Posts Tagged ‘commodities’

More pressure on copper as commodities start to fade

FCXFollowing on from my post last week “What goes up  must come down” , where I looked at the two largest producers of copper, Chile‘s Codelco & also the American firm Freeport McMoRan, I have spent some time over the weekend researching the copper market & looking to see if I could find anymore signals that would show market direction.

Re-capping on the trade, FCX so some very significant selling volumes from the open on Friday &  the trade triggered as FCX fell through the 65 mark, where I commited to 50% of my planned exposure, the remaning 50% was then entered at 64.25 & I rode this down to 63.06.  I am looking to repeat this trade as a swing this week & here are some of the reasons why.

As previously stated on Freeport McMoRan, the company has scaled back copper production & has increased gold production to an all time high. Freeport is making some serious cutbacks & cost management is a major theme, as with many other major stocks, so I am still bearish on FCX as a whole from a fundamental standpoint.

Whats more interesting, is looking at some other factors that help bear out (nice pun) my thesis that we are looking at short term oversupply of copper. First let’s have a look at the copper Exchange Traded Fund : JJC, it has seen a strong uptrend  since early this year, returning a tad over 100% year to date, however looking at this technical chart, it would seem to be overbought & is signalling this.

JJC

Turning to a shorter term chart & looking at volumes on JJC, we can see that it hit & refused it’s upper Bollinger on Thursday 13th & saw some very aggressive selling in high volumes on Friday. If we then look closer at the history of the ticker, it has a habit of withdrawing back to it’s 20 Day Moving Average, which would give a reasonable bottom at 36.90 on any significant breakdown. So, I am looking to take another short position in JJC (if I can, it’s pretty illiquid) & see if I can’t double up on my FCX trade.

JJC 3 month

Another indicator that all may not be well is the performance of the Base Metals ETF : DBB, which holds an equal 33.33% in copper, aluminium & zinc. DBB has also had quite a years so far, with a return rate of 53%, on Friday this started to look fragile & there was fairly spikey activity in the ticker all through the day, finally closing 3.8% down, so not a bright day for metals at all. Again looking at a 3 month chart, we can see that DBB has been hitting it’s head against the upper Bollinger since mid July & at the latter end of last week also refused. Needless to say that Friday saw some volumes selling off, although not as heavily as FCX & JJC. The reasoning behind this is that DBB is held by select financial institutions & they are unable to un-reel their positions very quickly.

DBB

So to summarise, FCX still looks weak, JJC in my opinion is looking to implode & the major ETF in this sector is on the retreat. Again, I’ll be looking at shorting Freeport down, as per the tactics from my last post & if I can get in on JJC, I’ll be tapping into a short there too, looking for an exit at around 38.50. If the sell off continues, next stop for me is the 34.20 mark, so I’ll look to drop the short at 34.50. Add to all this the negative sentiment on China  & commodities right now, I think these swings could be real earners for this week.

Author has no current holdings in any stock mentioned

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Vale to sweep up as Rio “fails” in Chinese espionage fiasco

bulk ore carrierThis post from China News Wrap is significant, as it’s sourced locally from International Financial News, which is a Peoples Party owned newspaper. China informs Australia that proof is irrefutable (sic) Basically the Chinese authorities are not going to back off, having been snubbed over the Chinalco deal. I reckon this will run & be very detrimental for both Rio & BHP Billiton. Anyyone else noted that both firms have been talking up inventories being built up elsewhere ? The real deal is in the 2nd last paragraph of the story :

“At the same time, although Rio Tinto had made statements last week emphasizing that it would ‘continue its iron-ore operations in China’, the actual situation does not seem to reflect this. The overseas media yesterday reported that shipments of spot market iron-ore from Brazil to China soared to record highs in July, which could be related to the Rio Tinto case. Australia seems to have temporarily suspended its exports of spot market iron-ore to China. Data from the shipping company AXSMarine indicates that orders for shipments to China from Australia’s main iron-ore port fell to 12 this month, while orders for shipments from Brazil reached the record high of 31. This means that China’s demand for iron ore is still strong.”

so basically VALE is picking up the slack & would also seem to be enjoying it too, if this piece from Reuters is anything to go by :

Vale Resists China Price Cut Request on Demand Gain

“Politically Vale has done well with its customers by letting the Australians settle first,” Cliff said. In the first quarter, China took 66.5 percent of Vale’s total iron-ore sales of 52.1 million metric tons, up from 32 percent a year earlier.”

