Copper, Iron Ore, Aluminum and Coal Undervalued

China's lust for oil, copper, aluminum, iron ore and coal will bounce back during second half of 2011, having been sluggish as the government's campaign put the brakes on growth and inflation.

The current retreat in commodities prices this month, which saw oil and copper near lows for the year, came on the back of growing fears of weaker economic growth.

Alcoa, the largest US aluminum producer, expects global demand for aluminum to hold up into the fourth quarter despite a falling metal price and fears the global economy may slip back into recession.

China imported 382,175 metric tons of scrap copper in August, a decline of 12% from July and a drop of 4.1% from the same period a year ago. During the whole January-August period, scrap-copper imports had been up 7.3% on year, at 3.01 million tons.

China's Ministry of Environmental Protection introduced new regulations Aug. 1 for importing scrap goods. The new rules require importers to have certificates for bringing solid wastes into the country to ensure they meet environmental standards, according to a statement on the ministry's website.

The price of copper has fallen sharply since posting a record high of $10,190 a metric ton on the London Metal Exchange in February. While the red metal had risen strongly on expectations of growing demand from developing economies like China, as well as fears over supply constraints, in recent months the market has been under heavy pressure from concerns that slowing global growth would damp interest in the industry-linked commodities.

The demand outlook remains strong for 2011 and 2012.

Shayne Heffernan's list of Indonesian listed coal miners have all been upgraded to Must Owns in 2011 and offer great value after a sell off in Jakarta stocks. Today the Must Own Status was extended by Shayne Heffernan to other coal miners in the region.

The new additions are, Banpu, China Shenhua Energy Company Limited, HKG:1088, Yanzhou Coal Mining Co. (ADR), NYSE:YZC, Gloucester Coal Limited , ASX:GCL

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Rolling blackouts, power shedding because demand outstrips supply, are commonplace across the country. India often needs 10 per cent more electricity than the country can produce, the Central Electricity Authority says.

Even in the capital, in the garage or backyard of most homes sits a generator, which is used to ride out the inevitable cuts. (During the peak of summer demand, the Herald office backup rumbles into life three or four times a day.)

Across the country, 40 per cent of Indians get electricity for fewer than 12 hours a day.

And still the country needs more.

The International Energy Agency says 404 million Indians live with no access to electricity at all, and the government has set an ambitious target of electrifying more than 5.2 million below-poverty-line households this year alone.

Demand for energy in India is nearly insatiable.

And it is coal the country needs.

While India is home to 20 nuclear power plants and has a staggering 44 under, or slated for, construction, there are growing concerns - post-Fukushima - over nuclear power and the regulation of the industry.

Wind and solar energy are growing too, but are still at the periphery of India's energy needs. Dependence on coal is unlikely to abate for generations.

Coal, Bami explains to the room of people who know it better than anyone, provides 50 per cent of India's energy.

There is no shortage of the material. India is the third largest miner of its indigenous supplies in the world, with millions of tonnes still to be exploited.

But getting to that coal can often take several years. Developers must deal with India's famously obstructionist bureaucracy, comply with new, stricter environmental regulations, and observe the rights of those who live above the coal, recognised only recently (many would say, too late).

Several proposed plant developments remain under moratorium from the Environment Ministry.

For five years, from 2004-05, India's local coal production increased 7 per cent a year. But it has stagnated in the past two, barely moving from about 550 million tonnes, hampered by reasons of politics, land rights, environment, or all three.

Four years ago, the shortfall in India's coal production was just 59 million tonnes.

This year, the country will produce 554 million tonnes of coal, but will need 696 million.

By the financial year 2016-17, it will need 1 billion tonnes - an estimated 300 million tonnes of which it won't be able to produce.

The chairman of the India Energy Forum coal group, N.N. Gautam, says it is unavoidable the country will become more and more dependent on imported supplies.

"But we cannot rely to simply buy on the global market, because there are so many factors we cannot control. Global coal availability might not come to our rescue. India will have to acquire coal mines outside India," he says.

Although buying up coal mines overseas was not a panacea for energy problems "one thing is for sure, acquisition will continue". He also stresses that domestic production needs to be increased through more mines being approved, better infrastructure and efficiency.

The China Iron and Steel Association (CISA) rolled out The China Iron Ore Price Index on Monday, reports

According to the new index, the domestic price of iron ore has fallen for four consecutive weeks.

The new index includes data from September and October, which indicates that the price of domestic iron ore fell 6.58 percent in September, while the price of iron ore imports was down by only 1.08 percent.

In the first week of October, the iron ore price index for imports hit 653.41 points, down 0.13 points week-on-week, while the average offshore price of imports hit $176.22 per ton, down US$0.03 from the previous week.

As of end August, major ports in China held iron ore inventory of 95.21 million tons, an increase of 23.41 million tons year-on-year.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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