In Australia, commodities are the life blood of the economy. So it’s little wonder that there have been long faces down there. The price of coal has tumbled 60% from its peak a year ago.
Coal exports in January were worth A$4.5bn, a 20% drop from the previous month and February is unlikely to have been any better. ‘It’s a buyers’ market said one coal producer. ‘The market is very weak and there is plenty of coal out there.’
No wonder the mood is as black as the coal itself. But as we’ll see, there are signs of a turning point – and a chance for us to profit from it…
Just a year ago coal miners were cranking up production just as fast as they could. Nobody foresaw an end to the era of high prices. But the global recession has changed that. Even the mighty Chinese economy is not immune from its chill wind.
Why this new deal could spark a revival in the coal market
But let us get a little perspective. Because the gloom could lift much sooner than people realise. Indeed only last week Xstrata, the world’s biggest producer of power station coal settled a supply agreement with Japan’s Chubu Electric Power at a price of $70 per ton. True, this is some way below the $125 per ton that Chubu settled for last year. But coal industry watchers in Australia are still happy.
And here’s why this deal should set the benchmark for other annual supply negotiations taking place around this time…
You see, $70 per ton is still double the price that coal producers were receiving two years ago before the super-cycle theme got an airing and sent commodity prices into the stratosphere. It is still a level at which any low- or mid-cost mine should comfortably be in profit. And it could also mark the low point of the cycle.
Nobody believes that the long-term picture has changed. Population growth, industrialisation, urbanisation, the desire for motor cars, fridges and washing machines – all of these trends are still very much in place, even if temporarily put on hold. And it’s these trends that still point to a great opportunity for investors buying the right coal companies…
The Australian Bureau of Agriculture Resource Economics reckons that China will soon regain its appetite for Australian commodities. It says that the financial crisis is only likely to put a temporary dent in its massive and growing demand for iron ore and coal.
The Bureau acknowledges the likelihood of a slump in export earnings this year. But it predicts that over the five years to 2014, Chinese steel production will grow by an annual average of seven per cent a year. That means that by 2013-14, it will be consuming up to 44 per cent of the world's steel output. That’s more than enough to ensure a healthy demand for coking coal.
China’s new multi-billion-dollar kick-start for commodities
But the upturn could come sooner. You see, the lull in demand for coal is as much down to the unwinding of stockpiles that have built up at Chinese ports. But these stockpiles will soon be run down. And China is ready to embark upon a multi-billion dollar construction package to revive its flagging economy. That could be a major fillip to demand for coal and metals.
So it could be a good time for investors to revisit the commodities theme. The share prices of the big mining stocks Rio Tinto (ticker: RIO) and BHP Billiton (ticker: BLT) have been edging up in the last three months.
And I also like the high-yielding shares of Anglo Pacific (ticker: AFP). The share price may have fallen 60% in the past nine months. But last year it received £22m of royalty income from its Australian coal interests and paid out some 8.5% in terms of dividends to shareholders.
Equity investors should take the long-term view – now more than ever. So long as you’re able to do that, then commodity stocks at current levels look a good bet.
Good investing,
Tom Bulford
For The Right Side
P.S. There are only two other coalfields in the world that can rival Queensland’s massive Bowen Basin. One of them is much closer to China. It has barely been exploited and but I’ve found one tiny UK company that has a way in. Click here to access my latest research and receive this great little coal tip by return.
MARKET NOTES
Never mind the FTSE – keep buying defensives
BY THEO CASEY
Fool me once, shame on you. Fool me twice, shame on me. Fool me five times…
The stock market is doing now what it has done four times already in the credit crunch of 2007 – 200X… it is rallying from record lows. So until further notice, I’d suggest you ignore it.
You can see from the chart below that since 9 March, marked by the red line, the blue chip index has gained 8.4% and, at the time of writing, is back up at 3,834.
A dead cat bounce? – The FTSE 100 rallies 8.4% in last week 
Source: Google Finance
But don’t go jumping in just yet…
Bear market rallies are referred to by pessimists as a dead cat bounce. They argue that if you dropped a dead cat from a high enough perch it would bounce even though it is dead.
Is the FTSE dead? No, but that does not mean it’s time to go “all in”. As we have seen in recent history, all it could take is some gloomy data on the UK economy or some blue chip stocks to send shares back down to their lows.
