some fash­ion from this sec­tor.

The only ques­tion to con­sider is whether those heady days will ever re­turn, or at least some­thing closer to what was the great­est pe­riod of wealth ac­cu­mu­la­tion that the world has ever seen.

Sec­ond to that is what the ef­fect will be of tech­nol­ogy de­vel­op­ments in the elec­tric car space. More in the short-term, what will the in­creased fuel

A sus­tain­able and broad-based eco­nomic re­cov­ery in Europe is cen­tral to any re­cov­ery not only in plat­inum but in the over­all com­modi­ties mar­kets

ef­fi­ciency of petrol cars do to fu­ture de­mand for plat­inum?

Gold sits in a rather dif­fer­ent po­si­tion to plat­inum.

It doesn’t sub­scribe to the sup­ply-de­mand fun­da­men­tals of industrial met­als, but rather to sen­ti­ment in the global econ­omy, the US dollar, in­fla­tion or de­fla­tion and geopo­lit­i­cal con­cerns.

Last year was a tame one for the pre­cious metal, trad­ing be­tween the $1 140,5 and $1 383,05 band, a break from the volatil­ity of 2013.

Con­tin­ued mon­e­tary eas­ing in Europe, Ja­pan and China should sup­port the dollar in the medium term and neg­a­tively af­fect gold, ac­cord­ing to the Thom­son Reuters GFMS an­nual Gold Sur­vey.

But over the long-term, the agency sees “bullish” fun­da­men­tals.

“…As well as the knock-on benefits of lower oil prices there are in­fla­tion­ary forces on the long-term hori­zon (en­ergy only con­trib­utes 8% to US CPI) as a re­sult of the mas­sive liq­uid­ity in the sys­tem. This year will see the nadir of the gold price.”

Gold is used an in­fla­tion hedge, pro­vid­ing pro­tec­tion against the de­crease in the value of a cur­rency.

SP An­gel fore­casts the gold price at $1 300/ounce this year and $1 350 in the longer term.

Fol­low­ing gold stocks for more the past decade has not been for the faint-hearted, but much like plat­inum min­ers the years since they reached their peak haven’t wiped out the ap­pre­ci­a­tion ex­pe­ri­enced lead­ing up to it.

Since the start of the new mil­len­nium, which marked gold’s decade-long bull mar­ket, to its Fe­bru­ary 2009 peak, Har­mony Gold more than tripled in value. It has since lost just un­der 80%.

Gold’s decade-long bull mar­ket peaked in Septem­ber 2011, with bul­lion gain­ing six-fold to just over $1 900 an ounce.

Gold Fields was just short of a six-fold ap­pre­ci­a­tion, gain­ing over 484%, to its July 2006 high. The com­pany has since lost 66%.

An­gloGold gained over 160% from the turn of the cen­tury to its De­cem­ber 2011 peak, los­ing 64% since.

Gold min­ers, like their plat­inum peers, are faced with high debt lev­els that many took on to fund their ex­pan­sion ef­forts. The un­sup­port­ive prices have caught them out as they sim­ply can’t mean­ing­fully cur­tail out­put as it would jeop­ar­dise debt obligations.

Re­struc­tur­ing which may in­volve as­set sales, es­pe­cially for An­gloGold and Har­mony, is of prime fo­cus for each com­pany over the next year.

Last year, share­hold­ers jet­ti­soned An­gloGold’s plans that would have seen the com­pany split into a South African and an in­ter­na­tional op­er­a­tion, squeal­ing at the $2bn price tag which was to be funded from the sale of new shares to ex­ist­ing share­hold­ers.

Jus­ti­fy­ing one’s be­lief that re­sources and, in par­tic­u­lar, plat­inum and gold, will im­prove, is go­ing to be a rather dif­fi­cult for any­one. While gold raises par­tic­u­lar con­cerns, plat­inum has its sup­ply-de­mand dy­nam­ics that at some point will in­ter­vene to sup­port a stronger price.

Apart from the ex­pected as­set sales in the com­ing months from the world’s big­gest plat­inum pro­ducer in An­glo Amer­i­can Plat­inum, the com­pany has man­aged to take sig­nif­i­cant pro­duc­tion out of the mar­ket over the past few years.

At some point it has to re­flect in the num­bers.

Con­tin­ued mon­e­tary eas­ing in Europe, Ja­pan and China should sup­port the dollar in the medium term and neg­a­tively af­fect gold

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

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