Global trouble and lack of supply set scene for commodity price rises

The dead hand of Australian politics took a firm grip of the stock market
17th May 2019
Tim Treadgold

The dead hand of Australian politics took a firm grip of the stock market in the days before Saturday’s election despite abundant evidence that a number of sectors appear poised to move up sharply, led by gold, oil, iron ore and nickel.

Gold and oil are the stand out opportunities as the Middle East heads towards a US v Iran showdown, potentially with severe implications for oil and LNG shipping movements along the world’s energy highway, the Persian Gulf.

Iron ore has a different price driver, Brazil’s production shortfall, which looks like lasting longer than expected with a shortage of material expected to push prices back above the magic mark of $US100 a tonne.

Nickel, despite a big vote of confidence from BHP, which has decided to keep its Nickel West business as a toe-hold in the battery-metals industry, failed to fire even as stockpiles continued to shrink to multi-year lows, setting the scene for a price break-out.

Gold first, because it has a strong following among Australian investors and should soon re-acquire European and US support as interest rates in those regions slide back towards the lows of six years ago, a time when gold was selling for around $US1600/oz.

On the international market this week, gold did manage a rise of $US12 an ounce to $US1297/oz, and spent a day above $US1300/oz – but it was on the Australian market that records tumbled as the Aussie dollar fell to US69 cents, taking the local gold price to a record $A1879/oz before easing to $1875/oz

A pointer to gold moving higher can be seen in the rush by investors to buy US Treasury Bonds even as the yield on 10-year paper dipped to an 11-month low of 2.36%. Treasuries and the US dollar itself are gold’s major competitor and a fall by either improves the investment appeal of gold.

Most Australian gold stocks edged higher, with St Barbara the newsmaker as it launched a $768 million takeover bid for Canada-focussed Atlantic Gold and hinted that more acquisitions might be made soon. On the market, St Barbara added 17c to $3.32 before going into a trading halt to finalise a $490 million capital raising.

Other gold moves included Northern Star, up 74c to $9.51, Saracen, up 31c to $3.26, and Gold Road, which touched a 12-month high of $1.05 as the first pour nears at its Gruyere mine in WA, before easing to $1.04 for a week’s gain of 10c.

Fortescue led the iron ore sector higher thanks to the ore price and a positive market reaction to a special 60c-a-share dividend, adding 88c to a multi-year high of $8.41 – perhaps on its way back to its all-time high of $10.80 in mid-2008.

What happens next with Fortescue is one of the hottest debating topics in financial markets with the stock already higher than the level seen by the most enthusiastic banker such as Shaw and Partners, which has $8.30 as the price target, but a country mile above the more cautious analysts at Credit Suisse, which have a sell on Fortescue and a price tip of $6.30.

Nickel stocks, despite BHP making a long-term commitment to the metal, failed to fire even as the London Metal Exchange stockpile dropped to 168,000 tonnes, a fraction of the 470,000 tonnes of four years ago. Back then the nickel price was around $US6 a pound, comfortably above the current $US5.44lb.

Among the oil stocks, Woodside benefited most from the Persian Gulf stand-off, adding $1.19 to $36.76 while Beach put on 8c to $2.04.

Understanding what’s moving commodity markets is proving difficult for even the most seasoned analyst, with a trade war-induced slow-down in China the biggest worry as a war of words with the US continues to be stoked by inflammatory comments from both sides.

Set against the negative force of political and diplomatic point scoring is mounting evidence that production of most commodities is not hitting targets, which could support a price surge later in the year.

Citi, an investment bank, noted in a mid-week research report that worldwide production volumes of five important commodities (copper, zinc, iron ore, and the two types of coal, thermal and metallurgical) fell by between 2.6% and 9.5% in the March quarter.

The declines could reflect reduced demand as the global economy slows, but there was one stand-out performer if looked at on an annual basis and that was an increase (not a decrease) in thermal coal production.

At a time of climate change fears and a rush to embrace renewable energy, the 2% year-on-year increase in thermal coal sales is food for thought.

Most share price moves in a pre-election week were modest, as was trading volume with investors putting up the shutters ahead of the election.

Market news which produced prices moves, mostly modest, included:

  • Greenland Minerals, up half-a-cent to 8.5c after releasing an updated feasibility study, which features lower costs and increased potential profits for its Kvanefjeld rare earth project on the island of Greenland.
  • TNG added 2c to 12 after signing a life-of-mine sales and marketing agreement for titanium dioxide from its Mount Peake project in the Northern Territory.
  • Azure Minerals moved up by 1c to 11c after its managing director, Tony Rovira, told a conference in Perth that the company’s Oposura project in Mexico would be one of lowest cost producers and zinc and lead in the world.
  • Ramelius Resources managed a 3c rise to 86c despite suffering the rejection on environmental grounds of an application to expand its Greenfinch mine.
  • Image Resources said it had produced ultra-high-grade zircon ore at its Boonanarring mineral sands project in WA, news which lifted the stock by 3c to 21c.
  • Australian Vanadium add two-tenths of a cent to 2c after announcing a deal with a private company, Ultra Power Systems, for the development of the Coates vanadium project near the historic coke and vanadium mining centre of Wundowie in WA, and
  • Zenith Minerals added half-a-cent to 5.5c after reporting that it had identified a number of lithium-bearing pegmatite structures close to the Earl Grey project of Kidman Resources. Kidman, however, lost 1c at $1.89, to be trading below a takeover offer from Wesfarmers.

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