Energy and Nat­ural Resources Mar­ket Radar (Jan­u­ary 30, 2012)

Strengths

• Indus­trial met­als ral­lied strongly this week bol­stered by pos­i­tive eco­nomic data in the U.S., dovish lan­guage from the Fed­eral Reserve and likely short-covering. Cop­per fin­ished up almost 4 per­cent at $3.89 per pound, mak­ing this the third con­sec­u­tive week of gains.
• J.P. Mor­gan reported that China has now sur­passed Japan as the world’s largest coal importer after import­ing 183.2 mil­lion tons in 2011, up 10 per­cent on a year-over-year (yoy) basis. Com­par­a­tively, Japan’s total imports for 2011 came in at 175.2 mil­lion tons, down 5 per­cent (yoy). The drop in Japan­ese imports could par­tially be attrib­ut­able to the earth­quake and tsunami in the first half of 2011.
• Deutsche Bank high­lighted that com­modi­ties ral­lied across the board after the Fed­eral Reserve sig­naled that a rate hike was nowhere in sight. The Fed­eral Reserve’s state­ment that con­di­tions are likely to war­rant excep­tion­ally low lev­els for the funds rate “at least through late 2014” is on the sur­face a major dif­fer­ence from the “at least mid-2013” date given in the last statement.
• U.S. nat­ural gas prices have also ral­lied off a bot­tom near $2.32 mil­lion British ther­mal units (mmbtu) to break through a tech­ni­cal ceil­ing. Traders drove a sharp move higher on Wednesday.
• Grain prices recov­ered this week on sup­ply con­cerns due to dry con­di­tions in Argentina. Corn gained 5 per­cent and wheat gained 6 per­cent this week.

Weak­nesses

• Aus­tralian oil pro­duc­ers shut­tered as much as one-quarter of the country’s out­put as Trop­i­cal Cyclone Iggy was fore­cast to strengthen.
• India Coal Mar­ket Watch said that India’s coal pro­duc­tion fell 2.7 per­cent since April 1, 2011. The group said that out­put was 359.8 mil­lion tons from April to Decem­ber com­pared with 369.8 mil­lion tons the pre­vi­ous year. Pro­duc­tion was 8 per­cent less than the government’s tar­get of 391.48 mil­lion tons. India’s coal pro­duc­tion was 533 mil­lion tons in the year ended March 2011, below the gov­ern­ment tar­get of 573 mil­lion tons.
• South Africa has become sig­nif­i­cantly less attrac­tive as a min­ing invest­ment des­ti­na­tion since 2006, the South African Insti­tute of Race Rela­tions (SAIRR) said this week. "Uncer­tainty over nation­al­iza­tion and mine own­er­ship, and increas­ing work dis­rup­tions are affect­ing investors' will­ing­ness to get involved in min­ing ven­tures in South Africa," SAIRR researcher Jonathan Sny­man said in a statement.

Oppor­tu­ni­ties

• Cop­per stock­piles at the Lon­don Metal Exchange fell for the 16th week, declin­ing 2.3 per­cent to 348,750 tons. This is the low­est level since Decem­ber 2012 and could be another dri­ver for stronger cop­per prices as stock­piles get replenished.
• Bar­clays Cap­i­tal reported that global man­u­fac­tur­ing data and busi­ness con­fi­dence seem to sug­gest that indus­trial pro­duc­tion and sen­ti­ment have started to sta­bi­lize. On a monthly basis the Bar­clays aggre­gate global man­u­fac­tur­ing PMI data recorded its strongest improve­ment since Jan­u­ary 2011, advanc­ing from –0.71 in Novem­ber to 0.5. Fur­ther, that improve­ment was wide­spread, span­ning the U.S., U.K., Brazil, Asia and even in the Europe. In fact, Flash PMI for the euro­zone moved above 50 for the first time since August 2011.
• Bar­clays cited a news report that the cur­rent size of the cat­tle herd in the U.S. may be the small­est since Dwight Eisen­hower was Pres­i­dent in 1958. A Bloomberg News sur­vey said ranch­ers held 91.24 mil­lion head of cat­tle as of Jan­u­ary 1, down 1.5 per­cent from a year ear­lier. A record drought in Texas last year and ris­ing feed costs prompted ranch­ers to cull herds, even as beef exports from the U.S. surged. Cat­tle futures are up 15 per­cent since the end of June. After reach­ing an all-time high on an annual basis in 2011, the Live­stock Mar­ket­ing Infor­ma­tion Cen­ter says retail-beef prices will keep ris­ing through next year.

Threats

• GMP reported that an oil pipeline in United Arab Emi­rates that would strate­gi­cally bypass the Strait of Hor­muz to the tune of 1.5 mil­lion bar­rels per day could face more delays due to dif­fer­ences with a Chi­nese con­struc­tion company.
• Gains that made nat­ural gas the best-performing com­mod­ity this week may soon be evap­o­rat­ing as traders bet U.S. pro­duc­tion cuts won’t be enough to reduce the biggest sup­ply sur­plus since 2009. Resource Daily com­mented that futures soared as much as 20 per­cent from a 10-year low in New York after Chesa­peake Energy Corp. and Cono­coPhillips said they’ll reduce out­put. Energy pro­duc­ers are shift­ing spend­ing to basins that yield more lucra­tive oil and gas liq­uids, in addi­tion to pro­duc­ing nat­ural gas. Gas has tum­bled 14 per­cent this year as a boom in U.S. shale out­put pushes inven­to­ries toward record lev­els. Stock­piles were 21.4 per­cent above the five-year aver­age last week, the most since June 19, 2009. Data from the U.S. Depart­ment of Energy shows pro­duc­tion grew by an all-time high of 4.5 bil­lion cubic feet a day in 2011, while demand rose 920 mil­lion cubic feet.

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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