The big bets are on for an oil and copper recovery
- Economists rarely get calls right – 70% got the latest RBA rate call wrong
- Takeover moves on oil and copper assets are important mid-term indicators
- Shell is moving on BG and China's GRAM is making a play at PanAust
By Adam Courtenay
I’ve always tried to avoid the viewpoints of economists, even if our society definitely needs them. Whether I like it or not, we have to look up to someone for advice about the direction of the economy, policy and the state of the world. We need forecasters to help keep the market informed by establishing a consensus – so if most economists are saying one thing, investors then have a kind of current thinking benchmark to work with.
Sadly, I’d like to have my own personal economic guru – someone I could look up to explain things clearly and set out cogently what he or she thinks is going to happen. That someone would publicly put their hands up and say mea culpa when they are wrong. But what we tend to get is something else entirely – wrong calls are swept under the carpet, and all we get are yet more calls, said with the same anodyne conviction time and time again.
I rarely believe institutional economists, because their views are often so filtered through a corporate consensus that any hunch the original thinker might have had is lost in a compromised and watered-down opinion. You never quite know whether the voice is an honest opinion or just interpreting statistics to suit the institution saying it. In Australia, as elsewhere, we have plenty of highly paid economists – but not one has called all the past three interest rate rounds of the Reserve Bank of Australia correctly.
I’m told there is a one-in-eight chance of calling each of the three meetings correctly, so I’m not saying it’s easy to get them all right. There are 30 economists in the widely circulated survey tracked by Bloomberg News. Only seven have got two out of the three correct. Most got one call right and five got none correct. In the run up to the last call on interest rates earlier this week, there was a 70% consensus that there would be a rate cut. The minority were correct.
So now I’m going to contradict myself completely and trumpet an economist who I think has got a few things right – or at least gives an interesting take on the future. His name is Robert Gottliebsen, an independent Australian economist, and he’s making an interesting call right now – that the two commodities that will begin the upturn are oil and copper.
Writing in Business Spectator, Gottliebsen says that when there is a slump in commodities or in key economic sectors, you need to watch where the big operators move. “That will normally give you advance notice of where the recovery will be initiated and gather most momentum,” he says. What’s interesting is that the big boys in an industry always move early – that’s why Shell is bidding for BG and the giant Chinese state-owned enterprise Guangdong Rising Assets Management (GRAM) is now making a play at copper and gold miner PanAust.
Iron ore costs and copper supply
Oil shock on the way
Gottliebsen says the current US overproduction in shale oil – and the oversupply in Middle Eastern markets – are both short-term events that cannot continue forever. That is, there will be a shock in the Middle East of some sort affecting oil supply, and the Americans will have to drop their production or go out of business. The Americans are highly leveraged and are high-cost producers, and the Middle East is a powder keg waiting to happen.
“Shell believes that these conditions cannot last and oil will recover, so now is the time to make a big bet. The $70 billion bid for the UK’s gas giant BG is a clear bet on the price of oil rising and the benefit of having assets in countries away from the Middle East like Brazil and Australia,” he says.
Credit Suisse said today that Woodside Petroleum may be a Chevron target and Oil Search also presents value in the latest speculation after Shell's $91 billion bid for BG. BHP apparently wants buy into oil as well, says Gottliebsen, but it simply can’t afford to. It is also very big on copper and is expanding its operations in Chile. It has also produced a graph showing a copper shortage in 2018. What about iron ore and coal? Nobody’s buying those assets, Gottliebsen reports. There’s no middle term events to help these commodities recover.
Copper to shine
The GRAM group believes that copper will be a winner as a new China emerges from infrastructure development to rampant consumerism – it is the second largest shareholder in China Telecom. Copper will be needed in this phase, as will rare earths. Its target, ASX-listed miner PanAust, has bought a copper resource in Papua New Guinea and is looking to lift output in Laos.
Of course, the market has no idea of what the medium term is – it only prices in commodities as they come, day in, day out. PanAust shares had fallen to $1.10 before the latest bid and are now at $1.75 after a sharp rise late last month. The copper price has also been improving – up around 16% in Australian dollar terms since mid January.
The point in all this is that you can listen to a thousand views on copper, but there’s always the big players who sway us in one direction. It seems clear, says Gottliebsen, that top companies have selected oil and copper to lead the commodities recovery - but if you’re making judgments through short-term fluctuations, that is always going to be a mug’s game.
– Edited by Robert Ryan
For more on commodities, click here.
Adam Courtenay is a business writer and editor at TradingFloor.com