Here’s a bit of energizing news: In 2014, for the first time in four decades, the global economy grew along with energy demand without an increase in global carbon emissions.
That’s according to energy policy group REN21’s just-released Renewables 2015 Global Status Report, which attributes this stabilization to “increased penetration of renewable energy and to improvements in energy efficiency.”
What this means is that as the world’s population continues to grow, and as more people in developing and emerging countries gain access to electricity, the role alternative energy sources such as wind, solar and geothermal play should skyrocket. Between now and 2040, a massive $8 trillion will be spent globally on renewables, about two thirds of all energy spending, according to Bloomberg New Energy Finance. Solar power alone is expected to draw $3.7 trillion.
This is good news indeed for copper, necessary for the conduction of electricity in all energy technologies, whether they be traditional or alternative. The use of some carbon-emitting fossil fuels—coal, for instance—will likely drop off over the years, but copper will remain an irreplaceable component in our ever-expanding energy needs.
Global copper consumption is poised to increase not just because electricity demand is growing. New energy technologies typically require more of the red metal than traditional sources. Each megawatt of wind power capacity, for instance, uses an average of 3.6 tonnes of copper. Electric trolleys, buses and subway cars use about 2,300 pounds of copper apiece. Where we’ll see the most significant growth, though, is in the production of hybrid and electric cars, which use two to three times more copper than internal combustion engines.
Leading the way in electric vehicle technologies, of course, is billionaire entrepreneur Elon Musk’s Tesla Motors, whose $5-billion Gigafactory is currently under construction in Reno, Nevada. When production begins on its lithium-ion batteries, it will consume biblical amounts of base metals and other raw materials—so much, in fact, that some analysts question whether world supply can meet demand. Besides needing a constant stream of lithium and nickel, the factory will consume a staggering 17 million tonnes of copper, 7,000 tonnes of cobalt (today, worldwide supply is 110,000 tonnes), 25,000 tonnes of lithium (about a fifth of worldwide supply), and 126,000 tonnes of raw graphite (a little over a third of global supply). To keep up with such demand, nine new graphite mines will reportedly need to be opened.
This should come as welcome news for industry-leading base metals mining companies such as Freeport-McMoRan, Rio Tinto, Lundin Mining and Glencore, the last two of which we own in our Global Resources Fund (PSPFX).
Airlines Stocks Could Climb as High as 50 Percent
Automobiles aren’t the only types of transportation that are looking to renewables. The world’s first circumnavigation of the globe by an aircraft powered entirely by the sun is in its third month. The wings of Solar Impulse 2, whose span comes slightly under that of an Airbus A380, is covered by over 11,600 photovoltaic cells. Next year, Alaska Airlines plans to demonstrate a flight using only renewable jet fuel made from forest residues.
As for the entire airline industry, a recent Barron’s article announces that within 12 months, shares of the nation’s top four carriers could rise as much as 50 percent. Among the changes that “have left the industry in the best financial shape in decades,” according to Barron’s, are “consolidation, cost cuts and fee hikes,” not to mention cheaper fuel.
Demand in China Cooling, but Eurozone Could Pick Up the Slack
To be sure, copper and other base metals face some strong headwinds right now, not least of which is the strong U.S. dollar. As you can see, the red metal and the greenback have an inverse relationship.
The Thomson Reuters GFMS Survey estimates that the incentive price for new copper production is $3.50 per pound, a level unseen since March 2013. Although global copper mine production increased around 1.5 percent year-over-year in the first quarter of 2015, we might see a copper supply deficit in the next 10 years.
Many base metals, copper especially, rely heavily on orders from China, the top purchaser of the red metal. The world’s second biggest economy accounts for 40 percent of all copper consumption, but this figure might be threatened the longer its manufacturing sector remains at lukewarm levels. Although the preliminary purchasing manager’s index (PMI) reading rose slightly in June to 49.6, it’s still below the important expansion threshold of 50.
About 60 percent of the copper China purchases goes toward the property sector, an area that’s finally starting to show signs of life after almost a year of falling prices.
A bright spot for copper demand, however, is the eurozone, whose own flash PMI hit a 49-month high of 54.1. The expansion was led by Germany and France, which saw output rising at its sharpest rate since August 2011.
Copper Keeping It Cool for Billions Around the World
In the coming years, more and more people all over the globe will gain access to electricity, a growing percentage of which we will derive from renewable sources. In an interview with The Gold Report, my friend Gianni Kovacevic—whose 2014 book, My Electrician Drives a Porsche?, is an indispensable and entertaining resource on this topic—reminds us that by 2035, nearly 2 billion additional people will have an electricity bill.
