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Mix-Ansicht- Späte Einsichten, aber immer öfter............................................. - Emerald, 05.09.2003, 07:29
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-->Smith Barney unpacks copper-gold rally
By: Tim Wood
Posted: 2003/09/04 Thu 17:00 EDT | © Mineweb 1997-2003
NEW YORK -- Smith Barney recently published a “foundry side chat” after a flurry of client inquiries that echo what so many are seeing - an apparent US economic recovery matched by continued strength in gold.
Smith Barney thinks both copper and gold will do well, an unusual nexus, but one that will be especially profitable for the likes of Freeport [FCX], Newmont [NEM] and Placer Dome [PDG] who mine both metals in large quantities. The diversifieds, Rio Tinto [RTP], Anglo American [AAUK] and BHP Billiton should also do well, a fact underscored by the snappy appreciation in their stock prices over the past three months.
Ann Knight, Smith Barney Associate Director of U.S. Research describes an “incipient recovery” that will no doubt bring howls of derision from so many gold bugs convinced that a catastrophe draws nearer by the hour.
Although the US recovery is good for metal demand, Smith Barney is cautious on Europe’s recovery. Alan Heap, Australian commodities analyst believes 2004 will be a take-off year of sorts with base metal demand expected to grow 5.3%, up from 4.6% this year.
John Hill, U.S. precious metals and mining analyst, says metals are early indicator investments relative to other basic materials. “The best time to invest is exiting recession, when the first rays of sunshine begin to peek through the gloom, but before unequivocal statistical confirmation is available.”
That said, the Smith Barney team says conventional measures of improved demand remain limp. If there is going to be a change, it will probably be driven by China, the new bedrock of any demand analysis since it consumes 17% of global base metals.
With Chinese demand having reached a “critical mass”, heap believes it has the potential to lead metals to cycle highs even if the rest of the global economy remains moribund. Hill adds that this cycle has also seen Western inventories run down due to regional shifts in manufacturing centres. However, Asian inventories remain high so restocking is unlikely to drive prices.
Chinese base metal demand is up 25% this year alone, apparently unaffected by the SARS virus although it must be cautioned that SARS is likely to reappear this winter. Manufacturing, housing and infrastructure development are all consuming lots of metal. “There are compelling reasons why investment-led growth will continue, although probably not at the recent rate,” says Heap.
China does have a supply impact and it is particularly affecting aluminium where the country produces more than it consumes.
Hill agrees on the Chinese drivers, citing a useful Pareto insight - the country accounts for 20% of global metals consumption, but 80% of the growth.
Yet he warns against the Pollyanna’s. “The metals ‘China play’ is not a secret and has been loudly voiced for two years. The quality of the statistical data is questionable. Internal and external pressure for a stronger currency is building. Poor quality debt has been an issue in the banking sector. Common sense tells me that high growth rates are likely to moderate under the ‘law of large numbers’.”
Heap says nickel has the most going for it (that’s good for Mineweb’s highlighted play on the metal - Canico [T.CNI]. However, the current strain on supplies could be addressed quickly if Inco comes back on stream quickly and with Russia’s Norilsk Nickel able to shift the market easily.
Smith Barney’s second base metal pick is copper followed by aluminium.
Hill believes copper may provide superior “investable cyclical leverage into 2004.” Copper prices are expected to exceed 80 cents per pound in 2004 even as higher prices will lure producers to restart stalled capacity.
Metal equities continue to lead prices which in turn are leading demand. As a result, Hill believes metal equities will achieve peak valuations in 2004 and metal prices in 2005.
“We believe the September-November period will offer the last, best opportunity to buy quality names at attractive valuations before the metals cycle rally really heats up,” says Hill.
Gold is not excluded from the boom and now benefits from attention shifting from geopolitical niggles to macroeconomics. “Healthy developments that potentially set the stage for the sustained, incremental gains that have proven more constructive for the equities.”
The twinning of gold and copper is unusual, but as Mineweb noted last week, inflation and currency issues are important where they were less so in previous cycles where the overall trend was toward markedly lower inflation in the OECD countries. The Smith Barney team has a similar view, agreeing that the US dollar is likely to remain under pressure for a host of reasons.
“For the first time in the last fifteen years gold can perform in a recovering economy, supported by currency themes,” says Hill. “One no longer needs to be a paranoid, bomb-shelter-in-the-basement, ‘gloom and doomer’ to find gold attractive.”
Emerald.
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