Article first posted yesterday on sharpspixley.com
In his address to today’s Global Mining Finance Spring Conference in London, Jeremy Wrathall, Investec’s Global Head of Natural Resources, placed Gold at the top of his list as the likely best performer in global metals and minerals for the current year. But overall he was not too optimistic for the continuation of the recent commodities recovery over the short to medium term. May to September, he commented, tend to be weak months for commodities and he doesn’t see this year as being any different.
But, many metal commodities have outperformed this year so far with silver and gold top of the list in terms of gains to date. It has been a commodity rally, Wrathall averred, that came out of the blue. Almost all the metals and minerals had been drifting in price up until the end of 2015, but right from the start of the 2016 New Year things did begin to pick up – at least for the precious metals.
Wrathall put the principal drivers down to China and weakness in the US dollar. The former’s fundamentals appear to have improved quite sharply – perhaps even akin to the 2009 recovery there which drove commodity markets to new highs. This was a total change from 2015 which he commented was a year of maximum commodities pessimism. However he wasn’t entirely convinced that the Chinese recovery would be sustained through the rest of the year.
So what has changed? Mining companies across the board have proved remarkably successful in substantially cutting operating, management and capital costs, reducing debt and in taking impairments on projects whose values had been slashed by commodity price weakness due, in many cases, to substantial oversupply brought on by weakness in the manufacturing sector worldwide, and notably in China. They have been helped in their efforts by the strength of the US dollar against local currencies and lower oil prices. This is something of a two-edged sword though. It has helped operations which might otherwise have closed stay open, thus continuing to keep supply surpluses in place. For example Wrathall showed charts suggesting about 90% of world iron ore and copper production as being viable at current prices despite the big price declines for both metals. Currency parities and oil prices could also reverse which could put mining operations which had been enjoying corresponding benefits back into difficulties again.
On gold, Wrathall admitted that he’s been trying to work out a rationale for gold price performance for the past 30 years – and failed! But what he has seen is an increased allocation by fund managers into resource assets – and precious metals have probably been the major beneficiaries here – after they had been ignored through times of rising prices. Now funds are flowing back, but into what is effectively a small sector in global financial terms, which has led to some well above average price increases as a result.
Wrathall’s most preferred order of positivity on metals and minerals is as follows: Gold (silver wasn’t mentioned but presumably falls into this category), diamonds, copper, oil and gas, alumina, rhodium, manganese, platinum, zinc, aluminium, lead, nickel, palladium, iron ore, chrome and coal – the worse the prospects the further down the list one goes. Part of the uncertainty is the possibility that China, which is key to a sustained recovery in the industrials sector, could possibly be exhibiting parallels with Japan of the 1970s, and which has been suffering virtually zero growth most of the time since! That palladium falls so far down his list will surprise many who feel that fundamentals are very supportive (but again much of this is predicated on substantial growth in the global market for petrol (gasoline)-powered vehicles and China is very much the key market here so any faltering in growth could put a substantial dent in market expectations, while allowing alternative drive units (electrical and fuel cell) to take an ever growing share of this market as technology improves.)