24/07/2014 - 15:09

Commodity cycle keeps on turning

24/07/2014 - 15:09


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The iron ore and gold mining industries have served Western Australia well during the past decade, but that does not mean they will do the same job over the next decade, especially if the switch to other minerals evident on world markets gathers pace.

Commodity cycle keeps on turning

The iron ore and gold mining industries have served Western Australia well during the past decade, but that does not mean they will do the same job over the next decade, especially if the switch to other minerals evident on world markets gathers pace.

A number of significant milestones have been passed in recent days, including a fresh slide in the prices of iron ore and gold, and fresh highs reached by aluminium and zinc.

What’s happening is a classic example of how commodity markets work in cycles, with iron ore and gold suffering from oversupply (and falling prices) while other metals, which have been suffered from a lack of fresh investment, are entering a period of short supply and rising prices.

Nickel, a WA speciality, has enjoyed a remarkable price revival thanks to the supply squeeze caused by Indonesia’s ban on the export on unprocessed ore. Even coal, the hardest hit mineral, is showing the first beneficial effects of mine closures and supply cutbacks.

Two of the top-performing companies on the Australian stock market this month are coal miners. Whitehaven Coal is up 18 per cent and New Hope Corporation is up 11.5 per cent, not because of a sudden upward move in the coal price, but due to the expectation that prices cannot go any lower and higher prices might be on their way as investment in the sector dries up, mines close and new developments are mothballed.

The rotation away from commodities that have performed well into a fresh set of neglected commodities will be a challenge for WA industry, government and investors, because everyone has become overexposed during the boom years and might not be able to quickly adapt to a fresh set of circumstances.

It would, however, be unwise to ignore the evidence building on the stock market and in commodity markets. It also might pay to keep an eye on the investment decisions of WA’s richest people, some who are starting to allocate their spare cash to non-mining investments.

The move by Gina Rinehart and Andrew Forrest to expand their interests in beef production, at almost the same time, was not coincidental. They remain heavily exposed to iron ore, but some of their spare cash is going elsewhere.

What Mrs Rinehart and Mr Forrest can see is a time when it will be much harder to extract profits from iron ore, especially if the price resumes its downward drift (it hit a low of $US89 a tonne in June, and a three-week low overnight of $US94.50/t).

That latest price is for premium quality ore, with a 62 per cent iron content and low impurities, is not the price most WA producers get paid because steel mills are enforcing quality discounts on a market entering a period of oversupply.

Discounting is starting to affect producer behaviour, with Atlas Iron earlier today announcing its plan to boost production of its premium product (standard fines) and limit production of lower quality material (value fines), a move that’s a form of ‘high grading’ an orebody to overcome a period of lower prices.

Gold is also suffering from declining investor interest, and while it is impossible to understand what really drives gold (one day it’s a commodity, the next it’s a currency) the price is struggling to stay above $US1,300 an ounce – and a number of local goldmining companies are struggling produce gold at less than $US1,300/oz.

Contrast the weakening prices for iron ore and gold with strengthening prices for other minerals, metals, and beef, as China switches from a time of building things to a time of eating well.

The nickel revival is the best example of what might happen to other commodities over the next few years; and while the 40 per cent rise in the nickel price to $US8.58 a pound could be reversed should new Indonesian President Joko Widodo overturn the ore-export ban, local miners are enjoying a much-needed boost to their profits.

Zinc, a metal produced in relatively small quantities in WA, might make a comeback as an exploration target as it sets fresh three-year price highs thanks to declining global stockpiles. Last night, zinc hit $US1.07/lb, up 24 per cent from mid-March when it was selling for US86c/lb.

Aluminium, which is not made in WA but does use WA alumina for its production, is up 20 per cent over the past six months, trading last night at a 17-month high of US89c/lb compared with US74c/lb in February.

The rotation into minerals other than iron ore and gold can be seen clearly in the performance of Australia’s two biggest miners, BHP Billiton and Rio Tinto, where another metal, copper, is attracting the greatest attention of management and shareholders.

Both companies have boosted copper output to catch an expected increase in demand; and while the price has not moved up substantially, yet, the global stockpile of copper is shrinking – an essential precursor to a price hike.

Some doors might be closing but others are opening.


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