Because the industrial metals are my primary focus, I pay close attention to metrics geared toward industrial activity. This includes Purchasing Manager Indices (PMI), industrial production data and capacity utilization data. I also look at the velocity of money as a signal of inflation. These data points are forward-looking indicators and are a reasonable gauge of the expansion or the contraction in an economy’s industrial base. Additionally, the PMI data in particular gives a more granular look at economic activity including new orders, inventory, prices and output. This granularity is helpful in accurately gauging the expansion or contraction of an economy’s industrial base.
While recent PMI data released out of China confirms that the economy continues to cool down to a more sustainable growth rate, the PMI data in the Eurozone and the U.S. surprised to the Offering High Builder cleaning Services, which is a hopeful sign going forward.
Personal experiences can help to gauge trends outside of official statistics. When I’m on the road, I stop into all types of businesses to get a gauge of the health of that business and, by extension, health of the local economy. On a recent trip to Paris, I happened to go into the flagship Hermès store on the rue du Faubourg Saint-Honoré, and was very surprised at what I saw. What really took me aback was that the company had hired salespeople who were fluent in Mandarin and were helping Chinese customers, all of whom were buying. This reinforces one of my core investment theses—that there will be amazing growth in the market that services the increasingly large and affluent, global middle class that has exposure to the international economy. This example in Paris is a single instance and does not make a trend by itself. But experiences like this are valuable pieces of evidence of the rising power of the consumers and the implications for commodities going forward.
When you begin to experience a higher quality of life, it means now you now have something to lose. You’re typically earning more money, paying taxes and you have skin in the game. You have assets and you have expectations of your government to provide basic services. A higher quality of life is like a Pandora’s Box—once it’s been experienced, there is expectation for maintaining, if not improving, quality of life in the future. There is no going back. It is incumbent on governments to do whatever it takes to make sure that their populaces can continue to experience these creature comforts at a reasonable cost.
The uprisings in each of these countries that you just mentioned all stem from different issues. The case of Brazil is instructive. The uprising in Brazil is a surprise to many people, as this country has been one of the powerhouses of global growth, and the middle class has expanded there greatly over the last 10 or 15 years.
Brazil is an example of uprisings happening in a democratic regime. The uprising emanated from an increase in bus fares—approximately a $0.09 fare increase. Tiny in the grand scheme of things but with Brazil set to host the World Cup and also the summer Olympics, the government is spending lavishly on public works. Many Brazilians feel left out and unhappy with having their quality of life impinged upon for the sake of Brazilian authorities worried about public relations in the eyes of the global elite during these sporting events.
The New York Times recently published an article discussing this further, stating that a cheese pizza costs $30 in Brazil due to a host of factors. This is another example of why the average Brazilian citizen is upset.
We’ve seen the effects of a China slowdown in the commodity complex since 2011 when many commodities topped. Since then, commodity prices of all types have suffered. With China as the world’s largest producer and consumer of numerous commodities and the Chinese GDP growth rate targeted for 7.5%, down from 10% just a few years ago, this implies lower demand for commodities.
It’s important to keep in mind that China, growing at 7.5% a year today, is a much bigger economy than China growing at 10% a few years ago. It’s growing from a larger base despite the lower growth rate. China is slowly rebalancing and opening its economy, which is another plus in the longer term. We can see this in a number of ways, most recently with the increasing number of currency swap deals that the country is entering into with other countries like the UK, Australia, Brazil, Singapore, and South Korea. The goal is to begin to establish the Chinese yuan as a trading and, ultimately, reserve currency. This is a positive development in the long run. It’s a positive development for the entire commodity complex.
Let’s also not forget that the emerging middle class extends well beyond China. Although economic growth has slowed in other countries like Brazil, as we have talked about, or Indonesia, the long-term picture for the average citizen in these countries, striving for and attaining a higher quality of life, is still very much intact. I’m a firm believer in the thesis that no middle class has either sustained itself or increased its standard of living without access to reliable and affordable energy. This is why I’m so optimistic about commodities over the longer term, in particular the energy metals that I tend to focus on. This is despite the current economic headwinds.
Prices are certainly less convoluted than macroeconomic data. I think your question speaks to the ability to accurately time the market. Calling a bottom can be very lucrative, but it is very difficult. I prefer to look at economic data in metals or minerals usage to understand when a cycle has turned. It’s possible to bottom and stay there a long time. V-shaped recoveries are preferred, but rare. The quote attributed to John Maynard Keynes comes to mind: “Markets can remain irrational longer than you can remain solvent.” So this implies the need for patience and courage in your investing discipline today.
One of the most beneficial indicators I use is statements from end users of given commodities and participants along the entire supply chain. As an example, I pay particular attention to statements made by management from Rockwood Holdings Inc. (ROC:NYSE), the largest lithium compound producer in the world. Or I look at a company like GrafTech International Ltd. (GTI:NYSE) or SGL Group (SGL:XETRA) to gauge any imbalances in supply and demand for graphite. Right now, for most industrial metals, I just haven’t seen enough evidence of a turn to convince me that a new metals cycle has begun. With earnings season in full swing, I’m anxious to hear what a number of CEOs across different commodities are seeing in their respective markets.
Despite the underperformance of graphite shares in 2013, the long-term value proposition is still intact. That said, there likely won’t be a need for more than a couple of new deposits to integrate into global supply chains, so speed is of the essence for graphite companies. GrafTech released its Q2/13 earnings this morning and discussed a very challenging environment dominated by declining steel production and overcapacity in the graphite electrode business. Pricing power is a problem and this presents a stern near-term challenge for graphite juniors.
As investors, you can either invest in early-stage companies with lots of question marks that may make discoveries and dramatically increase their share prices, or you can exert patience and invest in more sustainable stories with proven management, advanced studies on their deposits and clarity around capital expenditures. Both methodologies have their pros and cons.
We know a great deal about Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) and its Bisset Creek deposit. While the company awaits approval of its mining lease, we can also anticipate an updated bankable feasibility study to enhance the overall economics. A new resource model and mine plan will be included as well.
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