Think about the impact that will have on all of our resources. Many of these people live close to the equator. When they begin to have more wealth, they live in more comfort. One of the first things they acquire is an air conditioning unit, or a refrigerator as they eat a protein-based diet. However, whether it’s a need or a want, the backbone of their future consumption footprint is energy, and, more specifically, electricity.
And along for the ride, whether in fossil-fuel power plants or wind turbines, will be copper.
- The major market indices finished mixed this week. The Dow Jones Industrial Average fell 0.38 percent. The S&P 500 Stock Index fell 0.40 percent, while the Nasdaq Composite fell 0.71 percent. The Russell 2000 small capitalization index fell 0.38 percent this week.
- The Hang Seng Composite fell 0.47 percent this week; while Taiwan gained 2.80 percent and the KOSPI rose 2.12 percent.
- The 10-year Treasury bond yield rose 22 basis points to 2.47 percent.
Domestic Equity Market
- Telecommunications was the best-performing sector in a down week for the S&P 500. The S&P 500 Telecommunications Services Index rose 1.16 percent this week.
- Personal spending rose 0.9 percent month-over-month in May, the highest reading since August 2009. Consumer-oriented data is becoming increasingly strong.
- New and existing home sales continue to show improvement in the U.S. housing sector. The S&P 500 Homebuilding Index rose 4.04 percent this week.
- Utilities was the worst-performing sector in the S&P 500 this week as government yields continued to rise. The S&P 500 Utilities Index fell 2.42 percent this week.
- Durable goods orders in the U.S. declined for the second straight month in May. The continued weakness of this indicator is cause for concern for industrials.
- The U.S. Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 53.4 from 54 in the month of June, according to preliminary results.
- The ISM Manufacturing PMI for the month of June will be released next week and is expected to rise to 53.1 from 52.8.
- The U.S. Supreme Court defended the existence of the federal exchanges in “Obamacare” this week, a tremendous victory for the legislation. Health care companies should benefit from this decision.
- The University of Michigan Consumer Sentiment Index rose to 96.1 from 94.6 for the month of June. Retail and other consumer-oriented stocks should benefit.
- Year-over-year growth in average hourly earnings for the month of June will be released next week. Analysts are expecting no increase in the growth rate from the prior month, a negative sign for the U.S. economy.
- Core consumer prices, as indicated by the PCE Core Price Deflator, showed weak growth for the month of May.
- The German IFO Business Climate Index fell to 107.4 from 108.5 for the month of June.
The Economy and Bond Market
- Greece and its creditors made significant progress this week as the International Monetary Fund (IMF) repayment deadline inches closer. Resolution to this drawn-out issue would be the single biggest benefit to the eurozone’s recovery.
- Germany’s manufacturing purchasing managers’ index (PMI) data improved for the month of June. The center of the eurozone, Germany, is showing signs of economic improvement.
- China’s manufacturing PMI also improved. The recent data for the month of June should ease investors’ concerns that the economy is on the wrong track.
- German and U.S. yields jumped higher this week. Rising interest rates are creating headwinds for fixed income.
- One persistently weak area of the global economy is the materials sector. Metals prices remain depressed as seen by the London Metals Exchange Index.
- M3 money supply growth in the eurozone fell from its previous level. With the massive bond purchasing program underway, investors would hope to see a continued rise in the growth rate of the money supply.
- If Greece and its creditors are unable to come to an agreement, the economic repercussions could cause a flight to safety, pushing down both U.S. and German bond yields.
- Eurozone banks are lending at the fastest rate in three years as government authorities flood the region with ample liquidity. A more constructive lending environment should be considerably positive for the eurozone economy.
- Bloomberg’s consumer comfort data point for the month of June will be released next week. The number is expected to increase.
- With the U.S. economy remaining strong and certain inflation indicators improving, it is becoming increasingly likely that the Federal Reserve will hike rates sometime this year.
- Month-over-month German retail sales for June are expected to come in flat next week. A slowdown in consumer spending in Germany would be negative for the Euro-area’s recovery.
- Germany’s year-over-year consumer price index (CPI) growth is expected to fall to 0.5 percent, according to a Bloomberg survey of analysts.
