Market suffering New Year wobbles
ROADHOUSE REGULAR: As you can’t have failed to notice the first few weeks of the New Year have seen a return to ‘Interesting Times’.
We have seen corrections in the major stock markets, and continuing falls in commodities.
There is really no point in giving a summary of what is happening in the resources markets – current events are basically a continuation of last year, however with some added impetus given perception of news out of, and events in China.
I won’t write more on China – there is plenty of comment (both informed and uninformed) out there on the web.
I must say however, I thought we may have reached bottom on base metals late last year, with, for example copper flattening out and seeming to be looking for a recovery, but now, it goes and falls off a cliff again.
So are we in normal times in the overall markets (and concentrating here in Australia)?
Outside of the China boom/GFC anomaly, three other notable movements are readily apparent – a fall through 2002, same again through 2011 and the current market downturn which started early last year.
Now let us look at these:
2002 – Peak of 3444 in February 2002, low of 2666 in March 2003 – a fall of 23 per cent over 13 months.
2011 – Peak of 5069 in April 2011, low of 3927 in September 2011 – a fall again of 23 per cent but this time over five months.
2015 – Peak of 5963 in April 2015, low of 4927 in January – a fall so far of 18 per cent in nine months.
So, in comparison with the previous two non-GFC falls, the current market downturn is nothing out of the ordinary (thus far), despite the impression that the mainstream media may put forward.
Any continuing falls to around 4500 could possibly be considered normal.
However, who knows what will happen in the future?
We are seeing what some may consider a perfect storm of global events.
Although there is sustained growth in the United States, this is nothing spectacular, and may be slowing somewhat.
Despite this the US still has the capacity to be a major driver of the global economy.
There are deep recessions in some developing economies, including Russia, Venezuela and Brazil.
These have been partly driven by falls in commodities prices, in particular oil (Russia and Venezuela) and iron ore (Brazil).
Chile is also being hit hard by falls in copper prices.
Brazil has also been suffering from drought, which affects the economy in two ways: Firstly it affects agricultural exports (Brazil is one of the world’s top agricultural exporters), and secondly the cost of manufacturing through increased power prices – Brazil relies heavily on hydro-electric power, with electricity production turning more towards the more expensive thermal production to conserve water supplies.
Unrest continues to dog the Middle East, with this also creating issues in Europe with the movement of refugees, and world-wide with terrorism driven by the Middle Eastern groups.
And the Eurozone is still not in hearty good economic health either.
Back to the Middle East, we have tensions between Saudi Arabia and Iran (however very unlikely to escalate into anything dramatic other than the skirmishes by proxy currently going on in some places such as Yemen), and falling oil prices are unlikely to do either country any good as well.
Falling prices could also be exacerbated by potential increases in exports from Iran, which apparently has up to two million barrels of oil per day available capacity.
Australia has been hit as well, largely through the falls in commodity prices, mainly driven, with the exception of oil, by the slowdown in China.
This has led to significant falls in Government revenue, an almost complete stop to capital investment in resources projects and very high unemployment in the resources and related sectors, despite our generally quite low unemployment rate overall.
My main concern with Australia now is that we may not have the fiscal or monetary tools needed to effectively cope with any upcoming downturn.
Australia was in a relatively fortunate position prior to the GFC – we had cash in the bank, interest rates in the order of 6 per cent and the resources export market was going strong.
Now we have interest rates of around 2 per cent, which may be too low for any decreases to have a positive effect on the economy, no spare cash in the bank and we are now over the resources boom.
I won’t leave resources entirely out.
One thing I have noticed is the continuing appetite for technological resources, including graphite and lithium, both integral in the manufacturing of batteries.
Three companies I follow, Peninsula Mines (ASX: PSM, through my coverage of Aurora Minerals – ASX: ARM), Metalicity (ASX: MCT) and Ardiden (ASX: ADV) have all recently picked up graphite and/or lithium projects.
In Peninsula’s case it is both lithium and graphite projects in South Korea, and in Metalicity’s case lithium in the Pilgangoora area of Western Australia, near Pilbara Mineral’s (ASX: PLS) lithium and tantalum projects.
Ardiden has added the Seymour Lake lithium project in Ontario to its portfolio, which includes the Manitouwadge graphite project.
Mark Gordon
Senior Resource Analyst
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