Energy and Nat­ural Resources Mar­ket Radar (Jan­u­ary 23, 2012)

Strengths

• The Global Resources Fund per­for­mance over the last week has bested its bench­mark largely through stock selec­tion in the energy sec­tor and specif­i­cally in the oil ser­vices and equip­ment area.
• Barclay’s cap­i­tal high­lighted that base met­als have started the year with a “bang;” prices are up on aver­age 11 per­cent since the start of the year mak­ing it the best-performing sec­tor so far. Cop­per gained approx­i­mately 10 per­cent for the week.
• One of the key lead­ing indi­ca­tors of U.S. non-residential con­struc­tion, the Amer­i­can Insti­tute of Archi­tects Billings Index, remained above 50 in Decem­ber, rep­re­sent­ing an increase in the month.
• Con­sul­tancy Steel and Metal Mar­ket Research said this week global crude stain­less steel pro­duc­tion hit a new record high of 35.5 mil­lion tons in 2011, but the pace of growth was slower than the pre­vi­ous year.
• Freeport McMoRan has resumed cop­per con­cen­trate ship­ments from its Gras­berg copper-gold mine in Indone­sia, which had recently only resumed work from a three-month strike end­ing in Decem­ber. Freeport is the world’s second-largest cop­per mine and sup­plied the global mar­ket with nearly 2.5 per­cent of the global demand.

Weak­nesses

• After another soft read­ing of the weekly stor­age with­drawal, nat­ural gas prices tum­bled fur­ther this week as warmer than nor­mal weather curbs demand. Nat­ural gas futures fell 12 per­cent this week to close at $2.35 per mmbtu.
• Total steel ship­ments rose just 5 per­cent year-over-year for their small­est increase in nearly two years. Ship­ments fell 14.7 per­cent month-over-month on a days-adjusted basis, while total steel inven­to­ries rose 3.1 per­cent month-over-month and 8.3 per­cent year-over-year.
• Accord­ing to Deutsche Bank, Norsk Hydro, the world's fifth-largest pri­mary alu­minum pro­ducer with mar­ket share of nearly 4 per­cent, has con­firmed that it will close one of the three pot­lines at its 180,000 tons per annum Kurri Kurri smelter in Aus­tralia in response to the price weak­ness of recent months. Rio Tinto and Alcoa, the world's sec­ond– and third-largest pro­duc­ers, have also announced plans to close some capacity.
• Arcelor­Mit­tal will extend the clo­sure of it Ses­tao plant in Spain as it does not expect south­ern Euro­pean steel demand to improve in the near future, it said. The com­pany had announced last Octo­ber that it would halt steel pro­duc­tion at the Ses­tao plant in Novem­ber and Decem­ber. "Arcelor­Mit­tal Ses­tao will restart oper­a­tion as soon as mar­ket con­di­tions turn around," a spokesper­son said in an e-mailed statement.

Oppor­tu­ni­ties

• Deutsche Bank high­lighted that the Inter­na­tional Energy Agency (IEA) said that China’s oil-product con­sump­tion is expected to rise 400,000 bar­rels per day to 9.9 mil­lion bar­rels per day in 2012, almost 40 per­cent of the increase in global con­sump­tion. Accord­ing to its fore­cast, global crude oil con­sump­tion is expected to increase 1.1 mil­lion bar­rels per day to 90 mil­lion bar­rels per day.
• BP Plc said that China will drive the world’s growth in oil demand in the next 20 years and in 2027 will over­take the United States as the world’s top oil consumer.
• Deutsche Bank reported that Japan’s largest cop­per smelter sus­pended its Saganoseki smelter oper­a­tion, with an annual capac­ity of 200 000 tons, due to fire dam­age. On top of this, Philippine’s PASAR cop­per smelter is also fac­ing pro­duc­tion prob­lems. On the back of pro­duc­tion dis­rup­tions, Lon­don Metal Exchange (LME) cop­per can­celled war­rants increased sig­nif­i­cantly from New Orleans, where more free cop­per units exist globally.
• Freeport McMoRan reported that down­stream demand in the U.S. is pos­i­tive and project a tight and encour­ag­ing cop­per mar­ket in 2012, with the auto sec­tor strong and signs of improve­ment in construction.
• U.S. ser­vice cen­ter steel inven­to­ries rose 3 per­cent month-over-month for Decem­ber and were still 18.7 per­cent below aver­age his­tor­i­cal lev­els. Decem­ber inven­to­ries were 52.8 per­cent below peak lev­els and 42.5 per­cent above trough lev­els. Inven­tory restock­ing likely has helped boost steel prices in recent months.

Threats

• Nigeria’s gov­ern­ment ordered a fresh audit of its entire oil and gas sec­tor cov­er­ing the last three years. This move fol­lows the open­ing of an inves­ti­ga­tion into the sec­tor by the cor­rup­tion watch­dog and a sep­a­rate Sen­ate inves­ti­ga­tion into fuel sub­si­dies — all announced this week. In response to a reduc­tion in fuel sub­si­dies, the coun­try has wit­nessed a country-wide strike threat­en­ing the gas and oil sector.
• Crude oil is the most vul­ner­a­ble to near-term sup­ply dis­rup­tion from geopo­lit­i­cal ten­sions. The sus­tain­abil­ity of com­mod­ity sup­ply is being chal­lenged by ris­ing state polit­i­cal inter­fer­ence and local self-interests that is delay­ing and con­strain­ing the resource devel­op­ment needed to meet emerg­ing demand growth.

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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