Wednesday, April 13, 2011

Morning Call: Goldman's Near-Term Bearish Turn on Commodities

http://seekingalpha.com/article/263135-goldman-s-near-term-bearish-turn-on-commodities
 
During our morning calls we spend time analyzing a certain headline and dissecting it.  We addressed the following questions today to the article mentioned above:

1. What's the reason do you think the Goldman's commodity team made the statement in their research note?
2. What does Japan use copper and platinum for? How much were the industries use these commodities affected by the earthquake and tsunami? (several examples and general numbers needed only)
3. How tight credit motivate will affect China's consumption on copper?
4. Taking all the supportive and negative effects that Currie mentioned in his note, briefly analyze the possibilities that the oil price will go up and down by listing several possible scenarios and their outcomes.
5. Any other commodities you think are being speculated? Any reason for the speculation?
6. How did the other companies reacted to Goldman's statement, if there's any? If there's none, how do you think they should behave?

A very brief outline of what each of us stated to the questions above is listed below.  This certainly isn't the complete description of our call:

1. What's the reason do you think the Goldman's commodity team made the statement in their research note?

a. The very basic and fundamental reason for this statement is that the current economy status doesn't support the high commodity prices at this level, as recently pointed out by medias and many economists.
b. The stabilizing situation in middle east and decreasing world-wide demand have started pressing the commodity prices down.
c. Because of the big stake that GS has in the commodity market, it needs to start cutting its position earlier at the beginning of any risk arises.
d. Worrying about market speculation by hedge funds and world-wide hot money investors is also one of the reasons. 

2. What does Japan use copper and platinum for? How much were the industries use these commodities affected by the earthquake and tsunami? (several examples and general numbers needed only)

Japan mostly uses the Platinum Group of Metals in the auto industry. They are used as autocatalysts and catalytic convertors. However, the recent events in Japan have caused a downside demand for the platinum group metals. Moreover, in the electronic markets that use platinum quoting, there has been a 5% drop in the demand. On the other hand, the demand for copper in Japan has increased due to the need to rebuild infrastructure. As of 2010, Japan consumed 4.8% of the world's refined copper.

"The demand for PGMs, following the recent events, car production in Japan could be 5% lower than previously expected. Japan had been expected to produce around 9 million light vehicles in 2011 - the world's third largest producer - which would have required around 15,000oz of Palladium and 7,000oz of Platinum each week".  

3. How tight credit motivate will affect China's consumption on copper?

China is the world’s largest copper user. Demand for copper is surging as the nation plans to build more homes, autos and appliances and upgrade power-grid networks. However, the government is attempting to cool its economy, especially its real-estate market.

Because of government measures to tighten lending and curb inflation, China’s demand for Copper will slow in the second half of the year. The main contributor to the slowdown in China will come from the construction sector as the real-estate market cools. Chinese regulators curbed loans for third-home purchases, increased downpayment requirements and raised mortgage rates in a series of announcements since last year, so as to rein in spiraling property prices. China’s property prices climb at a much slower pace this year, according to China Information News, adding to signs government measures are taking effect.

Besides, the demand for copper may also be undeterred on concern that surging oil prices may slow economic growth. 

4. Taking all the supportive and negative effects that Currie mentioned in his note, briefly analyze the possibilities that the oil price will go up and down by listing several possible scenarios and their outcomes.
Indeed this is a good article to discuss. Dispite what's in the article, I am bullish on the commodities markets.
Oil prices go up..... Opposition party in Libya can't able to export oil eventhough Qatar offered to market their oil

Oil prices go up...Some oil fields are Cut on fire in Libya

Oil prices go down.... OBEC decides to boost production.  

5. Any other commodities you think are being speculated? Any reason for the speculation?

The attach on the oil pipelines impacted oil prices and now the uncertainties in the currency market is impacting the price of gold and silver. JP Morgan has been widely tied to the silver story. The firm's short covering resulted in the price of silver sky rocketing to $40, resulting in a 121% change over the past year. According to an analyst, "there has been a statistically significant negative relationship between bank concentration and silver prices (96.4%). Every one percent decrease in concentration has resulted in a 40 cent increase in silver prices."

Take a look at the following U.S. Bank Concentration vs. Silver Price chart:
http://static.seekingalpha.com/uploads/2011/2/9/308162-129725975427497-Hyperinflation_origin.jpg

Here is a chart showing the price trend of silver:
http://apps.cnbc.com/cgi-bin/upload.dll/file.gif?z0383110az7cb641c40d20410aa720a6c90c59c6d2 

6. How did the other companies reacted to Goldman's statement, if there's any? If there's none, how do you think they should behave?
Firstly, I think there is no speculation happening here. In fact, what GS is saying is not based on facts but a psychic valuation. It is just like how they valued NetFlix at $300, BS!

Other companies per say have yet to react but reading some other articles and chatting with some investors, I get the feel that no ones buying into GS theory and are bearish on commodities. I believe the same mostly because there is an indirect relationship between commodity prices and the FX rate - value of dollar. And unless the Fed pulls back on the money supply allowing the Dollar to appreciate in value, commodity prices will continue to go up. 

No comments:

Post a Comment