Mining Stocks_____________Of Note:Investors beware. Another day passes and another mine is shuttered.
The halcyon days are gone.
The most dangerous idea for investors is that the global downturn will be short-lived and soon give way to
renewed trade and strong growth.
As record-high inventories of base metals at London Metals Exchange warehouses gather dust, investors
will look to the multi-billion-dollar infrastructure projects to get the market moving and reduce supplies.
... but a bull market for commodity investors is nowhere in sight.___________________________________________________________________________________________
To access my current posts, click the following link:Notes From a Cyber Trader___________________________________________________________________________________________________________________________________________
Stimulus won't bail out metals
Stephen Shaver/Bloomberg News
An abandoned copper-pit mine on the Philippine Island of Marinduque. Another day passes
and another mine is shuttered.
Another day passes and another mine is shuttered, the latest casualty a nickel mine in Western Australia operated by BHP Billiton, the world's largest base metals producer. Commodity investors look to higher demand coming from government sponsored infrastructure projects and lower supplies for a rebound in prices. These factors will put a floor on metals prices in the near term but over the next two to three years are unlikely to amount to a sustained rally
. Investors beware.
Investors holding long positions in commodity indexes are operating under a misconception about the global economy that is essentially a flawed economic paradigm. The most dangerous idea for investors is that the global downturn will be short-lived and soon give way to renewed trade and strong growth.There are a number of reasons why the halcyon days are gone.
As I mentioned in November, global economic output in recent years was well above the historical average of 2.9% for the 1990s. In fact, world output
rose at about 5% in 2006 and 2007, according to the World Bank. The partial explanation for this high rate is worth restating: Higher global trade boosted growth. It relied on a widening U. S. current account deficit, which allowed for household borrowing.
Said another way, the credit bubble has now collapsed
and with it goes global trade and the entire commodity complex.
World trade that averaged 8.7% of GDP from 2004 to 2007 was an outlier, having averaged 6.5% from 1990 to 1999.
As the U. S. consumer is forced to retrench and repair his balance sheet, the U. S. trade deficit will continue to improve. Private-sector debt in the United States rose from 120% of GDP to 180% from 1996 to 2008 and that must fall. Fewer U. S. dollars will flow to China, so fewer dollars will be recycled into U. S. credit. Another implication of this change is that China's export sector will be slow to recover from its sharp downturn.
And it was demand from China that created the commodity boom.
China accounts for one-fifth of nickel demand; almost one-quarter of copper demand; more than one-third of steel demand; and more than half of demand for iron ore, according to Citigroup Global Markets. Yet China's economy, which grew about 12% in 2007, is being hard pressed to grow 8% in 2009.
Government policy, globally, will put a floor under industrial commodity prices at current depressed levels, but it is doubtful the massive fiscal stimulus will lead to a sustained rise in base metals prices. These policies are fleeting since every dollar spent must eventually be paid back. And the US$825-billion stimulus package, for example, will only go part way to offset the decline in demand linked to the fall in lending to the private sector if its continues contracting at its current pace.
As record-high inventories
of base metals at London Metals Exchange warehouses gather dust, investors will look to the multi-billion-dollar infrastructure projects to get the market moving and reduce supplies. Prices are likely to stabilize in the near term as governments prime the pumps, but a bull market for commodity investors is nowhere in sight.