This is the future enviroment for MSQ ?Bring it on !!!
No End in Sight to Commodities Bull Cycle
By Jon A. Nones
30 Mar 2006 at 11:19 PM EST
St. LOUIS (ResourceInvestor.com) -- At the third annual American Stock Exchange Precious & Base Metals Investor Conference in New York today, Van Eck Global analyst Charl Malan gave a broad overview of the metals market. His synopsis: many more years to come in the commodities bull cycle.
Malan’s presentation focused on the supply and demand fundamentals of precious and base metals, and began by noting a lack of major discoveries in recent years as compared to the 1980s - but with increased exploration spending.
Neal L. Wolkoff, Chairman and CEO of AMEX cut the proverbial ribbon at the conference by saying, “It a very good market now in metals and business expansion of the like.”
Indeed with base and precious metals all hitting record highs today, the timing couldn’t be much better. So without further ado....
Supply
Malan wasted no time with making forecasts for the future – all bullish.
“We believe that is very unlikely that the current commodities cycle will come to an abrupt end due to a large influx of new supply. And even more so, if we consider the time lag associated between discovering a new deposit and the time before the metal comes to the market,” Malan began.
This almost mimics the point raised by veteran resource analyst Donald Coxe at the BMO Nesbitt Burns Global Resources Conference last month. Coxe said it now takes about eight to ten years to bring a mine online because of stricter regulations when it used to take only five years.
“We’re not going to have the knee jerk” on commodity prices like we’ve had before, Coxe said.
According to Malan, current inventories remain low at about an average of four weeks of global demand. And this tightness in the commodities market can be seen in copper especially, he said.
Copper inventories in 2001 average roughly 5.8 weeks, but in 2005, it was predicted to average just below two weeks of supply.
“Van Eck remains confident that the tightness in the market will remain not just because of a lack of below ground supplies but also due to the lack above ground inventories,” he said.
For example, gold production peaked at roughly 2600 tonnes in 2001, and was set to decline 8% per year going forward, according to GFMS.
But the problem does not only lie with a lack of surface or below ground supplies, but a number of gold mines have past their peak of production, said Malan. In addition, shortages of mining equipment, supplies and skilled labour all have also hindered production. Tires for the trucks for instance have been especially short in supply and taken far longer to deliver, he said.
In addition, the cost of producing both gold and base metals has escalated, he added. About 25% of these costs will not be able to be diverted and “thus long-term high commodity prices are here to stay,” said Malan.
Demand
Demand remains significantly strong, he said.
In 2002, China’s demand for metals was roughly 20%. In the next five years, this number was estimated to increase to 35% to 40%.
“We are of the opinion that China will remain metal hungry as the country continues to develop,” he said.
Some interesting facts on the country, according to Malan:
China plans to build a city the size of Boston every two years;
China currently consumes nearly 40% of global cement;
China has an ongoing 15,000 highway projects, adding an estimated 164,000 kilometres of road, “enough to wrap around the world four times.”
“Clearly we are looking at long-term demand for commodities from China,” he said.
But we also see India, Brazil and Russia to continue to underpin demand, Malan added. Demand in these countries for metals will increase and ensure long-term commodity price support.
Malan also made light of fund investments - nearly $200 billion of fund inflows “as non-traditional investors are looking to diversify their portfolios.”
Fund investments have contributed to an addition 12% of demand in base metals alone, according to a study by Citigroup.
“We at Van Eck remain of the opinion that growth in commodity fund flows will continue,” said Malan. “New investment vehicles such as ETFs, index funds and other instruments provide an ideal diversification tool for investors looking to provide hard assets to their portfolio base.”
Economic Outlook
Malan said he has a bullish outlook for gold for its inverse relation to currency and its hedge against inflation/deflation.
“At the end of the day, we see gold as money. It’s portable, it’s valuable, it’s universally acceptable, it’s durable and unlike modern day currencies, it has a limited supply,” he said.
He said central banks sales have reduced and “both the Bundesbank and the People’s Republic Bank of China have given indications that gold is becoming a more important currency in their foreign reserves.”
According to Malan, one of the biggest economic uncertainties is the current account deficit in the U.S. The current account deficit is reaching as high as 7% of nominal GDP, which “is an historic high.” And we won’t likely see any reduced spending with the war in Iran and the rebuilding of New Orleans, he added.
Malan also said that the real estate market has entered an area of inflated prices and when this bubble crashes, it will have a substantial impact on consumer demand and spending.
“We believe that the consumer is house rich and cash poor and ultimately a weak real estate environment will add fire to the already uncertain economic and financial outlook of this country,” he said.
Private non-household debt is climbing as high as 65% of GDP and household debt is touching unsustainable highs of 90%.
“During the past decade, the Fed has been relying on credit extension to promote economic growth. But surely the question we have to ask ourselves is how much more can the system bear, and ultimately will this result in another recession,” said Malan.
Conclusion
The recent run up in this commodities cycle pails in comparison to previous commodities cycles, said Malan. Previous commodity cycles have lasted 20 years on average, much longer than the few years we’ve seen so far, he added.
Dale Doelling, Chief Market Technician of Trends In Commodities, told Resource Investor today that market trends continue in the same direction until they reverse, and he sees “no sign of a reversal at this juncture.”
In summary, Malan agreed.
“Van Eck continues to remain very positive on the cycle, and we especially see opportunities in the metal and small cap commodity equities,” he concluded.
Metal Price Activity
Gold for June delivery traded as high as $592.10 an ounce on the New York Mercantile Exchange before closing up $13.20, or 2.3%, at $591.80. It marked its highest close since January 1981.
Silver for May delivery rose as high as $11.715 an ounce, its highest level since late 1983, before closing up 54.5 cents, or 4.9%, at $11.66 an ounce.
May copper added 4.6 cents, or 1.9%, to close at $2.4845 a pound, having earlier traded at a record $2.494 a pound.
June palladium rose $12.90 to close at an almost four-year high of $350.30 an ounce and July platinum reached a record $1,102.70 an ounce, closing up $14.80.