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David Fuller and Eoin Treacy's Comment of the Day
Category - Precious Metals / Commodities

    Hands Tied and Swords Bent, Emerging Markets Battle the Dollar

    This article by Srinivasan Sivabalan for Bloomberg may be of interest to subscribers. Here is a section:

    But that’s not the ominous undertone. It’s about how the traditional fortifications of emerging markets -- strong oil and commodity prices -- are failing to protect developing-nation currencies from the onslaught of a stronger dollar.

    Look at the chart below. In January, developing-nation currencies and commodities fell together and rose back in tandem. But this time, while the Bloomberg Commodity Index is extending gains, currencies have collapsed. This divergence suggests that a strong U.S. dollar is more decisive for risk appetite than commodity prices.

    That’s bad news for countries such as South Africa and Russia. The ruble, for instance, is now moving in the opposite direction to oil even though it’s the country’s biggest export earner. Their usual positive correlation was destroyed by a four-day decline in the currency in the wake of enhanced U.S. sanctions.

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    RBC Electric Vehicle Forecast Through 2050 & Primer

    Thanks to a subscriber for this report from RBC which may be of interest. Here is a section:

    Trump Gives Americans the Gift of High Lumber Prices

    This article by Justin Fox for Bloomberg may be of interest to subscribers. Here is a section:

    Lumber prices are really high right now! The Chicago Mercantile Exchange futures contract for the softwood two-by-fours used in framing houses closed at its highest price ever on Tuesday, in fact.

    If one adjusts for inflation, current prices are no longer record-setting. But an interesting pattern does appear if one adds in a few other key data points.

    It appears that every time the U.S. picks a fight with Canada over its alleged subsidies of softwood lumber — which comes from coniferous trees such as pines, firs and cedars — U.S. lumber prices go up. The match is likely even closer than the chart above indicates, given that threats of tariffs (“countervailing duties,” to be precise) and follow-up tariff increases also affected prices.

    The U.S.-Canada softwood lumber war first flared up in the early 1980s. Imports of lumber from Canada had been on the rise as environmental restrictions cut back on logging in U.S. National Forests, and the U.S. timber industry began to complain that Canadian local, provincial and national governments, which own almost all of the country’s forest land, were charging such low prices for timber that it amounted to an unfair subsidy.

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    Elysis: A New Era for the Aluminum Industry

    This press release today announcing a joint venture between Rio Tinto and Alcoa, with technical input from Apple, may be of interest to subscribers. Here is the key point apart from being carbon free:

    A NEW ERA FOR THE ALUMINUM INDUSTRY

    There’s a new, revolutionary way to make aluminum. It eliminates all direct greenhouse gases. And it produces pure oxygen.

     The technology can create more aluminum in the same size smelting cell as the traditional process. And it can be installed in new facilities or retrofitted for existing ones.

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    War on coal making the world's top mine owners a lot richer

    This article appeared in Mining.com and may be of interest. Here is a section:

    Some of the more significant declines are occurring in China, the top mine operator, and financing for new supplies is drying up. That’s creating a windfall for the producers who remain.

    “It’s a perverse consequence” of policies intended to combat climate change, said Julian Treger, co-founder of activist investor Audley Capital Advisors LLP. “It’s going to be very difficult for funders to provide capital to bring new coal assets online. We have a very interesting supply and demand picture being set up.”

    Anglo American, which not long ago wanted to unload its coal assets, has seen income from the business triple since 2015 to become the mining company’s most profitable commodity. Last year, Glencore reported earnings from the fuel more than doubled, while BHP Billiton said it surged sixfold.

    While global coal use and mine output has been dropping, production failed to keep pace with demand in 2016 for the first time in seven years, data compiled by BP Plc show. As supplies continue to drop, the amount available for export is shrinking. BMO Capital Markets says the 1 billion-metric-ton seaborne market will have a small deficit by 2021 and expand to 15 million tons in 2022.

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    Tesla Supercharging Its Model 3 Means Less Cobalt, More Nickel

    This article by James Attwood for Bloomberg may be of interest to subscribers. Here is a section:

    Tesla Inc. may have some bad news for those betting on cobalt to continue its record-breaking rally, and good news for nickel bulls.

