Energy and Natural Resources Market Cheat Sheet (August 8, 2011)
Strengths
- Due to recent defensive positioning of the portfolio, the Global Resources Fund weathered this weekās marketās turmoil relative to its benchmark, the Morgan Stanley Commodity Related Index.
- In spite of escalating macro fears, analysts at Credit Suisse find that many of the āreal economyā data points that they track are actually showing improvement. Specifically, rail carloads posted the second-highest level year-to-date during the week ended July 30; the Cass Freight Shipment Index increased 11 percent year-over-year in July (comparable to +5 percent in June); and the ATA Truck Tonnage Index rose 7 percent year-over-year in June (accelerating from the +3 percent in May).
- According to Mineweb, the U.S. car market is rebounding off an annualized rate of 9.5 million units at the 2009 bottom, and could reach 13 million units this year. This may rise as high as 15 million units by 2015.
- Analysts at Macquarie highlighted that commodities for which China sets the market price remained strong, with iron ore holding at $179.5 per ton CFR China (62 percent Iron) in the latest Platts assessment, the highest level since mid-May. Meanwhile, Plattsā assessment of Chinese hot-rolled steel coil prices rose $5 per ton week-over-week to $707.50 per ton.
Weaknesses
- The S&P energy sector was one of the weakest sectors this week, falling approximately 10 percent on a slide in crude oil and mixed results from earnings reports. Small cap exploration & production was one of the worst performing sub-sectors, down 12.7 percent for the week, negatively impacting the Global Resources Fund.
- Crude oil was down approximately 9 percent, to $87.03 per barrel, the lowest close since February. Traders are concerned with slowing global economic growth and worries over contagion of European sovereign debt problems.
- Chinaās Purchasing Managers Index (PMI) fell to 50.7 last month but the HSBC PMI fell to under the 50-mark for the first time in one year. This indicates that shrinkage in that countryās manufacturing sector is underway according to Kitco Metals.
- Chinese imports of uranium slowed during the first half of the year, amid industry uncertainty caused by Japanās Fukushima nuclear crisis. China imported 5,356 tons of uranium in the first six months of 2011, a 13 percent drop year-over-year, according to figures released by the General Administration of Customs. In contrast, China had tripled its uranium imports from 2009 levels to 17,136 tons in 2010.
Opportunities
- Chileās Escondida mine workers accepted a company offer to end a two-week strike that shut the worldās largest copper deposit and raised fears of a supply shortage, according to Reuters.
- Ernst and Young predicts a record $120 billion in transactions this year as the pace of deals within the resource sector have picked up in recent weeks, putting the sector on track to top a record.
- Because of ongoing nuclear power development in China, Africa and the Middle East, uranium prices could bounce back to pre-Fukushima levels of $70 per pound in 2012 according to the Energy Report.
- According to JP Morgan Market Intelligence, China is aiming to increase its self-sufficiency in non-ferrous metals over the next 5 years by increasing domestic exploration and making overseas acquisitions.
Threats
- In Rio Tintoās first half of 2011 results, the company noted an approximate 30 percent increase in capital intensity for its cornerstone Pilbara expansion to approximately $175 per ton annual capacity. This is in line with previous hikes noted by BHP Billiton, and provides yet another example of spiraling capital costs afflicting Australian iron ore projects.
- Chileās copper output may be 5 percent below the target of 5.6 million tons this year on the back of various unforeseen events, according to the CEO of the worldās largest copper producer, Codelco. Year-to-date, Chileās copper production has already been 2 percent below comparable figures for the previous year.
