15 April 2009

Commodity supercycle thesis remains solid

Most prices for commodities are merely correcting there first massive upleg of a bull market that will be driven by infrastructure spends and chinese financed infrastructure in the third world, my contrarian viewpoint it looks as though things are lining up for the commodity market to regain momentum and continue in its secular bull. While the relative decline of the West is baked in the cake, the long term preasures of demand, future putative supply destruction due to the credit crunch, I would expect stronger commodity prices going forward. Kevin(New Kontent).

Zeal look at the case for copper..

"From a macro perspective copper, and commodities as a whole, will be long-term beneficiaries of the staggering inflationary actions of the world’s governments. Not only is there a massive pipeline of stimulus projects that will directly benefit the infrastructure build out, but rampant and careless monetary policies that have been set into motion will be a huge boon for commodities prices.

We also cannot forget where demand growth will come from in the future. Though this recession has slowed growth from the developing economies in Asia, these countries still have a long ways to go in their strategic development plans.

For example the Indian government says its recently completed fiscal year should see growth around 7%. And even with the current economic calamity it sees growth in the next year exceeding 5%. Moving to the northeast, according to one of China’s largest banks this growing economic powerhouse should see 2009 GDP growth of around 8%.

Interestingly the China Geological Survey is actually worried about commodities production shortfalls in 2009. And this has been evident in 2009’s activity so far at the Shanghai Futures Exchange. The SHFE saw record copper gains in Q1 as the metal has been trading at a premium to the LME in order to encourage producers to ship more copper to China.

Though China and India see growth at less than 10% in 2009, it is growth nonetheless and a lot of this will come in the form of infrastructure growth. China in particular has shouldered a larger portion of copper demand of recent, but when demand eventually picks back up in the rest of the world there will be fierce competition for what is likely to be a shrinking copper supply.

With copper near multi-year lows and demand growth slowing a bit, it is natural that the miners will eventually throttle back production. Production cutbacks are usually lagging and reactionary events in response to shifts in demand. And this is why we are seeing global stockpiles on the rise.

But many of the world’s top copper miners have already adjusted 2009 production forecasts to the downside. Some of these cutbacks are voluntary as a means to conserve copper for when prices and demand are higher. But some of these cutbacks are forced as a result of waning economics.

From mid-2005 to mid-2008 copper averaged over $3, thus prompting aggressive industry-wide exploration and development programs. These high prices also allowed the producers to profitably mine lower-grade ore within the confines of existing operations as well as bring past-producing mines back to life.

But these lower-grade, thus higher cost, operations and development projects that were economically feasible at higher copper prices are now losers. Production cutbacks, mine closures, and the scrapping of now-uneconomical exploration and development projects will eventually translate into materially lower mine production. Supply will eventually shrink enough to balance demand, even if demand stays weak for an extended period of time.

Regardless of where this balance is met, I believe copper has seen its low. And investors and speculators have taken advantage of this wildly oversold environment to reap fantastic gains as the markets bounce back to reality. As mentioned the futures traders have seen the metal pop 50%+ since the beginning of the year. But stock traders have fared even better.

By the time the dust settled at the initial panic low in November, the copper miners had leveraged copper’s losses to the downside in a big way. Even the world’s largest copper stocks had sold off by 80% or so from their highs. As mentioned earlier investors had discounted an apocalyptic ending to the commodities trade and sold their shares with reckless abandon. But in hindsight this November stock-market low was the time to load up on commodities stocks, especially copper stocks.

After coming to the brilliant conclusion that the world wasn’t coming to an end and we weren’t entering into the next Great Depression, buyers returned to commodities stocks and took advantage of their wildly oversold levels.

Copper stocks in particular have been among the best performers in the entire markets in the last 4+ months. Many have already seen triple-digit gains from their bottoms in the midst of an S&P 500 grind that had seen new lows set just last month."

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