The commencement of Fed tapering was a key market driver during December, as was the bipartisan agreement on government spending levels for the next two years.
Global economic data releases were broadly positive and local economic news was dominated by the government’s release of its deteriorated forward budget projections and scrapping of the debt ceiling.
Geo-political risks increased with conflicts escalating in Syria, Iraq and increased unrest in other areas within the Middle East and S.E. Asia. Thankfully Australian equity markets held a “Santa rally” towards the end of December to close out the month in positive territory.
Commodity prices were mostly higher over the course of December.
Base metals strengthened as Indonesia’s proposed ban on the export of unprocessed ore gathered momentum with nickel up 2.8 per cent, zinc 10.0 per cent higher, aluminium was 2.6 per cent stronger and copper gained 4.6 per cent.
WTI oil climbed as geopolitical tensions escalated, particularly in Syria, South Sudan and Iraq.
It gained US$5.83 for the month to close at US$98.59/bbl. Gold declined, closing at US$1,205.33/oz along with iron ore which was down $2.20 closing at US$134.20/t.
The 2014 outlook for the world economy is more positive than for many years, with an upswing in the developed economies, robust growth in China and relatively few potential macroeconomic shocks on the horizon.
Typically, this is an environment where commodity prices do well. However, raw material supply in metals, energy and agriculture remains plentiful following a strong investment cycle in the preceding years.
As a result, global demand needs to accelerate further to break supply shackles. Nevertheless, with prices doing their best to limit future supply investment, underlying fundamentals in upcoming years are starting to look incrementally more positive.
In the metallurgical coal market, near term there appears to be a tight trading range around $150/t, on a longer term view the coking and metallurgical coal markets have a lack of supply growth which set them apart from other bulk commodities. This should see benchmark prices rise within 18 months closer to $180/t in our view.
Iron ore price strength is having greater longevity than predicted despite the significant supply growth.
Interestingly though, as a result of some forecast supply either not making it to market or taking longer to get to market than originally expected, the commodity is forecast to remain somewhat robust at $100/t over the longer term.
In copper, the market on paper seems to be in surplus in 2014-2015 which will keep prices at or around current levels. That said, given the lack of lower cost producers the price should be well supported at greater than $7,500/t over the medium term.
In gold whilst there appears to be short term price support at around $1,200/Oz. Ongoing physical demand strength out of Asia will be impacted by the normalisation of US monetary policy, which remains a sword over gold’s head.
The medium term outlook doesn’t provide too much inspiration for positive price movements.
However, as always low cost producers who can operate in the current environment should do well over the longer term.
Mining Stock Outlook
Reflecting on another tough year in resources and taking note of the various cash takeovers happening in companies across various commodities, it does appear that we are somewhere at or near the bottom of the resources market cycle.
The fact is that most retail investors are simply no longer in the market and many of the resources focused fund managers have either shut their doors completely or are in positions that make it very difficult to attract new funds or generate positive returns.
These facts combine to create a situation in which those investors and fund managers currently in good financial standing should benefit from current market conditions.
Rick Rule, CEO of Sprott Asset Management, who manages around $10B of assets and has spent his entire career in resources, recently had the following to say about mining stocks:
“The nature of mining markets is that they’re extremely cyclical. You go through these ugly down cycles and investors need to remember that bear markets are the authors of bull markets," he stated.
“The truth is finding decent companies, that have the ability to survive and then thrive for the next two or three years, is all you have to do in this market. This is actually a very, very, very simple market despite the fact it seems very bleak. My message is simply, you’ve been hit with the pain, why not stick around for the gain”.
We concur with Rule’s sentiment and believe given the positions in our core holdings, we could be in for an exciting year ahead.
*Matthew Langsford is a Portfolio Manager at investment fund Terra Capital.
Tera Capital specialises in small and mid-capitalisation stocks in the natural resources sector.