From the Man in the Woods to Indonesia

Chop your own wood and it will warm you twice,‘ said early American writer Henry David Thoreau. Indonesian politicians must have picked up a copy of his complete works. Last weekend, the government banned the export of mineral ore out of the country.

The stated aim is to create ‘value add’ refining and smelting within the domestic economy. But some Aussie shareholders might bag the windfall instead. Who’s it going to be? It’s the task of today’s Weekend Markets and Money to find out.

You might remember we reported on the proposed ban in late December when the copper price jumped in expectation of the law. Now copper is exempt from the ban, as is gold. Nickel, tin and bauxite are not. Coal appears to be a ‘maybe’.

Confused? So is everyone else, especially the miners. According to The Age on Thursday: ‘Australian miners with operations in Indonesia are still scrambling to understand the full impact of the Asian nation’s new ban on exports of some raw minerals.

Effectively, Indonesia is threatening to cut the supply of key raw materials to the world market in the belief they can capture more of the wealth generated by the finished goods which commodities eventually become. But the history of government intervention in commodity markets would suggest mining companies will simply cut investment and production in Indonesia and look elsewhere.

After all, you can’t just legislate industrial capacity into being with a pen. As our colleague Byron King has pointed out previously, ‘Currently, Indonesia lacks sufficient roads, railways, energy systems, processing plants, support facilities, service industries and workforce to refine all the ore that already comes to the surface. But despite these facts on the ground, the government of Indonesia now wants smelting and processing done in country – starting in January.

Nickel and bauxite appear to be the two metals to watch. According to Ambrose Evans Pritchard in The Telegraph, Indonesia accounts for 20% of global nickel supply and over 50% of China’s bauxite imports, which is used in aluminium. If the Chinese can’t source bauxite from Indonesia, Australia, which is the world’s largest producer, is the next closest supplier.

Kris Sayce positioned his Australian Small Cap Investigator subscribers mid last year in a bauxite stock leveraged to what he calls the latest ‘wonder weld’ breakthrough. It’s up about 30%. The business case got it that far. Indonesia might inadvertently hand investors a very tidy windfall on top.

But the case of nickel is just as interesting.

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We touched base with our resource analyst Jason Stevenson over at Diggers and Drillers for his take:

Indonesia accounts for 18-20% of the global nickel supply.

Wood Mackenzie, a research house, believes that Chinese stockpiles are large enough to at least sustain the output of nickel pig iron until the final quarter of this year. Nickel pig iron is a lower-grade substitute for the refined metal.

This could push the nickel pig iron market into supply deficit as early as 2015.

This could see the nickel price move above US$15,000 per tonne to as high as US$17,000 per tonne by 2017. The current price is around US$14,000 per tonne.

In this case, I would expect stock prices to react more towards the end of the year. I’ll follow this story closely.

The market has not been kind to resource stocks over the last few years. But now might be time to go hunting for bargains. Good companies often get taken down with the bad. But you don’t have to take our word for it; that’s straight from one of the richest men who ever lived, J. Paul Getty.

We picked up a copy of his small book How to Be Rich this week. It’s actually a collection of essays he wrote for Playboy magazine in the 1960’s. Getty made his billions mostly in the oil business, but was a shrewd investor in both real estate and stocks.

The seasoned investor buys his stocks when they are priced low, holds them for the long pull rise and takes in-between dips and slumps in his stride,‘ Getty writes on the art of investment. This is a man who took his oil profits and bought up shares on the floor in the middle of the Great Depression – and did the same thing over and over whenever stocks crashed.

He wrote that, ‘Great numbers of people who purchase stocks seem unable to grasp these simple principles. They do not buy when prices are low. They are fearful of bargains. They wait until a stock goes up-and up- and then buy because they feel they are thus getting on sure thing. Very often, they buy too late.

We think Getty would like the look of certain resource stocks trading on the ASX right now, but he’d be very wary of the US. He warns of the danger of paying too high a price for yearly earnings and the risk of margin debt in the stock market. The US market is trading on an expensive 25 x earnings with record margin debt. Any drop in the US could lead Australian stocks down. That’s seems like a risk right now. Hmm.

We’ll have more on Mr Getty next week. There’s plenty more to glean from How to Be Rich. If you can, pick up a copy. At the very least, you can say you really have read Playboy for the articles.

Stay tuned.


Callum Newman+
for Markets and Money


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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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