Energy and Nat­ural Resources Mar­ket Cheat Sheet (Sep­tem­ber 19, 2011)

Strengths

• The Global Resources Fund gained this week and out­per­formed its bench­mark as energy– and indus­trial metal-related stocks ral­lied with major stock indices.
• The lat­est Steel Bench­marker price assess­ment by World Steel Dynam­ics showed fur­ther sta­bil­ity in global steel prices, with the major­ity flat over the past two weeks. The excep­tion was U.S. hot rolled coil, which rose 5.1 per­cent sequen­tially to $768 per ton, arrest­ing three months of con­sec­u­tive falls.
• The Baltic Dry Index of freight costs increased 7 per­cent this week as ship­ments of iron ore remain robust. This is the fifth con­sec­u­tive weekly gain for the Baltic Dry Index.

Weak­nesses

• Seaborne iron ore prices ended the week lower for the first time in 5 weeks on weak­en­ing steel prices. After hit­ting 3-month highs of $181 per ton last week, the TSI ref­er­ence price has fallen nearly 2 per­cent to trade below $178 per ton. Per ana­lysts at Cit­i­group, sen­ti­ment in the Chi­nese steel mar­ket is still dete­ri­o­rat­ing and buy­ers remain inac­tive owing to the lack of any clear direction.
• Corn prices fell 4 per­cent this week on a gov­ern­ment report that corn crop con­di­tions have improved recently.
• Despite news of addi­tional sup­ply con­straints, cop­per prices slipped 1 per­cent this week on con­cerns of slow­ing demand in Europe and Asia.
• South­ern Cop­per cut its pro­duc­tion fore­cast by 8 per­cent for the year. Out­put will fall to 600,000 tons, from an ear­lier esti­mate of 650,000 tons, CEO Oscar Gon­za­lez Rocha said.
• The Inter­na­tional Energy Agency released its Oil Mar­ket Report this week, revis­ing its global oil demand growth fore­cast lower for 2011 by 160 thou­sand bar­rels per day to 1.04 mil­lion bar­rels per day, and for 2012 by 200 thou­sand bar­rels per day to 1.41 mil­lion bar­rels per day. The IEA attrib­utes lower non-OECD read­ings and reduced eco­nomic growth expec­ta­tions as the prime rea­son for its down­ward revision.

Oppor­tu­ni­ties

• Reuters reported that power rationing in China will likely per­sist in the first half of 2012, and the deficit should be between 10 gigawatts and 15 gigawatts in the first half of 2012. Other than low water lev­els impact­ing hydropower sup­ply, power out­put has been ham­pered by insuf­fi­cient coal pro­duc­tion, low coal qual­ity and a mis­match between coal and power prices. The grid has asked the local gov­ern­ment to sub­si­dize addi­tional power generation.
• Accord­ing to Alberta's Energy Min­is­ter Ron Liepert, Canada’s oil sands pro­duc­ers need to build at least two more pipelines the size of the con­tro­ver­sial Key­stone XL project if they are to meet their ambi­tious plans for growth. “As we move for­ward, there will be a need for other pipelines ... By 2020, we may need three Key­stones,” he said.
• Peru’s Finance Min­is­ter Miguel Castilla com­mented that the country’s over­haul of its min­ing tax sys­tem will max­i­mize gov­ern­ment rev­enue while ensur­ing com­pa­nies pro­ceed with more than $40 bil­lion of invest­ment in new mines. Castilla also stated that com­pa­nies won’t pay more than 50 per­cent of their oper­at­ing prof­its under the new tax régime. Under Peru’s exist­ing sys­tem, roy­al­ties are based on sales. He said that the new sys­tem will be fairer because it levies taxes on oper­at­ing prof­its instead of rev­enue, and com­pa­nies with con­tracts that pro­tect them from higher taxes will be sub­ject to a sep­a­rate levy on profits.
• Australia’s Bureau of Mete­o­rol­ogy sees La Niña con­di­tions devel­op­ing in Q4 this year. His­tor­i­cally this would mean cold win­ters in the U.S. north­east and stronger demand for heat­ing fuels.

Threats

• Work­ers at Freeport MacMoRan's Cerro Verde mine in Peru launched an indef­i­nite strike today after dis­cus­sions with the gov­ern­ment failed to reach an agree­ment on wages and work­ing con­di­tions. The mine rep­re­sents roughly 2 per­cent of the world's mined cop­per production.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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