Energy and Natural Resources Market Cheat Sheet (November 7, 2011)
Strengths
- The Global Resources Fund performed in line with the benchmark for the week. The NYSE Arca Gold Miners Index, Oil Exploration & Production and the Metals and Mining index were among the few indices positive for the week. With continual uncertainty around the state of the Eurozone, despite some clarity earlier on this week, investors sought refuge in gold. The fund’s exposure to the precious metal helped to reduce downside risk. The indices were up 1.4 percent, 0.86 percent and 0.9 percent respectively.
- Roubini Global Economics highlighted that oil prices rallied in October, narrowing the Brent-WTI spread, with WTI appreciating over 24 percent to $94.2 per barrel and Brent rising by 11 percent to nearly $111 per barrel. Oil and oil product inventories drew down to below their five-year average, as did growth, which was surprising on the upside at an annualized adjusted rate of 2.5 percent for third quarter.
- Bloomberg reported that the number of India’s power stations with coal stockpiles of fewer than four days’ normal use has tripled in two months, prompting electricity-supply cuts and threatening to curb growth in Asia’s third-biggest economy. Coal output in India was disrupted with monsoon rains flooding mines and a workers’ strike. The country’s stockpiles dropped from 70.9 million metric tons of coal on October 18 to 8.1 million tons on November 1, also representing a 33 percent decline from the first of September.
Weaknesses
- Considerable weakness relative to other indices was seen among construction materials, alternative energy and the Baltic Dry Shipping Index, all down 4.39, 4.82 and 4.17 percent, respectively for the week.
- Freeport-McMoRan Copper & Gold’s Grasberg mine in Indonesia is operating at only 5 percent of its capacity of 230,000 tons of ore per day, according to the director general of mineral resources and coal at the Energy Ministry. This works out to a loss of over 1,600 tons per day of copper-in-concentrate. Freeport recently declared force majeure on shipments of copper concentrates as a result of an increasingly acrimonious strike over pay and conditions that is now into its sixth week. Grasberg is the world's second-largest copper mine equal to around 4 percent of global output and is also one of the world's largest gold mines.
- A Bloomberg report highlighted that Brazil’s industrial sector has been the hardest hit by Europe’s debt crisis and slowing growth in the U.S. The economic activity index, a proxy for gross domestic product, contracted 0.53 percent in August, its biggest monthly drop since the global financial crisis of 2008. It dropped further for the month of September, posting its second steepest decline since the financial crisis, sparking the central bank’s argument for more interest-rate cuts in Latin America’s largest economy.
Opportunities
- Global copper supply remains challenged. Xstrata estimates 2011 global copper mine output growth to be the weakest since 2002, with mine production to rise by only 40 kilotons this year.
- McKinsey Quarterly published a piece examining the oil industry and whether or not supply growth could accelerate to meet global demand. The report highlighted that despite high oil prices for much of the past decade and surging investment outlays by many major private and national oil companies alike, capacity has only risen by more than 1 percent a year during that time. The company’s current projection suggests that the world could reach a realistic supply capacity of around 100 million barrels a day by 2020, which is an increase from 91-92 million barrels per day today. This number, however, would barely satisfy the roughly 100 million barrels of liquids the world would consume each in day in such a scenario, which is up from 88-89 million today.
Threats
- Bloomberg reported that Brazil plants to limit the expansion of mining companies with concessions in sizeable areas as part of new mining rules. It has been speculated that this may affect companies, such as Vale SA, negatively. Vale is a Brazilian diversified mining multinational corporation and one of the largest logistics operators in the country. It is the largest producer of iron ore, pellets, and second largest of nickel.
- Roubini Global Economics is assigning a 60 percent probability to a recession in developed markets in 2012. The firm believes this will cap the recent surge in crude prices despite OPEC output tightening in the wake of Libyan supply entering the market.
- ArcelorMittal SA, the world’s number one steelmaker, said that a summer dip in demand is now extending into a second-half slump, with even lower steel shipments and prices in the fourth quarter, leading it to scrap some investment plans. ArcelorMittal globally supplies between 6 and 7 percent of steel. It is attributing this to economic uncertainties, the risk of recession in developed markets, and policy tightening in China, and is causing customers to be increasingly cautious.
