30/06/2011 - 00:00

Time’s right to go out and get on the juice

30/06/2011 - 00:00

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What’s the connection between a light metal, fruit juice and a US-based economist?

ORANGE juice and aluminium sound like a perfect packaging combination, though not one likely to catch the eye of investors. Look again, because both the fruit juice and the world’s preferred light metal are showing signs of joining the commodities boom.

Last week, without too many people in Australia noticing, the price of OJ hit a five-year high, thanks to a combination of strong demand, a cold winter in southern US states, especially Florida, followed by a dash of drought in recent months.

Across the Atlantic, on the London Metal Exchange, the price of aluminium continued to edge higher and stockpiles continued to dwindle.

Both events, somewhat surprisingly, are connected in that they are the latest example of the squeeze developing on all commodities as Asia gets richer (and hungrier) and traditional sources of supply struggle to keep up.

Two months ago, the British born (but American based) economist and fund manager, Jeremy Grantham, highlighted the coming commodity crunch in a paper to rival any previous conversion, whether on the road to Damascus, or not.

After a 50-year career of dismissing commodities as a valid form of investment, Grantham used his quarterly newsletter to issue a wake-up call – literally.

“Time to wake up,” he headed his GMO newsletter (short for Grantham Mayo Van Otterloo): “Days of abundant resources and falling prices are over forever”.

It was big call by Grantham, and not one that all professional critics and casual observers shared. The man himself, however, was putting his money where his mouth is, saying that an increasing portion of his personal investments would be directed into commodity-linked products.

Since that call to load up on commodities, events have continued to move in Grantham’s favour. Wheat prices rocketed in May at the first whiff of drought in Russia and France. Iron ore prices stayed high despite China getting a fit of the economic wobbles, and copper, the bellwether of all metals, remains above $US4 a pound, a price once regarded as stratospheric.

OJ and aluminium are the latest commodities to fit Grantham’s thesis, which should not come as a surprise to believers in his argument because OJ production is naturally limited by weather events, and the time it takes to establish new orchards. Aluminium slips neatly into his list of metals that have China as their dominant customer.

When Grantham compiled his list of commodities to watch there were a number very close to Australia’s economy because of the China-domination factor. Almost half of the world’s iron ore for example (47.7 per cent) is being consumed by China.

Other metals high on China’s shopping list include 41.3 per cent of the world’s zinc and 40.6 per cent of the world’s aluminium – a metal some investors treat with extreme care because of the way it almost destroyed Rio Tinto in 2008 when the GFC exposed its $40 billion (all cash) purchase of Canada’s Alcan as over-priced.

Times have certainly changed for Rio Tinto, aluminium and Western Australia, which is the world’s biggest producer of the metal’s precursor commodity, alumina.

In essence, what’s good for aluminium is good for Rio Tinto is good for WA, and while the light metal has been late to the post-GFC commodity party it is finally arriving (along with OJ and a few other forgotten commodities).

During the past three years the aluminium price has risen from a Rio Tinto-destroying US50 cents a pound to around $US1.11/lb, taking it back to 2007 levels (but short of its $US1.50/lb pre-crash high).

Now comes the interesting bit for investors looking for the next commodity to enjoy an upward run similar to that which has pushed zircon and other mineral sands to near-record levels, making the normally lacklustre Iluka Resources one of the ASX’s better-performing stocks.

On commodity markets, aluminium has the second best (after coal) forward price curve. Rather than decline over time, like copper, nickel, zinc and iron ore, the aluminium forward curve rises, all the way out to 2016 – to around $US1.40/lb.

One metal (and one form of fruit juice) does not prove Grantham’s commodities wake-up call, but they do add to the weight of evidence that indicates many years of strong demand for all commodities as China and the rest of Asia lift their living standards.

What about Yeelirrie?

FAR less optimistic, and potentially bringing a touch of political pain to WA Premier Colin Barnett, is the problem of what do about BHP Billiton and its on-off Yeelirrie uranium project near Wiluna.

Discovered back in the 1960s, Yeelirrie is named after a sheep station of the same name, and for a few years in the 1980s looked like it might be developed into a world-class uranium mine.

The original owner, Western Mining Corporation, even conducted trial mining and processing operations before the uranium market collapsed and Yeelirrie returned to its original use as a sheep paddock.

That might be happening again, if BHP Billiton has its way, recently re-allocating staff to other (iron ore) duties, and effectively wrapping Yeelirrie in a fresh shroud of mothballs, arguably until the uranium price improves, but more probably because it doesn’t want to develop a mine in competition with its much bigger Olympic Dam project.

By opting to not develop, now, BHP Billiton is begging to be hit with a ‘use it, or lose it’ demand from the WA government, or from another miner egging on the government with a claim that it can commercialise an asset which, after all the bluster is blown away, belongs to the Crown, or in this case, the state of WA.

Royal Dutch Shell had a similar problem with its plans to buy Woodside Petroleum, especially after a senior executive said it would ‘sequence’ LNG projects to suit its timetable – and not Australia’s timetable.

Rio Tinto hit the same problems at its Blina diamond field, which it was forced to sell to Kimberley Diamonds after years of non-development.

If BHP Billiton really proposes to warehouse Yeelirrie for a fourth decade then perhaps it is time someone reminded the company that its actions might not be in the interests of WA.

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“Before everything else, getting ready is the secret of success.”

Henry Ford

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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