Fund managers are underweighting commodities big time according to the latest fund manager survey issued by Bank of America Merrill Lynch (BoAML) on March 19 which reveal a big jump in the underweighting of the commodities sector from a net 1% to a net 11% underweight in March. This is 1.3 standard deviations below the average and the largest underweight since July 2012.
The number of emerging market investors worried about a hard landing in China also rose from 10% to 18%, highlighting concerns about demand for commodities after four months of improved sentiment towards China recorded by the BoAML survey.
Participating in an investment panel on asset allocation at the 2013 Mines and Money conference in Hong Kong on March 20, Juerg Kiener – Singapore-based managing director and CIO of Swiss Asia Capital –remarked that “total investment in the resources space has halved over the last two years, to below 2001 levels”. He commented that “investors are getting tired to live on promises” adding that the only way to get money coming back to the sector is capital discipline and return of shareholder capital.
Eric Sprott - CEO, CIO and senior portfolio manager with Sprott Asset Management - observed that, “in a zero interest rate world a dividend is a valuable thing”. Companies which pay a dividend will “get a better market capitalisation so can use the market to fund capex (capital expenditure)”, says Sprott. He urged companies not to “commit to the next mine that takes 3-4 years because I don’t think the market has patience to look 3-4 years down the line”.
“Right now there is a large reduction on capex” remarked Kiener, “future production is going to start falling quite significantly in a lot of different areas by 2015, 16, 17” and “capex reduction will filter through to the bottom line, to the shareholders” resulting in decent returns coming back to shareholders in the next 12 months. “In the short-term shareholders will see lifts and benefits out of very aggressive changes occurring in the industry”, he added.
Singapore-based Blake Olafson, managing director, Whiterock Capital, remarked that “capital will flow to those companies which have a much better cost structure, we’re already seeing that”, adding that “the only thing within the control of a lot of companies is their own cost structure “ rather than relying on commodity prices to go up.
Kiener observed that “people are incredibly pessimistic - everybody asks where the demand’s coming from and how to get the price up”. Yet capex reductions are already seeing decent prices being paid for good delivery on real assets with output. “The market has already shifted” remarks Kiener. “If you look at Glencore, they are all over place trying to get copper concentrate because they have a huge derivatives book, commitments to deliver and there’s just no decent copper concentrate coming out”.
In response to a question about which commodities will be attractive over the next five years, panellist Mickey Fulp – author of a newsletter titled The Mercenary Geologist – responded that he was “focussed on copper because 25% of world’s people – 1.75 billion people - can’t turn on a light switch, they live in the dark, that’s going to change”.
Olafson said that he was “Focussed primarily on two areas. One is the growth area of a lot of these emerging markets: in particular in the copper space, we feel very strongly about the fundamentals around copper”. The second is the building materials space. “Look at super-frontier markets like Myanmar, where you have some of the lowest consumption of cement in the world” he remarked, adding that “It doesn’t matter what happens to the global market because these economies will be able to be domestically driven – that goes through for several years”.
Fulp added that he focusses most, “as a contrarian on the supply/demand fundamentals of uranium look very compelling to me”. He observed that “even in 2012, with 48 of 50 Japanese reactors off-line, still have a 13% deficit in the uranium market”. Adding that the “spot price is US$42 a pound, the long-term contract price is US$60 an ounce, [but] most new uranium mines coming onstream are going to need US$80/pound. We have 66 nuclear reactors currently being built – where is the uranium going to come from?”
Following the broad-based price increases experienced over 2002-08, the commodities sector is seeing more attention focussed on supply/demand fundamentals by commodity. Fulp remarks that it is “increasingly obvious that the mining industry is not a growth industry, [it is] a value industry”.
