Five good years plus five bad years equals one good decade

THE CONFERENCE CALLER: Opening the RIU Melbourne Resources Roundup Patersons Securities resource analyst Jason Chesters couldn’t have summed up the resource industry’s last decade any more succinctly.

“As far as the past decade in concerned, resources have performed phenomenally well,” he told a packed first day audience.

“Probably more in the first half of the decade than in the second part, but that was primarily driven by the rise of China and the demand it created for commodities.”

In other words – the last ten years have been great, however they could have been really great if it weren’t for how dire the last five have been.

Taking a look at how commodities have performed over the past decade – first up gold and silver, Chesters suggested former positive attributes that had driven the rise in the gold price had faded.

Silver, he noted broke its traditional correlation with gold around 2011, but had reverted to type in recent times.

Palladium he noted had separated from platinum’s performance with one reason being a disparity in demand for use in auto catalytic converters in gasoline vs. diesel vehicles.

On the base metal stage he described the performances of copper, tin, lead and zinc to have been much the same over the past decade with China directing the action.

Supply restrictions, he said, benefitted each commodity at various times during the period.

Nickel and aluminium, being dogged by excess supply capacity and large stockpiles, didn’t enjoy the past decades as much as, although nickel has recently recovered strongly as a result of the Indonesian unprocessed ore ban and potential emulation by the Philippines.

Chesters then turned his attention to what he considered to be the resource equity drivers over the past year.

Iron ore exposure dominates the ASX200 Materials Index, mostly through the dominance of industry heavyweights BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) and to a lesser extent Fortescue Metals Group (ASX: FMG), BC Iron (ASX: BCI), and Atlas Iron (ASX: AGO).

“It [iron ore] is a dominant feature of the Materials Index,” Chesters said.

“So where goes the iron ore price – so goes the Materials Index, to a large extent.”

Chesters explained the sector is going through a phase of introspection at present, especially in terms of cost reduction, capital preservation, which has made it difficult for new projects to justify their allure to the current market, which remains attracted by yield and cash flow.

“Gold has effectively lost its investor appeal, ETFs have been selling up gold,” he said.

“With iron ore we saw substantial supply increases – driven largely by the boom in margins through the high iron ore price…but that has now started to impact at the very point that we have seen China’s growth start to dwindle, and we have seen what has happened to the iron ore price…at just under $80 per tonne.”

 

Source: Patersons Securities

 

Chesters has an optimistic view of what we can expect to see from the market as we move forward.

He suggested we can look forward to improving global growth despite a marginal slowdown in Chinese growth, which should be supportive of current commodity prices in general.

“We still expect improved growth from the global economy over the next couple of years,” he said.

“Despite the marginal slowdown we have seen in China, we believe that general climate is positive for commodities.

“Investors should be focusing more on trying to isolate and ascertain which new applications and high-growth areas are around and what the potential impact could be on commodity demand from those new high-growth areas.”

Chesters drew the audience’s attention to the situation where the major companies are currently divesting their smaller projects to focus on key projects in order to conserve capital.

This creates opportunities for junior explorers and the private sector, while Merger & Acquisition activity is expected to increase.