The Australian Government has announces a revised version of the mining tax that, when announced a couple of months ago, resulted in a virtual capital strike by miners. The previous tax, known as the Resource Super Profits Tax [RSPT], would have seen an additional tax on miners of 40% on profits above a threshold which was set at the 10 year bond rate. The announcement of that tax resulted a vigorous media campaign by both miners and government as each lobbied, via advertising, for public support of their positions. The announcement of the tax appears to have been one of many blunders that ultimately saw the resignation of the Prime Minister due to perceptions within his party that the election due later in the year was unwinnable on the current course they were following. A change of party leader immediately brought a more conciliatory tone in negotiations with miners.

After meeting with three key miners, BHP Billiton, Rio Tinto, and Xstrata the Australian government has announced that the restructured tax will now be called the Mineral Resource Rent Tax [MRRT], that the tax rate will drop to 30%, and that the hurdle rate will be 7% above the 10 year bond rate. This appears to be a major win for the mining industry and should see a spike in prices, notwithstanding other global forces/sentiment that are moving to push prices down at the moment.

A breakdown of the changes can be found here:

http://www.abc.net.au/news/stories/2010/07/02/2943317.htm

Australia · coal · iron · taxes

A constant source of irritation to me is articles about base metals that fail to distinguish between physical demand and speculative demand and typically fail to mention the supply side at all. Are speculators adding liquidity to the market or are they the market? The way I see it rising prices in base metals don’t necessarily signal economic growth. You need to determine if the prices are rising because of demand from industries with an interest in the underlying commodity or from demand for futures contracts by speculators who have no intention of taking physical delivery of the commodity. My opinion of the rally in base metals since March 2009 is that physical demand has been weak, notwithstanding transient buying splurges by China in some — but not all — base metals.

Anyway I came across this interesting article by James Montier of GMO:

http://www.scribd.com/doc/32174243/JM-I-Want-to-Break-Free

The entire article is interesting but the commodities commentary begins on page 9. Note that GMO estimate that speculative money accounts for half of commodity trades.

hat tip to The Big Picture.

commodities · demand · speculators · supply

I always find Marc Faber both entertaining and informative. …but would I enjoy listening to him as much if he didn’t have that accent? Not sure. All I know is that he always reminds me of Dr Strangelove. Here is a link to a one hour long speech he recently gave at the Mises Institute titled “Mirror, Mirror on the Wall, When is the Next AIG to Fall?”

Boom · Doom · Gloom · Marc Faber · Mr Bernanke · Mr Greenspan · Mr Krugman

The Australian government today announced a new tax on miners beginning in the second half of 2012. Known as the Resource Super Profits Tax [RSPT] it will be levied at 40% and will apply to profits after extraction costs are paid and capital investment is recouped. The announcement also said that companies will not be taxed until they provide shareholders with a normal return on capital investments but I cannot find who defines what a nominal return is.

When this was touted it was suggested that if the new tax was introduced it would replace royalties currently being paid to Australian states. Royalties are paid on the quantity of ore dug up, not on whether it is profitable. A very strange part of this announcement was that from 2013 states will refund royalties, which implies that they will still collect royalties and then hand them back to miners that are profitable enough for the RSPT to kick in. So no doubt more bureaucrats will be required to implement that.

One of the positives from the tax changes is that miners will get rebates on exploration costs. Under current tax rules small exploration companies do not currently receive a tax benefit from deductible exploration expenses until they become profitable.

In response to the announcement miner BHP said that the new tax will result in an increase in the total effective tax rate on its profits earned from its Australian operations to around 57 per cent from 2013 from the current rate of 43 per cent. BHP boss Marius Kloppers said that the proposal will hurt the sector’s competitiveness.

“If implemented, these proposals seriously threaten Australia’s competitiveness, jeopardise future investments and will adversely impact the future wealth and standard of living of all Australians,”

I have to agree with BHP [see disclaimer], on the face of it this looks like a disaster, but one that won’t begin until late 2012. The Australian treasurer described the new tax as:

“We’re putting in place a tax that encourages investment.”