Regular readers of MyStockVoice will know that I’m a big fan of Vale, so, long VALE is a no brainer & I have felt that BHP is a little toppy for a week or so, may instigate a short. RTP I’ll leave for bigger fish to swim with.

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Chile leads the way for South American ETFs

london-metal-exchangeWhilst suffering from shrinking export markets, led by the all important 20% supply of global copper, a shrinking economy & climbing unemployment; Chile continues to buck global trends, with ratings agency, Moody’s Investors Service making it the first investment- grade country to be awarded a higher credit rating this year. The South American country’s $22 billion of savings in wealth funds has put it in a position to recover more quickly from the global credit crisis than other, similarly rated nations, Moody’s said yesterday in raising Chile’s foreign debt to A1 from A2 with a positive outlook.

This has been the result of a canny economic long game by President Michelle Bachelet, while near neighbours have splashed out on the commodities boom over the last decade, Chile has followed a prudent path of pumping  profits from state owned copper giant Codelco into soverign funds, providing the nation with a $22Bn cushion against global turmoil. That cushion is equal to roughly 13% of Chile’s GDP ($154Bn), so Chile looks as thought it should weather the storms of 2009 quite nicely.

“Nobody else compares with Chile,” Moody’s analyst Mauro Leos said in a phone interview from New York. “Like everywhere else, they’re getting hit hard. But because of the work they did ahead of time, they can go from a 5 percent surplus to a 5 percent deficit without any additional borrowing.”

Also helping is the price of copper on global markets, which is on a slow uptick, & an expectation that China’s economic recovery package will drive demand for the metal towards the end of 2009, this is reflected in current long term copper contracts on the London Metal Exchange. Central government has acted promptly, with Bachelet committed to a $19.5Bn package incorporating tax cuts & subsidies that should help stymie economic contraction. Even with copper prices at all time lows, economists think that Chile can still exit the current crisis without hitting recession.

Codelco announced its full year results earlier this month, generating a pre-tax profit of $4.968 Bn to December 2008, it is estimated that Codelco has provided an average of $7.5Bn per annum in revenues for the last 4 years. This follows Fitch rating $600M of the company’s debt as “A” back in January.

According to Fitch : “The company had USD 4.6 billion of total debt, of which USD 1.3 billion was classified as short-term. Codelco has adequate liquidity, backed by a track record of accessing debt in the local and international markets and a well-diversified debt maturity profile. Short-term debt is expected to be refinanced through a combination of the 2019 notes, bank loans from undrawn facilities and cash flow from operations.”

Chile’s banking sector is also helping stem the flow, business loans grew sharply in January, despite a deep economic slowdown amid the financial crisis, the country’s superintendent of banks said on Monday. Gustavo Arriagada told lawmakers that loans continued to grow, though at a slower pace, as Chilean banks, in counterpoint to their Western counterparts pass on a series of aggressive from the central bank to customers

“Although we have seen tighter credit conditions in the last few months and a fall in requests for credit, that is due to factors like an increase in risk and worsening of employment conditions and client income,” Arriagada said in his presentation.

This has led analysts to rethink their strategy regards South America, the single country ETF –  iShares MSCI Chile Investable Index : (NYSE : ECH) has seen some good buying activity of late, even if there is a 15% weighting towards Codelco within this product. ECH managed to add 5% over the last five days, with a huge spike in trading in yesterdays surge on the US markets. Along with Brazil / EWZ & Mexico /EWW, it looks as though Chile could be an interesting mid to long term long within the country specific ETFs.

South America : Copper cartel on the horizon ?

blackboard_copper22With global copper prices sinking from a 2008 high of $4 per lb, down to todays miserly, $1.25 per lb, it is hardly surprising that the two major copper producing countries in South America are looking at ways to buoy up their operations. Last week, Peruvian president Alan Garcia dropped some strong hints that Peru & Chile should coordinate on copper production , in order to achieve greater control of prices on international markets.

