Energy and Natural Resources Market Cheat Sheet (August 15, 2011)
Strengths
- Despite this week’s late pullbacks in gold and equities, our Global Resources Fund outperformed for the week. The fund has also taken on a defensive position, focusing on the food and agriculture sectors, which have historically shown positive performance during uncertain times.
- Global sovereign uncertainty has caused investors to seek refuge in bullion, driving the price of the precious metal to new highs.
- Fertilizers, natural gas and chemicals were among the top half of the better-performing sectors this past week. The fund was able to make positive gains from exposure to these sectors.
- Oil rose on Friday, paring this week’s decline, and reversed losses as European equities and the U.S. stock-index futures climbed.
- Silver-buying in China and India is set to rise 40 percent in 2012. Industrial demand is the main driver coupled with the devaluation of the dollar. Economic problems, political tensions, inflation and exchange rates are additional factors contributing to rising silver prices. Silver demand in both countries has increased sharply in recent years as more investors use silver as a store of value.
Weaknesses
- Oil tanker stocks and the construction material and steel sectors were among the bottom-half performers this past week. These sectors continue to perform badly relative to other resources.
- Industrial metals suffered sharp liquidation on commodity trading advisor (CTA) and hedge fund selling. If the market repeats the 2010 second-quarter correction of 17 percent, this will indicate that copper could fall to $8,150.00 per ton.
- This week saw a couple of mergers and acquisitions fall apart. Among these, Coal India’s $1 billion plan to acquire Indonesia’s Golden Energy unraveled due to government approval complications and unfeasible numbers. Negotiations between Peabody and Arcelor, who are both biding for Macarthur Coal for a total of $5.2 billion, have been reported as turning hostile.
- Lackluster results in terms of South Africa’s output for the month of June were published. Gold output fell 5.7 percent in volume terms while mineral production fell 0.7 percent. Production of non-gold minerals was flat compared to last year.
Opportunities
- China’s July auto sales were up 6.7 percent. Year to date, total sales of commercial and passenger cars rose 2.2 percent.
- Analysts at Macquarie believe that a combination of factors, led by Chinese demand, offer fundamental support for steel at current price levels. With steel being a benchmark of economic development, the recent concerns over economic growth and sovereign turmoil have made many concerned about the near-term future for prices. They say it is unlikely to worsen and may well hold up better than more championed peers.
- On August 11, the USDA cut its U.S. corn and soybean production forecasts sharply, on lower acreage and yields. With weather disappointing during both the U.S. planting and growing season, prices will need to rally further to adjust demand down to the lower available supplies. This suggests that agricultural prices will continue to hold up relatively well in a slowing economic environment.
- Vale South Africa Exploration, a subsidiary of Vale Inco, the second-largest metal mining company in the world, acquired an industrial mining exploration license in Ethiopia last week.
- Canaccord stated that the projected tight supply-demand environment "should underpin investor confidence that copper prices of $6,600 and above are now simply normal.” Outlook for copper prices looks robust going forward because of tight supply as medium-term demand is higher than projected capacity.
Threats
- Concern over Namibia’s mining tax plans continue to surface. The Namibian government’s proposals for additional taxes on mining could shake the foundations of the country’s industry, according to industry players in the southern African state. Windhoek analysts estimate that the impact of the new taxes on mine profits could be as much as 15 percent.
- Continuing European sovereign turmoil may continue to negatively affect commodities.
