Energy and Nat­ural Resources Mar­ket Radar (Jan­u­ary 16, 2012)

Strengths

• Des­jardins high­lighted that Chi­nese Decem­ber base metal import data is show­ing that unwrought cop­per imports reached 508.9 thou­sand met­ric tons, up 12.6 per­cent month-over-month and 47.7 per­cent year-over-year. Iron ore imports of 64.1 mil­lion met­ric tons were down 0.2 per­cent month-over-month while up 10.3 per­cent year-over-year.
• The lat­est Steel­Bench­marker assess­ment by World Steel Dynam­ics shows a con­tin­u­a­tion of the upward trend in U.S. steel prices. The U.S. hot-rolled coil (HRC) assess­ment topped $800 per ton for the first time since July and scrap prices hit $466 per ton of shred­ded mate­r­ial, the high­est level since August 2008.
• Reuters noted that OPEC’s crude oil pro­duc­tion was more than 30 mil­lion bar­rels per day in Decem­ber 2011, the high­est vol­ume since Octo­ber 2008.
• Pre­lim­i­nary ship­ping data shows that Brazil­ian ship­ments were up 5.6 per­cent year-over-year. Ship­ments to China exceeded the 200 mil­lion tons per annum mark for the first time last year and iron ore exports reached an all-time high run rate in December.

Weak­nesses

• The Global Resources Fund (PSPFX) under­per­formed its bench­mark by a small amount over the last week due to being under­weight large cap­i­tal­iza­tion basic mate­ri­als stocks and being over­weight U.S. explo­ration and pro­duc­tion stocks with nat­ural gas exposure.
• Nat­ural gas fell 14 per­cent this week to $2.64 per British ther­mal unit (Btu), a decade low. Sup­ply growth in North Amer­ica from rapid oil and gas shale basin devel­op­ment has cre­ated a glut of nat­ural gas that will require a com­bi­na­tion of increased indus­trial and power gen­er­a­tion demand as well as a reduc­tion in nat­ural gas well drilling to bal­ance the market.
• Deutsche Bank reported that the dry bulk index has fallen sharply in the begin­ning of 2012 while iron ore prices remain rel­a­tively sup­ported. Deutsch Bank believes the decline in ship­ping rates is a func­tion of slow­ing demand from Chi­nese steel pro­duc­tion ahead of its New Year and lower ship­ments from Aus­tralia and north­ern Brazil due to rainy weather. China steel pro­duc­tion has declined for six con­sec­u­tive months. Deutsche Bank expects spot iron ore and freight rates to face ongo­ing head­winds in the first and sec­ond quar­ters of 2012. How­ever, an end to the rains and an improve­ment in global growth dur­ing the sec­ond half of 2012 could lead to sub­se­quent strength.
• China’s import growth fell to a two-year low in Decem­ber, under­scor­ing a slow­down in the fastest-growing major econ­omy that deep­ens risks for the global outlook.
• The Cen­tral Dis­patch Depart­ment of the Fuel and Energy Com­plex said that Russia’s crude oil exports fell by 3.9 per­cent year-over-year to 212 mil­lion tons in 2011.

Oppor­tu­ni­ties

• BCA research showed that equity mul­ti­ples now dis­count a severe global growth slow­down at a time when min­ing stocks still offer lever­age to the bull­ish China income con­ver­gence story. The unfold­ing reces­sion in Europe and prop­erty slow­down in China have crushed min­ing share prices.
• Mac­quarie reports that Vale has now declared force majeure on cer­tain iron ore deliv­er­ies, account­ing for around 20 per­cent of Jan­u­ary out­put. They empha­sized that this now serves to indi­cate that the seaborne iron ore mar­ket will become fun­da­men­tally tighter dur­ing the quar­ter, requir­ing both destock­ing in China and a rein­cen­tiviza­tion of Chi­nese domes­tic out­put through higher prices.
• Deutsche Bank noted that oil pro­duc­tion in the state of North Dakota climbed 42 per­cent (year-over-year) in Novem­ber to 510,000 bar­rels per day. Suc­cess in devel­op­ing tight oil plays across the coun­try has cre­ated a real­is­tic prospect that U.S. net oil imports as much as a per­cent­age of total usage could fall sig­nif­i­cantly fur­ther. The fig­ure has already fallen from 65 per­cent in 2005 to 47 per­cent in 2011.
• The U.S. Energy Infor­ma­tion Admin­is­tra­tion (EIA) released its first Short Term Energy Out­look for 2012, in which the agency revised global oil demand down­ward by 140,000 bar­rels per day in 2012. This brings the EIA’s annual growth rate in-line with Bar­clays’ fore­cast at 1.27 mil­lion bar­rels per day. How­ever, the key fea­ture of the report was the large down­grade to non-OPEC sup­ply for both 2011 and 2012. Non-OPEC sup­ply growth for 2011 was reduced by a mas­sive 310,000 bar­rels per day to just 90,000 bar­rels per day.

Threats

• Italy faces a “sig­nif­i­cant chance” of a down­grade by Fitch Rat­ings, which is review­ing all Euro­pean sov­er­eigns and will make a deci­sion by the end of the month.
• Work­ers in Nige­ria began a national strike, threat­en­ing to shut ports and dis­rupt oil pro­duc­tion and exports. Work­ers are strik­ing in reac­tion to the government’s deci­sion to lift fuel sub­si­dies, more than dou­bling gaso­line prices. The strike makes Nige­ria the third OPEC nation with an ongo­ing sup­ply threat.
• Vale, the world’s largest iron ore exporter, reported that it had to halt some iron ore ship­ments from Brazil due to heavy rain­fall that has killed dozens of peo­ple. Due to the rains that have affected its oper­a­tions in Brazil, the miner esti­mates it will lose approx­i­mately 2 mil­lion tons of iron ore ship­ments, almost 1 per­cent of its annual output.

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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