Metal Tiger…

By: HRA_Advisory

A sign of the times is seen in the deal the CME Group (CME-N), umbrella for the Chicago and NYMEX commodity bourses, is buying 90% of the Dow Jones index system from News Corporation (NWS-Q).  The traditional newspaper business is having a tough go competing with the internet, which prompts the sale.  One could argue this is another example of the commodities space taking up some of the ground opened by the past decade’s bear market for equities. 

Others might point out that Chicago will be deciding what New York favors, though in practice the same folks that have been keeping the lists will continue to.  What may become the point of greatest interest is the main US options trading group will own the best known set of US equity indices.  That could greater criticism about neutrality when index adjustments are made.  Betting the farm could take on a new meaning. 

Certainly the strength of the copper market continues speaking to a warm commodities future.  The red metal bounced off of the $2.90 level and hasn’t really looked back.  Though warehouse stocks have seen only minor reductions, they are holding steady.  Chinese New Year and the week of rest that comes with it are now in swing, and this has become one of the market’s true testing grounds each year.  This year just starting is a Tiger, which may prove apt it is the year in which China solidifies its status as the global economy’s rising star.  It’s not any tiger though; it’s a Metal Tiger that opens on Valentines Day.  Perhaps we will shift to a stronger stance on copper before stocks are reduced, but not before the lunar New Year festival is behind us and we see the results of its annual soul searching and chat-fest.

If there are to be heated metal discussion it will likely be around the iron ore market.  Reports indicate that Vale, the conservative mostly privatized Brazilian miner that ships the largest tonnage of iron ore each year is agreeing with its more aggressive Australian peers that the old system of prices set by annual contract is waning.  Spot pricing for iron ore has stayed well above last year’s fix and this year’s negotiations will likely be tough.  For decades the first contract rate, usually between a Japanese foundry and an Aussie supplier, has set the price for the industry.  That was simple enough when price shifts were small, but no more. 

China, now the biggest buyer, is miffed it is not the lead on this year’s negotiation.  As with other smelters, China’s capacity has grown beyond immediate need in part due to subsidized power costs.  These will not last forever, and there is no fluid, open call market for iron ore that can adjust quickly to changing costs.  Japanese smelters have cut margins to the bone in other subsectors to ensure supply, and may do the same here.  That is good news for Cons Thompson (CLM-T) and other emerging iron ore producers, at least near term. 

It also fits our presumption that the Yuan should/will be allowed to strengthen and reduce Chinese import costs.  That mightn’t fix the world’s other currency issues as some would like to think it could.  It would better balance China’s own shift from an export to an import driven economy, and reduce the impact of its holding the dodgy IOUs most resources are priced in.  

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By David Coffin and Eric Coffin
http://www.hraadvisory.com

David Coffin and Eric Coffin are the editors of the HRA Journal, HRA Dispatch and HRA Special Delivery; a family of publications that are focused on metals exploration, development and production companies. Combined mining industry and market experience of over 50 years has made them among the most trusted independent analysts in the sector since they began publication of The Hard Rock Analyst in 1995. They were among the first to draw attention to the current commodities super cycle and the disastrous effects of massive forward gold hedging backed up by low grade mining in the 1990's. They have generated one of the best track records in the business thanks to decades of experience and contacts throughout the industry that help them get the story to their readers first. Please visit their website at www.hraadvisory.com for more information.

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