…which only confirms that politicians have no idea about business. The rent-a-quote from the investment community comes from UBS:

“I think it’s clearly negative for the big miners. I expect them to be down fairly materially,”

A material hit to profits beginning H2 2012 will have a hit on the current price. You don’t have to be a UBS analysts to reach that conclusion. To be fair, there probably isn’t enough fine detail about at the moment to quantify the effect on profits — notwithstanding the quote above from Marius Kloppers.

A Range of opinion from the News Ltd Australian press here:

www.theaustralian.com.au/business/in-dep…

www.theaustralian.com.au/business/in-dep…

www.theaustralian.com.au/business/in-dep…

www.theaustralian.com.au/business/in-dep…

www.theaustralian.com.au/news/opinion/mi…

BHP · coal · iron · taxes

The International Copper Studies Group released their preliminary data for 2009 this week. Copper closed the year with a refined copper surplus of 365,000 metric tons, up from the 224,000 metric ton surplus in 2008. The final year surplus arose from a large drop in demand in the second half of the year after the market was in deficit in the first half of the year when China was stockpiling.

Copper usage in EU-15 countries, Japan, and the United States decreased by 20%, 26% and 19%, respectively.

As I have mentioned previously, amidst this backdrop of a surplus, production is predicted to increase 4.3% per year over the next 4 years. In recent weeks wire services have carried stories with bullish quotes from analysts about expectations of higher copper prices due to a forecast deficit in 2010. It is notable that no information ever accompanies these stories outlining where the demand is going to come from to create the deficit other than vague sweeping statements about global growth.

If demand for copper globally increase by 4.3% this year then that balances the expected increase in supply. Another 2% growth in demand is needed to balance the current surplus. To put that sort of growth into perspective, the percent usage growth in recent years has been 7.1 %, -0.1 %, 2.2 %, 6.6 %, -0.9 %, 0.1% so a deficit in 2010 would require booming growth in usage like occurred in 2007.

2009 was a strange year in that the collapse in demand from the developed world was matched by the increase in demand by China. But Chinese demand dropped off in the second half of the year as prices rose. There seems no reason to believe that China would embark on another stockpiling drive at current prices. Some sort of increase in demand from the EU, Japan and the USA will be expected in 2010 but enough to take copper into deficit? (Bear in mind also that US copper usage has been in decline for a decade so the new normal for US copper usage is lower than the good old days)

In summary, despite copper being in surplus and stockpiles rising the copper price remains strong, essentially decoupled from the physical supply/demand fundamentals. Whether that is sustainable depends on what you believe is driving market sentiment. However, to predict that copper will be in deficit in 2010 requires some heroic assumptions that look to me like too much of a stretch. I am not considering buying any copper stocks until the price gets down toward the $2.50 range.

Hat tip to Josh Hoyt of Metallic Conversion Corp for useful discussions.

copper

Copper 101

What I’d like to do in this article is give a brief survey of copper mining, production and usage. This is not intended to be an exhaustive survey, but instead more like my previous article giving a brief overview of iron ore.

Broadly, the three types of copper deposits you’ll read about in company reports are copper sulfide porphyry deposits, iron oxide copper (sulfide) gold deposits [IOCG], and deposits that are largely copper oxide. Porphyry deposits usually contain some molybdenum, silver and gold. Freeport-McMoRan’s Grasberg mine is an example of a large porphyryr deposit. Copper content of the ore of 0.5% or below would be considered low, whereas above 2% would generally be considered on the higher side. The content of copper and other metals effects the cash cost of mining the ore. For example if the copper content is low you have to dig more ore to recover a given amount of copper and that costs money. It follows then that additional revenue from molybdenum and/or gold makes a project more profitable. IOCG, as the name suggests contain gold, and often contains uranium as well. The large BHP Billiton Olympic Dam project is a IOCG deposit.
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China · copper · mathematica · WCI

Here is a figure is taken from an ABARE quarterly report.