    While the weight of its Model 3 is on par with gasoline- powered counterparts, its battery cells are of the highest energy density used in any electric vehicle, the Palo Alto, California-based company said Wednesday in a letter to shareholders.

    “We have achieved this by significantly reducing cobalt content per battery pack while increasing nickel content and still maintaining superior thermal stability,” Tesla said.

    Cobalt prices have more than tripled in the past couple of years as companies like Tesla strive to bring electric vehicles into the mainstream car market, and with supply largely dependent on a few mines in the politically volatile Democratic Republic of Congo. Nickel, which has gained about 50 percent in the same span, is far more widely available.

    Tesla says the cobalt content in its nickel-cobalt-aluminum cathode chemistry is already lower than next-generation cathodes that will be made by other cell producers with a nickel- manganese-cobalt ratio of 8:1:1.

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    Email of the day on the long-term outlook and potential for inflation

    In your 10/April long-term themes review, you said: "So, the big question many people have is if we accept the bullish hypothesis how do we justify the second half of this bull market based on valuations where they are today? ..... However, the answer is also going to have to include inflation. "

    My thoughts, not in any particular order:

    If we look at Robert Shiller's research ~1870-now, on the US share market, his studies show that historically, extreme valuations in the US share market (as assessed by cyclically adjusted P/E ratio) have always been followed by poor average real return over the following 10-20 years."
    You point to inflation as to how a secular bull market (in nominal terms implied) can now occur for the US share market (by implications I think you are reflecting on the US share market) over say the next 10-15 years (say).  You use the experience of Argentina and Venezuela as justification for your argument - where from memory, there was hyperinflation in the periods to which you refer.

    First, I do not think you are suggesting hyperinflation for the USA .... mismatch 1.
    For Argentina and Venezuela, I think their currencies also crashed. I do not think you are suggesting the US dollar is going to crash. Possible mismatch 2.
    Rather than a comparison with Venezuela and Argentina, perhaps a better analogy is to the period in the USA following the late 1960s, when US share markets where at quite high valuations (though not nearly as expensive as now on a CAPE basis). Following the peak valuations of the late 1960s, the US share market went sideways (with some large dips) over the next 16 years or so.

    In summary, I am not sure that your argument is particularly robust.  Yes, the technological revolution is a critically important new phase which will have a huge impact over the next 10 and 20 years..... and there may well be a secular bull market in that sector ... but does that really mean that the technology sector by itself will take the whole S&P500 with it in a secular bull market for the next 10 or 20 years?

    Your thoughts?

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    World's lithium king is ready to unleash a flood of new supply

    This article from Bloomberg appeared in Mining.com and may be of interest. Here is a section:

    “There is a legitimate concern on the side of battery manufacturers about long-term availability of supply,” said Daniel Jimenez, an SQM vice president who recently estimated that the industry will require a capital investment of $10 billion to $12 billion in the next decade to meet demand.

    The green light to mine vastly more lithium, combined with pending changes in its ownership structure, has suddenly put SQM in the sights of several global mining companies, including London-based giant Rio Tinto Group. Among the most aggressive bidders is China’s Tianqi Lithium Corp., which has offered to buy SQM shares at a 20 percent premium, Eduardo Bitran, the former head of government development agency Corfo, said earlier this year.

    “Tianqi owning the stake would be another step towards overall Chinese consolidation of the lithium industry,” Chris Berry, a New York-based energy-metals analyst and founder of House Mountain Partners LLC., said in an email.

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    Why High-Flying U.S. Home Prices Are About to Get Another Jolt

    This article by Vince Golle for Bloomberg may be of interest to subscribers. Here is a section:

    The framing of homes, or putting up roofs and walls, accounts for 15 percent of the cost of construction. A composite measure of the cost of lumber for framing rose 16 percent from December to March, according to data from Random Lengths, a publisher of information on wood products.

    And it’s not just lumber. A Labor Department gauge of prices paid at the producer level for construction inputs -- everything from particleboard and plumbing to concrete and insulation -- was up 5.1 percent in March from a year earlier, the biggest annual advance in nearly eight years.

    So far, neither higher home prices or a four-year high in mortgage costs have been enough to dissuade buyers. Results of the Conference Board’s consumer confidence index on Tuesday showed 1.7 percent of the group’s respondents in April planned to purchase a new home in the next six months, matching the highest share in this expansion.

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