June 26, 2015
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Gold in the Age of Soaring Debt
- The Shanghai Gold Exchange is expected to receive approval from its central bank for a yuan-denominated gold fix soon according to Reuters. If the yuan fix takes off, China could draw buyers in the mainland and foreign suppliers to pay the local price, making the London fix less relevant in the world’s biggest bullion market. Additionally, the Shanghai Gold Exchange is in discussions with the CME Group about listing each other’s contracts on their respective exchanges, according to the exchange’s vice-president.
- Trading volume on the Shanghai Gold Exchange for the benchmark contract soared this week to the highest on record, according to data on Bloomberg, going back to 2002. The Shanghai Composite Index dropped more than 10 percent in the last two trading days of this week and is down nearly 20 percent from its highs.
- United States Mint bullion sales have been further propelled higher this week. With several days more remaining in June, gold sales at 59,000 ounces are the highest since January and silver sales at 2.5 million ounces are the strongest since April.
- After gold rallied to above $1,200 last week on the softer Fed outlook on interest rates, gold prices fell for the first four trading sessions and only moved slightly higher on Friday.
- South Africa’s Chamber of Mines said it gave workers a 10 percent pay raise in 2013 when the actual increase only amounted to 8 percent, according to the National Union of Mineworkers General Secretary. The “mistake” has eroded trust in the South African wage negotiations.
- Midway Gold filed for bankruptcy protection after suspending mining activities at Pan Gold Mine in Nevada. The company listed assets of $82.5 million and debt of $55.9 million as of June 21 in Chapter 11 documents. The company could owe creditors as much as $500 million.
- Standard Chartered announced bullion could rise to $1,300 per ounce by year end as the market begins to contemplate the impact of a Fed rate cycle that’s likely to be far more gradual and peak far earlier than normal tightening cycles. Furthermore, Credit Suisse said gold demand in Asia is likely to be more robust in Q3 and Q4 due to increased physical gold demand from Asia, central bank purchases, and declining supply that should offset the stronger dollar. Lastly, Barclays sees Q3 as bullion’s weakest, given rate hike expectations and a weak price floor. They see a mild recovery thereafter.
- Incrementum AG published their ninth rendition of “In Gold we Trust 2015” this past week. The publication provides an encompassing analysis of the global gold market and its relationship to governmental monetary and debt policies around the world. While we believe gold has a long-term role in a portfolio for diversification, we are now approaching what could be one of the most opportune times of the year to add gold and/or silver to your asset mix as July is historically a low point in the calendar year, in terms of prices.
- Gold demand in China may get a significant boost if the country’s stock rally fades. The Shanghai Composite Index has plunged 20 percent over the last couple of weeks, the fastest pace among global equity gauges and the most since 2008, amid concern valuations were unsustainable. About $1.3 trillion was wiped off mainland Chinese equities last week, more than the value of Australia’s entire stock market. Also, Fidelity’s Ian Spreadbury recommended owning gold, silver, and physical cash saying that there is no liquidity left and the idea of efficient markets facilitating reliable price discovery is an anachronism. He said this is the result of high frequency trading, an ineffective post-crisis regulatory regime, and central banks that have commandeered sovereign debt markets.
- A study by GMP Securities suggests the cost cutting programs entered into by most major and mid-tier gold mining companies may have largely gone as far as they can go. If metal prices don’t recover it could prove to be difficult to attain further growth in profit margins for the miners.
- Goldman Sachs and Societe General fear that contagion may be a bigger issue than people anticipate should Greece exit the eurozone. They highlight that the damage resulting from a breaking of the integrity of the euro would not be fixed by monetary policy alone. The failure to keep Greece in the euro would demonstrate the limitations of the growth and fiscal arrangements of the current euro area policy framework, offer a precedent to other governments and their oppositions, and crystallize the convertibility risk on all euro area securities.
- Sibanye Gold spoke out that the anticipated electricity price hikes, as much as 25 percent, by Eskom in South Africa will hit the mining industry very hard. Sibanye may be forced to close five of the company’s 18 shafts, effecting likely around 8,000 direct and indirect jobs. Undoubtedly, if such a tariff rate is put in force, all the miners in South Africa would be forced to make some difficult decisions regarding the operation of their mines.
Energy and Natural Resources Market
- Fertilizer stocks bounced back this week after falling nearly 10 percent the prior week. The Bloomberg Leaders Fertilizers Index rose 2.97 percent this week.
- Integrated oil stocks outperformed their respective energy peers this week as most of the damage was done to upstream energy producers. The Bloomberg Global Integrated Oils Valuation Peers Index rose 0.9 percent this week.
