It's true that prices of major metals from gold and platinum to
copper remain well above year-ago levels, as global demand remains
robust and low-cost supplies ever more scarce. Mining stocks,
however, have acted as though it were 2008 all over again. Shares
of Metals and Mining Portfolio foundation holding BHP
Billiton (
BHP
), for example, have slipped from nearly $100 in late spring to the
low $80s.
Xstrata (London: XTA, OTC: XSRAY)-a company with a USD49
billion market cap-is off by more than one-third over that same
period. Freeport McMoRan Copper & Gold (
FCX
) is down 20 percent in a month, despite announcing solid
second-quarter earnings. And the carnage is worse still for smaller
miners.
Metals are an unforgiving business for anyone who makes the
wrong bet. And every commodity bull market eventually comes to an
end, as high prices encourage development of new supplies, adoption
of alternatives and conservation. Even corrections within bull
markets-such as the 2008-09 slide- are vicious events hardly worth
holding on through.
That being said, the current slide in mining stocks does not yet
resemble 2008, let alone the end of the bull market that began in
the early 2000s. The main reason for this is emergingAsia.
The key catalyst for the steep slide in resources in 2008 was
the meltdown of theUS banking system, and fear that demand would
slide to depression-like levels for years. As it's turned out,
materials demand in theUS is still weak three years later, as
strength in manufacturing has been offset by weakness in
housing.
Like other commodities, however, most metals bottomed with the
market in early 2009 and have been on a tear ever since. That's
because Asian demand quickly picked up the slack, and it hasn't
slowed down.
No longer is a weakUS economy enough to keep metals prices at
low levels. That now requires a severe slowdown in emerging
economies as well, particularlyChina andIndia. In his
InvestingDaily.com article,
Asia and a Recession
, my colleague Yiannis Mostrous reaffirmed his forecast that
"emerging markets, particularly inAsia, will outperform developed
markets in 2011." Implicit in that forecast is continued robust
performance of Asian economies-which contrary to popular belief-are
less dependent than ever before on both global credit markets and
exports to developed nations. See the article,
China to Power Global, US Growth
, for more impressive facts on this paradigm shift.
China, for example, now relies on exports for just 28 percent of
its gross domestic product (
GDP
).India is only 20 percent reliant on exports, whileIndonesia is
just 26 percent dependent. Meanwhile,China's public debt-to-GDP
ratio is less than 50 percent, giving the government plenty of
flexibility should economic growth slip below the targeted annual
rate of 8 to 10 percent.
However,China consumes more than 40 percent of the world's
copper and last year it was the fastest growing user of oil-related
products.India, on the other hand, is the third-largest user of
coal and home to a rapidly expanding market for automobiles.
The upshot:Asia's demand for natural resources is set to remain
robust for the rest of 2011 and beyond, despite the recent turmoil
in the markets. And as long as that's the case, it's very hard to
imagine a 2008-style meltdown in metals prices.
For now, metals have been recovering, as demonstrated in the
chart below. Precious metals and copper remain at the forefront of
the action, with copper prices occupying the center point of
significant speculation. See,
Proving Their Mettle
, to get Elliott Gue's top pick for investors seeking to profit
from tightening supply-demand balances for industrial metals
Many analysts are looking for year-end copper prices of US11,000
to USD12,000 per tonne, as supply disruptions keep the market
tightly balanced. Our outlook remains a little more benign-a price
of USD9,000 per tonne seems more attainable.