The bars are the spread, in US dollars per metric ton, between copper prices on the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE). The orange line shows China refined copper imports in kilo tonnes. This chart was originally created to show that when arbitrage opportunities exist between the LME and the SHFE, China increases its imports of refined copper. Note that trade on the SHFE is restricted to Chinese firms and commodities held on mainland China.

I wanted to combine that data with some more recent data I had, and that presented a problem — how can I get this data out of the chart. Last year when I read this blog post I thought that what was presented could be modified to created a plot digitizer. Since I didn’t have any plots to digitize I didn’t give it any further thought — until now. After a little bit of trial and error I came up with the function below which has been designed solely for measuring in the y axis only: (more…)

BarChart · copper · LME prices · mathematica

It won’t be long before the 2010 round of contract talks begin between the major iron ore producers and major European and Asian steel producers. Early estimates from pundits who cover the sector were for an increase of approximately 10% but recently the punditry has been a bit more bullish. But what is the contract price? Whereas base metals are produced by a large number of companies and traded on exchanges such as the London Metals Exchange, the iron ore market is dominated by three players, Vale, BHP Billiton, and Rio Tinto, who annually engage in direct negations with steel mills to supply mills for the following year. Negotiations tend to be drawn out and often don’t conclude until June. Miners took a cut in the price in 2009 due to the global financial crisis which saw steel production plummet during the period of the negotiations.

Prior to 2009, 2005 through 2008 had been boom years for iron ore producers.

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Ansteel · Aurox Resources · Baltic Dry index · BHP · China · Cleveland-Cliffs · Cliffs Natural Resources · Fortescue Metals · Gindalbie Metals · hematite · iron · Magnetite · Portman · Rio Tinto · steel · Sundance Resources · Vale

Below is a chart of global crude steel production as of the end of November. China decreased steel output last month. A “one off” or a new trend?

Of most interest (to me) is what this means for iron ore and met coal prices in 2010 if this recovery in steel production is sustainable. Iron ore producers would need a contract price rise near 50% to make up for the hit they took with the 2009 contracts (down ~ 30% from the previous year). If you own BHP Billiton, Rio Tinto or Vale you should follow these steel production output numbers.

China · minerals · production · steel

These are buoyant times for (some) commodity investors, and (some) commodity producers, what does it mean in terms of a global recovery?

A common feature among people drawing conclusions about the economy from commodity markets tends to be a sole focus on price, and even then only prices in exchange traded commodities. If buyers out number sellers prices rise, so rising prices mean a return of global demand which in turn means global recovery — right? Well not quite, despite the enthusiasm displayed in many articles pushing that line. The flaw in this line of thought is that the buyers who are out numbering sellers in commodity markets need not be end users of the commodity. There can be speculative demand from speculative buyers just as there can be economic demand from industrial buyers. From the point of view of the markets, or the commodity producer, it doesn’t matter who the buyer is: more buyers than sellers means rising prices. The problem arises when you use market price — at face value — to draw conclusions about the economy. Since most of the people who connect price to economic recovery without digging deeper tend to be economists, I’m assuming economic theories don’t allow for speculators.

Let me focus on metals and minerals (e.g. iron ore, coal). People don’t eat these (unlike food commodities), they are used as inputs for industrial production. As global demand picks up we would expect to see increasing consumption of metals and minerals. When buyers out number sellers prices rise. This is clearly what is occurring at the moment, you only need to look at price charts–which I haven’t reproduced here because we’re all familiar with them. But what if the majority of buyers are not end users of the commodity and do not take delivery, i.e. speculative buyers? If the buyer doesn’t take delivery then you would expect stockpiles to rise. In other words if speculators are out numbering industrialists you would expect to see quantities of the commodity that are available, i.e. stockpiled, to increase. In the first chart we have the base metal stockpiles on the London Metals Exchange.

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LME prices · LME stockpiles