The Current View
A lengthy downtrend in sector prices had given way to a relatively stable trajectory after mid 2013 similar to that experienced in the latter part of the 1990s and first few years of the 2000s.
The late 1990s and early 2000s was a period of macroeconomic upheaval during which time sector pricing nonetheless proved relatively stable.
Relative stability suggests a chance for companies genuinely adding value through development success to see their share prices move higher. This was the experience in the late 1990s and early 2000s.
Still vulnerable cyclical conditions were aggravated in the second half of 2015 by a push from investors worldwide to reduce risk. Sector prices were pushed to a new cyclical low. These conditions were reversed through 2016 and 2017 although sector prices have done little more than revert to the 2013 levels which had once been regarded as cyclically weak.
With a median decline in prices of ASX-listed resources companies through the cycle of 89%(and 30% of companies suffering a decline of more then 95%), the majority of stocks remain prone to strong 'bottom of the cycle' leverage in response to even slight improvements in conditions.
Has Anything Changed?
The strength of the US dollar exchange rate since mid 2014 had added an unusual weight to US dollar prices. Reversal of some of the currency gains has been adding to commodity price strength through 2017.
Signs of cyclical stabilisation in sector equity prices has meant some very strong ‘bottom of the cycle’ gains.
Funding for project development has passed its most difficult phase with the appearance of a stronger risk appetite.
Resource Sector Weekly Returns
Market Breadth Statistics
52 Week Price Ranges
Equity Markets
Market volatility edged lower as US equity prices remained firm ahead of a series of potentially significant events in the coming week.
First up is the G7 meeting in Canada where frictions between US President Donald Trump and the other leaders is already evident and a source of market disruption.
The Federal Reserve is thought almost certain to raise its Fed Funds target. The North Korea-US summit in Singapore does not have any direct market link but remains a guidepost to the policy effectiveness of the US presidency. In Europe, the ECB is set to reconsider its quantitative easing approach. US inflation statistics are also due.
The US equity market has put the best face on these events moving gradually higher and pricing in lower volatility. Emerging market prices remained under pressure.
Resource Sector Equities
Resources sector gains trailed off toward the end of the week but were generally positive and, in the Australian market, ahead of their industrial sector counterparts. The explorers were relatively strong.
The gold sector as a whole has been losing volatility with the Australian part of the market ending the week unchanged.
Interest Rates
US 10 year bond yields remained under the 3% barrier even as nervousness about the formation of an Italian government was easing.
Italian government bond yields reversed somewhat but remained elevated. German yields reversed most of their previous decline as the flight to safety became less pronounced.
High yield corporate bond yields edged lower suggesting some of the best industry financing conditions in over a year.
Exchange Rates
The sharp currency moves of recent weeks stalled to produce a net decline in the US dollar with a positive impact on commodity prices. Nonetheless, the directional bias toward lower developing country and higher US dollar foreign exchange rates remains.
Some strengthening in the euro would have been in anticipation of upcoming policy adjustments in Europe. Developing country currency moves would have been helped by the fall in crude oil prices as market expectations about future rises changed.
Commodity Prices
The CRB index had returned to levels last experienced in 2015 indicating a prolonged cyclical trough in prices. The general upswing in commodity prices since mid 2017 had been given added impetus by stronger crude oil prices which have now eased back, taking the CRB commodities index lower over the past two weeks.
Prices remain within the bounds of a cyclical trough, albeit at the upper end.
The flip side of the benefits for commodity producers and exporters of higher commodity prices is the cost pressure now being experienced by users of agricultural and raw material commodities. Reporting companies have been suggesting this as a source of margin compression.
Business surveys closely watched by central banks are showing signs of upward pressure on selling prices as a result of higher raw material prices.
Gold & Precious Metals
Movements in precious metal prices remained muted with a noticeable lack of response in recent weeks to changes in bond yields.
Across the sector, prices appear close to a turning point as they butt up against the bounds of prior trading ranges.
The divergence in trend between Australian and north American gold related equities remains evident with US markets more aligned with a sceptical view of the near term future of precious metal prices.
Nonferrous Metals
Prices of the main daily traded nonferrous metals had broken into three groups. Group one comprised those affected by US sanctions on Russian economic and political interests, namely nickel and aluminum. The second group includes those metals being driven by broader macro trends which are experiencing a loss of momentum. The third category comprises tin alone.
The three groups remain evident although a strong rise in the copper price eroded the pattern in the past week. Nickel prices stood out once again with sharp gains.
The copper price rise occurred after appearing to have lost momentum in recent weeks and failing to follow the bond yield lead. That disparity has now largely been closed. Movements over the coming week may be telling about the future direction of economic activity - and whether the copper price move might have been little more than the last gasp of optimism.
Bulk Commodities
Relatively weak first quarter Chinese GDP growth had suggested a ramp up in activity through the remainder of 2018 if China was going to meet its growth target which, in a centrally controlled economy in which leaders are trying to maintain credibility, is a reasonable assumption.
Iron ore prices have failed to reflect the ongoing expansion in manufacturing output although coal and steel prices have been climbing.
Oil and Gas
Crude oil prices had reached the highest levels in several years before breaking lower over the past two weeks.
Russian president Vladimir Putin was reported as saying that a $60/bbl oil price would be adequate and other producers had hinted at an expansion in production.
The sharp market response to the slightly more bearish tone might lead to some reconsideration of any plans to push output higher.
US production, in any event, continues to rise. US producers are able to profitably hedge anticipated production contributing to the ongoing rise in their output.
Battery Metals
Eighteen months of rising lithium-related stock prices gave way to a period of market reassessment as a lengthy pipeline of potential new projects raised the prospect, although not conclusively, of ongoing supplies being adequate for expected needs.
Potential lithium producers have been able to respond far more quickly to market signals than has been the case in other segments of the mining industry with development prospects.
Movements in lithium related equity prices have been aligned more closely with overall sector equity prices in recent weeks.
Battery metals remain a focal point for investors with recent attention moving to cobalt and vanadium.
Doubts about a peaceful transfer of power in the Democratic Republic of the Congo (and an Ebola outbreak) added a dimension to cobalt prices lacking in other metals caught up in the excitement over transport electrification. Improved political conditions leave cobalt prices at risk of some retracement.
In the longer term, cobalt is the most vulnerable of the battery related metals to substitution with high prices likely to stimulate research in that direction leaving them vulnerable to reports of reduced demand.
Uranium
The uranium sector is forming a cyclical trough as market balances slowly improve. Power utilities are still not prepared to re-enter the market for contracted amounts of metal to meet longer term needs. A slight upward bias in prices was evident in the past month.
Slightly higher equity prices from time to time, in the hope of improved conditions, have not been sustained but could be repeated as speculation about improved future demand ebbs and flows.
The Steak or Sizzle? blog LINK contains additional commentary on the best performed stocks in the sector and the extent to which their investment outcomes are underpinned by a strong enough value proposition to sustain the gains.
