Energy and Natural Resources Market Cheat Sheet (August 22, 2011)
Strengths
- Despite global economic tensions and overall negative market performance this past week, the Global Resources Fund was able to weather market volatility very well relative to its benchmark and peers. This can be attributed to the Fund’s diversified positioning and limited exposure to the main negatively-performing sectors being affected most. The Fund benefited from exposure to precious metals and the food and agriculture sector.
- Macquarie research states that China’s electricity consumption increased by 12 percent year-over-year in July, in line with the year-on-year rate for the first seven months of this year as a whole. This data suggests growth in industrial production remains solid.
- Belarus Potash Company (BPC), the international potash trader, announced a new standard potash price for South East Asian markets of $535 per ton, up 4.9 percent from the previous price of $510 per ton. The company announced that due to its contractual obligations to supply potash to China and India in the upcoming quarter and the limited availability of producers’ inventories, the new price will apply from October 2011.
Weaknesses
- We continued to see the oil tanker stocks and the construction material and steel sectors among the bottom-half performers this week. The overall trend separating the top-half and bottom-half performing sectors continues to remain consistent.
- Colombia’s President Juan Manuel Santos has said his administration has prohibited mining in 47 coffee municipalities, according to the DRCO Precious Metals Brief.
- Rising utility prices have become increasingly common. Npower, in the U.K., has become the latest utility company to contribute to rising household bills, announcing that its gas and electricity charges will climb by 15.7 percent and 7.2 percent, respectively. Five of the ‘big six’ U.K. utility companies have now decided to raise their tariffs since June, all of them citing higher wholesale gas prices, according to the Financial Times.
- Morgan Stanley highlighted that the Architecture Billings Index dropped for the fifth straight month to 45.1. This represents a negative read for construction companies.
- Deutsche Bank reported that Japan’s crude oil imports fell 11.2 percent in July to 16.03 million kiloliters from a year earlier.
- Oil prices feel sharply this week as a raft of weak U.S. economic data once again affected sentiment negatively, wiping out the gain prices had managed to build up over the past week.
Opportunities
- Should global economic uncertainties continue, we should see the gold commodity maintain its positive performance relative to other precious metals.
- Macquarie analysts highlighted that one area where iron ore supply continues to fall is India, with only 19 ships departing between August 1 through the 15, equivalent to 742 kilotons of ore. If this rate was maintained for the month, it would be the lowest Indian export volume in recent history, something which is helping to keep spot market fundamentals extremely tight. This in turn suggests strong pricing for the commodity as supply remains low.
- According to Bloomberg, U.S. crude oil supplies declined to a five-month low as imports fell and refineries ran near the highest rates of the year. Inventories dropped 750,000 barrels, or 0.2 percent, to 349,000 barrels in the seven days ended August 12. This presents encouraging data to promote higher crude oil prices. “Refinery margins are relatively healthy, which will encourage the shift of crude inventories into products,” one Standard Bank commodity strategist said.
- Mineweb reported that “with recession fears weighing on equity markets, resource investors would do well to steer clear of speculative Canadian mining plays and put their cash into producing miners with strong balance sheets. Leading market indicators are pointing to slowing global growth, which will likely lead to lower demand for resources as the construction and manufacturing sectors pull back. Add to this the cost of building and operating a mine is spiraling upward, while recession worries could lead banks and the equity markets to shy away from funding new projects.” Focusing on producing mines could help to reduce negative exposure during these tumultuous times.
Threats
- Researchers at Macquarie published that in the U.S., the Philadelphia area index of economic activity fell to a negative 30.7 in August, from a positive 3.2 in July, which marked its lowest reading since March 2009, suggesting a sharp slowly of activity. This index is used as a sentiment indicator to markets.
- According to press reports, it was suggested that physically-backed exchange traded funds (ETFs) are unlikely to come to market as a result of prohibitively high costs and administrative complexity. Macquarie analysts hold deep-seated doubts about physically-backed ETFs in base metals for these reasons.