- Packaged food stocks were a relative outperformer in a primarily down market this week and strong dollar environment. The S&P 500 Packaged Foods Index rose 0.07 percent this week.
- Rail stocks fell sharply this week as global growth concerns, particularly concerning China, remain prevalent. The S&P Supercomposite Railroads Index fell 3.96 percent this week.
- Precious metals stocks underperformed this week as the continued strength of U.S. economic data affirms the notion that the Fed will raise rates sometime this year. The Global X Silver Miners ETF and the NYSE Arca Gold Miners Index fell 3.83 and 2.97 percent, respectively.
- Utilities was the worst performing sector this week as the yield on U.S. government 10-year notes spike up again. The S&P 500 Utilities Index fell 2.42 percent this week.
- The Baker Hughes crude oil rig count declined again this week. With each decline in the rig count, WTI crude oil supply and demand dynamics move closer into balance.
- With the dollar still elevated at disturbingly high levels, defensive areas such as forest and paper stocks should be a good place to whether the negative consequences.
- Copper traders are bullish according to a Bloomberg survey this week. The higher than expected preliminary manufacturing PMI reading from China comforted investors that growth is coming back.
- Oil is still going nowhere. WTI crude has hugged the $60 per barrel mark for a few weeks now. Without any significant pick up in the price of oil, energy stocks will underperform.
- Gold stocks continue to give investors cause for concern as there is more consensus surrounding a rate hike by the Fed sometime this year.
- Moody’s cut Peabody Energy Corp.’s credit rating this week, citing weaker than expected coal prices as the main reason. The coal industry remains considerably depressed.
- Greek equities capped off a tremendous week on Friday, as investors speculate a deal could be around the corner. Rhetoric from both sides of the table has eased and Greek creditors have proposed a multi-stage funding plan, contingent on certain policy changes. Euro-area leaders will meet over the weekend in an attempt to finalize an agreement before Greece’s IMF repayment next Tuesday. The Athens Stock Exchange General Index closed up 16.03 percent this week.
- Hungarian stocks rallied this week after the central bank cut rates once again. The move came in an attempt to further boost inflationary pressures. The Budapest Stock Exchange Index rose 1.57 percent this week.
- Polish equities finished the week in the green as concerns over Greece eased and the country saw a decline in unemployment. The WIG 20 Index rose 1.50 percent this week.
- China’s mainland equity market saw another sharp down week. Investors are adjusting their margin accounts due to fears of being overleveraged. The Shanghai Stock Exchange Composite Index fell 6.37 percent this week.
- Russian equities fell this week as the country’s macro outlook remains shaky at best. The MICEX Index fell 1.12 percent this week.
- Egyptian stocks retreated for the fifth consecutive week as investors’ optimism over Prime Minister Narendra Modi’s reform agenda dissipates. The Egyptian Exchange EGX 30 Index fell 1.99 percent this week.
- The eurozone had constructive preliminary results for its manufacturing purchasing managers’ index (PMI) numbers in June. The Markit Eurozone Manufacturing and Services PMIs rose to 52.5 and 54.4, respectively.
- Although some could argue the situation as a threat rather than an opportunity, the ongoing negotiations between Greece and its creditors are setting the stage for what could be a tremendous rally in the struggling economy’s markets. If a deal is indeed reached that is.
- A near 20-percent pullback in China A-Share equities over the last two weeks occurred in the context of zero change in government policy. While volatility is higher in the current bull market due to unprecedented use of margin financing, day-to-day correlation is extremely high at 97-percent, with the previous 2006-2007 advance. Liberalization of cross-border mutual fund offerings, favorable July seasonality, an enduring policy easing cycle, unachieved structural reform goals, and eventual inclusion into global indices, all remain near- and long-term catalysts for a resumption of ascent in China A-Shares. This bodes well for the undervalued H-Shares.
- The dollar remains resilient and emerging market currencies are failing to garner any momentum as shown by the MSCI Emerging Markets Currency Index.
- Russia remains a particularly frightening investment as the country’s economy continues to weaken.
- A recent wave of privatization of U.S.-traded Chinese companies (to re-list in the A-Share market), could face near-term challenges from an investor sentiment perspective. This view comes given the severe drawdown in the A-Share Index for small ventures, which veteran investor Bill Gross arguably targeted in early June as the next “short of a lifetime.”
(c) US Global Investors