In these volatile times I recommend against buying funds that track the whole market. Instead I suggest buying only those stocks which have proven themselves to be well insulated from the downturn. Defensive investing is the only game in town despite the renewed optimism for stocks.
Editor’s recommendation: Theo Casey is Investment Director for The Fleet Street Letter. Click here to discover the defensive shares Theo is recommending now.
The Daily Reckoning – The End of Socialism
BY BILL BONNER
Paris, France
Monday, 16 March 2009
Gird up your loins, dear reader. Put wax in your ears and lash yourself to the mast. You are about to be tempted.
“Lead us not into temptation,” says the famous prayer. The old timers knew we were weak. They knew we couldn’t resist. They didn’t pray that we would “just say no” to temptation. They knew that wouldn’t happen. Instead, they prayed to God to keep temptation away from us.
There’s nothing like a little temptation to get the juices flowing. A roulette wheel that seems to stop just where you thought it would... a pretty woman who smiles at you on the cross-town bus... a pastry as big as a sombrero and as rich as El Dorado – oh... Heaven forefend!
But the hardest temptation to resist is the temptation of getting something for nothing.
“Investors begin dipping toes back into stocks,” reports a Reuters article.
“While economies keep contracting, stocks may have already started pricing in the end of recession and the beginning of a recovery.”
Last week, the stock market showed a little leg. Yes, prices rose 12% over a 4-day period – teasing us with the prospect of a little fun. Finally – a rebound. Maybe.
The Dow rose again on Friday – up 53 points. The index is still down more than 15% for the year... and down more than 50% from its all time high. It is rare to see such big losses without a major rebound. Our guess is that we’re finally ready for one.
On that basis we have taken down our “Crash Alert” flag. If we’re right, we’re going to see stocks go up 20% to 50%. And we’re going to hear more people talking about the end of the recession... and a new bull market.
GM said it really didn’t need an extra $2 billion last week. Two of America’s biggest banks said they were running in the black again. Even the retail sales figures were not as bad as people expected.
Houses in some communities – such as Riverside, California and Miami, Florida – are selling for only about half of what they brought 3 years ago. Surely this is the bottom of the housing slump, right? And sales of existing houses – at bargain prices – rose almost 50% in January, from a year before.
Our advice is to listen politely – but don’t take it too seriously. This is a depression. If it follows the form of previous depressions, it will seem for a while that it is not a depression at all... but a recession, and one that is ending.
Many... probably most... people still believe that the crisis is merely a pause in an otherwise healthy economic model. They wait for the bailouts to take effect... and for the US consumer to begin buying again. That is the fondest hope, by the way, of the Chinese government. The Chinese hold $1.4 trillion worth of US dollar assets. They’re worried that their stash of cash may lose value. But, so far, it is the only thing that is NOT losing value.
The poor Chinese began spreading their cash around just before Humpty Dumpty fell off the wall. A number of their high-profile deals went bad:
“China loses billions on equities bets ahead of markets’ collapse,” says an awkward headline in the Financial Times. By the end of June ’08, the Chinese held more than $100 billion worth of US equities. Bad timing. But the collapse of the US stock market makes Beijing’s other dollar holdings look good. The dollar has gone up. So, the lesson the Chinese have learned is this: the safest thing you can do is to continue lending to your biggest deadbeat customer.
It is a dangerous strategy. But the Chinese think that if they extend enough credit to the US consumer, he’ll come back in the shop. And Ben Bernanke, another dreamer, said last week that the recession could end this year.
Stocks will probably rise for a few months. The economic news will be better. The Dow could rise to above 10,000. Then, we will be tempted to think that all the king’s horses and all the king’s men are actually better at putting things back together than their reputation suggests. We’ll be tempted to think that those bailouts and giveaways actually did the job... and that now, rather than turn our backs on temptation... we can safely give in to it.
Be careful, dear reader. Be careful…
And more thoughts…
*** The sentiment-du-jour is outrage. AIG has gotten about $160 billion in bailouts from the feds. Much of this money has been paid out to various counterparties. We’re not supposed to know who the counterparties are, but the word on the street is that billions have gone to Merrill Lynch, Goldman Sachs and two French banks, including Societe Generale. Why the taxpayer should be protecting Wall Street and foreign banks from their own errors is a subject for another day...
Read on…
To read the Daily Reckoning in full, click here.
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