“I believe that as countries with a strong mining presence in the world we must work in a joint manner, because when brotherly countries produce and compete with the same metal, the only thing we achieve is a fall in the price of copper, and we are both losers”, said Garcia

Demand growth in China, the world’s largest user of the metal used in plumbing and wiring, slowed to an estimated 9.8 percent in 2008 from 26 percent in 2007. Freeport-McMoran amongst others has shelved projects including a $450 million expansion at its Chilean copper mine El Abra. Freeport owns 51 percent of the mine and Codelco the remainder. The decline cut net income at Chile’s state-run Codelco, the world’s top copper miner, by nearly half to $4.5 billion in 2008.

In December, Jose Pablo Arrelano, CEO of Codelco stated copper prices will be “depressed” next year and demand almost “stagnant” as the international economic crisis leads to higher stockpiles of the metal. This will undoubtedly hurt other players in the commodities market, including BHP Billiton (NYSE – BBL) & Freeport McMoran (NYSE – FCX), Freeport McMoran have made some inroads to looking at the problem, the board announced in early December ,a  Revised Operating Plan in Response to Weak Market Conditions. Which is basically a slow down in extraction & refining in both its North & South American operations.

In Chile & Peru, copper extraction looks like a loss leader at the moment, in aggregate across all units, costs in 2009 are predicted to range from between $0.85 – $1.45 per pound. BHP have similarly looked at cutbacks regards copper extraction, the world’s biggest mining company, has delayed plans for an energy plant in Chile that it planned to build to supply two of its existing copper mines.

As discussed in an earlier post, Aussie-Canuck operator Equinox opened the largest copper mine in Africa last year, at Lumwana in Zambia, which when it comes fully online in early 2009, will be churning out 172,000 tonnes of high yield concentrate per year, which can only bring about additional competition for Codelco, BHP & Freeport, especially as Equinox has hedged production at $2.00 for the first three years of operation at Lumwana & have an estimated existing extraction cost of $0.80.

Chile may be able to weather the storm as Otto at Inka Cola puts forth in this article, the country has one of the highest per capita reserves in South America, totalling $26.49Bn, he further argues that Chile has an additional  $23Bn “tucked away in overseas accounts to call on.” Which is a considerable cushion to see out 2009, as Codelco & Arrelano await  global copper demand to turn positive in 2010.

Peru on the other hand does not look as if it will fare so well, although looking at Otto’s chart, they have a reasonable level of foreign reserves, the Andean nation is beset by rising unempolyment & a lack of foreign investment. Peru’s largest miner Southern Copper (NYSE – PCU) posted  a $125 million net loss in the fourth quarter, compared with a $311 million profit in the year-ago period, due to demand destruction. It is estimated that more than 9,000 miners have been laid off in Peru, whilst new projects have been suspended, including Southern Copper‘s plan to invest $1 billion in the Tia Maria mine. These cutbacks have already helped slow Peru’s growth rate to a projected 5% in January.

The question is, will Garcia’s plan, if it comes to fruition be timely enough ? We have seen how long it has taken OPEC production cuts to start to have an effect on the market price of crude. Of more concern for Garcia will be the new productive mines being opened in Zambia by Equinox at Lumwana & also the the Chinese backed Chambishi mine, which is operated by China Non-Ferrous Metals Mining Corporation (CNMC). The expected copper ore output is one million tons per annum, with a projected service life of 25 years. China has also embarked on an acquisition spree of late, which had also brought it interests in Australian miners such as Rio Tinto. Garcia will also have to play a careful game, as China is estimated to have committed to investing over $6 billion in Peru’s mining sector over the next five years. Politics come into play of course & the Chinese are expert in this field, my gut is that production cuts will come, although China will no doubt be exempt from any surging price changes in the near future.

My feel is that the copper mining stocks will remain low for a good time to come, much has been made of the Chinese stimulus bill, however, there is no guarantee that this will come to fruition any time soon, as & when it does kick in, China will be adequately supplied by its current investments in South America & Africa, as discussed in this piece. I am however, a little more bullish on the mining sector in general & have just initiated a position in the S&P Metals & Mining Index (ETF –  XME ,) which looks as though it may be building momentum for a bullish 2009.