08/10/2015 - 14:40

Commodities confidence returning

08/10/2015 - 14:40


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Tipping the top or bottom of a market is never smart, especially at a time of volatile trading; but a series of recent events point to confidence growing in the start of a recovery in the Western Australian economy.

RISING: BHP Billiton shares have jumped 15.6 per cent in just seven trading days.

Tipping the top or bottom of a market is never smart, especially at a time of volatile trading; but a series of recent events point to confidence growing in the start of a recovery in the Western Australian economy.

The latest positive turn was an overnight change of mind by analysts at the powerful investment bank, Morgan Stanley, which advised clients to buy commodities and assets in emerging markets.

Australia wasn’t mentioned in the Morgan Stanley note, but it’s not hard to draw the line that connects that asset class to one of the world’s principal commodity exporting countries, with WA leading the way for Australia.

Other indications that the worst of the slump in prices for the state’s exports might have bottomed came on the London Metal Exchange overnight, with all arrows for price changes in green and pointing up.

It’s a long time since everything rose at the same time, and while some of the recovery (including a 2 per cent price increase by nickel and zinc, and a more modest rise by copper) was probably a relief rally after weeks of falling prices, the trend is hard to ignore.

But the best indication of a keenly awaited revival can be found in some truly remarkable upward moves in the share prices of big mining companies active in WA.

BHP Billiton, up $3.37 from a 12-month low of $21.61 on September 29 to around $24.98 earlier today, with that 15.6 per cent rise posted in just seven trading days.

Rio Tinto, up $6.92 from a 12-month low of $45.93, also on September 29, to around $52.85, a rise of 15 per cent at the same lightning speed as BHP Billiton.

Fortescue Metals Group, up 61 cents from a 12-month low of $1.58 on August 25, a 38 per cent rise in six weeks.

As well as the sharp and largely unexpected rise in the share prices of mining companies there is growing confidence in an oil-price recovery, which will also help WA.

After 18 months of heading down, the oil price seems to have started a long-term recovery, aided by steady demand and first signs that supply is falling.

Two days ago one, of the oil industries senior leaders, Royal Dutch Shell chief executive Ben van Beurden, joined a chorus of concerned critics who believe the overproduction of oil by Saudi Arabia, Russia and the US is leading the world into a potential oil crisis that could start with a sharp upward spike in the price.

What the Shell boss sees are “the first mixed signals of a price recovery”, though that was largely a result of high-cost oil being forced out of the market by the low prices that have resulted from overproduction.

The problem is that low prices have forced an estimated $US1.5 trillion worth of oil projects to be deferred, so when the price recovery gets under way there is likely to be a shortfall in supply, triggering a price spike.

Two weeks ago, a firm of Norwegian consultants, Rystad Energy, made exactly the same point – low oil prices have killed so much future development that a price spike could occur as soon as February.

Right across the commodity spectrum there are telltale signs emerging that the collapse in prices, and the subsequent decline in exploration and project development, is having the predictable effect on supply.

Investment banks such as Morgan Stanley are reading those signals and changing the tenor of their advice from stay away to time-to-buy.

Other sign of a turn for the better is the increasing level of ‘deal flow’ in the resources sector, including the raid on the South Australian copper miner OZ Minerals by US private equity leader KKR, and the $865 million acquisition of a coal mine from Rio Tinto by New Hope Corporation.

In both cases, and despite coal being the world’s least-loved commodity, the deals represented money going in to resources, which has to be better than money going out.

Right across the commodity sector the clues point to next year being better than this year; and while that is an easy observation to make (because 2016 could hardly be worse than 2015), it’s the trend that is so important for WA.

There is, however, a sign of recovery that is less welcome – that’s the rise in value of the Australian dollar.  The local currency briefly tested a sub-US70 cents exchange rate but is now back testing the US72 cents mark, a function of international investors returning to oversold emerging and commodity intensive economies such as Australia.

More time needs to pass before anyone could confidently say that the market for WA’s exports has hit a bottom and has started to recover.

But a final, very unscientific, test of the recovery is the increasing use of the word ‘bottom’ in the analysis of the commodity sector by investment banks.


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