–Before the reckoning of 2011 kicks off, we want to extend our best wishes to all our readers in Queensland affected by the flooding. The pictures on the TV probably don’t do justice to the extent of the damage and disruption to real people’s lives. We’ll keep you in our thoughts and prayers tonight.
–As an economic issue, the flooding has already idled production in 75% of Queensland’s coal fields, according to Agence France Presse. The Bowen Basin – one of the main coal zones in the state – is right in the middle of the flooding. BHP Billiton, Rio Tinto, and other coal producers have already declared force majeure.
–Coal, as you may know, is one of Australia’s twin commodity titans. Iron ore is the other. Australia exported $139.1 billion worth of energy and mineral commodities last year. $71 billion of that total-or 51% of all export earnings came from coal and iron ore. Thermal coal for use in generating electric power churned out $11 billion. Metallurgical coal generated $24.5 billion. And iron ore generated $34.5 billion.
–The Australian Bureau of Agricultural and Resource Economics (ABARE) reckons that mineral and energy exports will grow in value by another 28% in 2011. ABARE forecasts a 46.5% increase in iron ore prices, a 34.1% increase in the value of met coal exports, and a 32.2% increase in the value of thermal coal exports. See the table below for details.
Click here to enlarge
–What’s telling about the table is that the 34% change in the value of met coal exports is forecast to come from just a 1.9% increase in the volume of production. The only way you get an increase that big is with higher prices. And ironically, any serious disruption in coal production from Queensland could drive prices higher. But obviously, if export volumes fall, then Aussie producers would capture less of the windfall from higher prices (at least in the spot market).
–Incidentally, you can see that ABARE is also forecasting a big increase in the volume and value of energy exports, especially oil and uranium. Oil futures hit $91.55 overnight, which confirms a bullish forecast. And that brings us to the larger issue that confronts you as an investor for 2011: will it be pretty much like 2010?
–That is, will it be a good year to buy precious metals and tangible assets? And will those assets outperform stocks? The question is worth asking, if only to shake up your preconceived ideas about what’s going on in the market. We used the break to try and look at our rather entrenched and bearish position on the market and examine it from a different perspective. Does it hold up?
–Well the S&P 500 was up 13% in 2010 and is up 39% since late 2008. Of course that is in U.S. dollar terms and reflects a U.S. market that has become a plaything for market manipulators (central banks and primary dealers) and high frequency traders. By comparison, the ASX/200 finished up Friday 2.6% lower than it started.
–Naturally, today’s Australian Financial Review, not a single of the ten analysts surveyed by the paper predicted that the market would go lower in 2011. The average forecast is for a 14% gain this year. The most bullish forecast (from RBS) is for a 20% gain. The least bullish forecast was for a 5% gain.
–Bears, apparently, were not surveyed. But then, the securities industry is in the business of selling securities. And you probably don’t sell a lot of securities by telling people that the securities prices are going lower. So where does that leave us?
–Well, copper went up 33% last year (as our resource guru Dr. Alex Cowie predicted). Mine supply shortages and demand growth have conspired to send copper futures to a record $4.45/lb in COMEX trading. Barclay’s estimates there will be an 800,000 tonne shortfall in copper production this year.
–Meanwhile, China consumes one-third of the world’s copper. And during yesterday’s U.S. trading, it was reported that U.S. manufacturing expanded at the fastest pace in seven months. All these signs can be read bullishly.
–And yet another industrial metal – sliver – is also making new highs. Silver made a 30-year high at $31.08 in New York. In addition to being money, silver is used in a lot of modern technology. You could say that along with copper, silver is giving a vote of confidence to the “recovery in 2011” theme. This would be generally bullish for gold, oil, and emerging markets.
–And maybe that’s the way it will be. Or maybe not. Nobody knows. But we’ll keep trying to figure out what’s really going on.
–In the meantime, let’s not forget that the best cure of high prices is…higher prices. At what point do rising oil and copper prices begin to destroy demand for them? The key will be watching producer price indexes. As those rise, manufacturers will have to pass on rising commodity costs to consumers.
–You’ve already seen how rising food and fuel prices can be politically destabilising in emerging markets. What you may see next is that rising prices for other members of the commodity complex may destroy the hoped-for recovery in 2011. But like we said, no one knows. Tomorrow, is it wise to buy something that’s been rising in price for ten years? Stay tuned…
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