“What were you on about yesterday anyway?” a friend asked at dinner last night.
“The whole Glencore and Xstrata thing. Sometimes I can’t figure out why you put that stuff in your letter. It makes no sense.”
“Oh. Well, my point was that when you can’t figure out any other way to make more money, you announce a merger. It makes you look busy. Everyone gets excited. You say you’re creating more shareholder value. But really you’re just trying to find efficiencies or “synergies” to squeeze a bit of extra profit out of the business…because the easy profit growth is gone.”
“You should’ve just said that.”
Yep, we should have. So we just have. And today, more proof that the days of easy money selling dirt and coal to China are over. First cab off the rank is the Reserve Bank of Australia’s index of commodity prices. Have a look below.
What you see above is the biggest downturn in the RBA’s commodity price index since the big crash in 2008. Mind you it doesn’t look quite as severe, at least not yet. Last time around in 2008, the rush to cash in global markets caused people to sell a lot of their speculative commodity positions. Base metals in particular got smashed.
Base metals – lead, zinc, copper, nickel, and aluminium – make up 15.7% of the index, according to the RBA. Metallurgical coal (for steel making) makes up 14.7%, iron ore 9.3% and thermal coal (for power plants) makes up 9.7%.
If metals consumption in China is really peaking – the claim we made yesterday – it’s not hard to imagine the index crashing again. And if the index crashes again, it won’t be good news for base metals producers or explorers.
But let’s not be a Danny Downer. Oil is omitted from the RBA index. LNG is included (4.8%). But unconventional energy is not. In other words, a whole sector of the commodities complex that’s in a long-term bull market isn’t measured by the RBA’s commodity index. Do you realise what this means?
It means the RBA’s commodity price index can go suck an egg for all we care. If energy – oil, natural gas, uranium, and coal – is going to be the most important sector of 2012, the RBA index won’t tell you anything about it. All the RBA index will tell you is if base metals price crash and China’s metals demand has peaked.
We’ll be keeping an eye on it.
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