"The behaviour of mining equities and the underlying commodities travelled in different directions last week. Mining shares again drifted down, driven more by worldwide negative sentiment to equities, while the LME Index gained 2% to close at 3,129. A large component of the gain in the index was derived from the 4% increase in the zinc price to $1,958 a tonne and the 1.5% increase in the price of copper to $7,218 a tonne. Indeed, at one point towards the end of the week the copper market went into a $13 backwardation as demand for metal for prompt delivery exceeded that for three months.
Underlying the price move was a further fall in LME inventories. They declined 3.7% to stand at 393,000 tonnes and Bloomberg reported that total copper inventories including those on the New York and Shanghai exchanges stand at just 551,745 tonnes. This tightness was not predicted and Stephen Briggs of BNP Paribas commented that the forecast surplus in copper this year has now disappeared.
A tighter market this year means that the 2014 will start in better shape and Barclays has revised its projected surplus for 2014 down by 34% to just 127,000 tonnes of copper. One reason for this is the admission by Anglo American that its copper production will slide from 755,000 tonnes this year to 690,000 tonnes in 2014.
The industry is doing its best to respond to these good conditions as evidenced by the announcement that Codelco will invest $4 to $5 billion a year over the next five years in new capacity.
The negative sentiment towards the miners as distinct from the metals can be explained to some extent by the perception that while price are steady they are not rising. Rising prices suggest the companies are growing revenue and profits while flat prices indicate flat profits. While true to a degree it does overlook the importance of cash flow and the compound growth that arises from that.
There are also powerful mitigating influences, not the least of which is currency. In the short term the weakness in the Australian dollar depresses the share prices of the big miners with overseas stock market listings. Set against that though is the consequent reduction in operating costs. The 1.8% decline in the Aussie dollar last week to 89 cents will help a lot. If Glenn Stevens, the Governor of the Royal Bank of Australia, gets his wish that it declines even further to 85 cents the positive impact on the bottom line of the local mining stocks will be significant.
Capital markets still remain hugely distorted by the continuing repercussions of the financial crisis of five years ago when interest rates were reduced to virtually zero. Some asset classes, like junk European debt, were thrown a lifeline. Others, like mining, have just soldiered on throwing out prodigious amounts of cash to those savvy enough to hold those equities. The volume of that cash flow has never really been recognised, but it will be eventually. Especially if conditions next year turn out to be less gloomy than some are still expecting. It looks as if analysts will be revising their data right to the very end of the year.
Source: minisite
