Commodities: Bull or Bear?
The mining and oil/gas sectors can be volatile, with very high highs and devastatingly low lows. Which way are they heading now?
In considering whether the mining and oil/gas sectors are in a bull or bear market, a case can be made for responding definitively, “Yes.” And “No.”
Both are true, YPO member Neil Passmore, CEO and co-founder of Hannam & Partners, London, England, UK, explained in a global conference call with YPO members. The mining sector is entering the middle stages of a bull market. “Bull markets can get a long way in and still have a lot of cautious investors questioning whether it really is a bull market,” Passmore notes. “But we are unequivocally into it, farther than some realize.”
As for oil, after a decade of wild price swings, from USD120 to USD28 per barrel, it is in a period of relative stability — one Passmore believes will extend for a while, succumbing to neither bull nor bear pressures.
Following are some of Passmore’s other insights into these commodities’ drivers and performance.
Mining not homogeneous
Mining is easy to generalize, but it is made up of numerous subsectors, each driven by different trends and geographic forces. One of the worst-performing areas encompasses potash and phosphoric acid, in which abundance and oversupply are dampening performance. Among the best-performing subsectors is future metals, meaning cobalt, chrome, palladium, lithium and rare earth. Passmore cautions that some of the enthusiasm around these metals is marketplace hype, but there is substantive reason for positivity, primarily due to their main potential use: storage for electric cars and other vehicles.
Coal is a huge contributor to global energy consumption, but it is offset by constraints on the investment and supply sides, because many large investment houses worldwide are steadily moving away from investing in coal projects.
Big mining opportunity
Roughly 18 months ago, a downsizing of supply led to what Passmore calls “fantastic fundamentals” for mining companies. Four or five of the top movers rallied more than 100 percent last year, driven in large part by the constrained supply side and a rapidly strengthening demand. “If you were an active investor last year and didn’t spot the rise of mining companies, it hurt you,” says Passmore.
But opportunity still exists. Big mining companies are carrying tens of billions on their balance sheets, are spending only half on capital expenditure and are paying down their net debt aggressively. This combination should reflect on prospective earnings.
Differences between oil and mining
These two sectors tend to be lumped together in the way they are addressed by banks and investors, but they have more differences than similarities. Mining generally requires long lead times, is more subject to host-nation politics and deals with the challenges of mass-scale employment.
Oil/gas cycles more quickly (the assets can be switched on and off more rapidly), has a far smaller concentration of participants, and wields more influence through governments and sovereign oil companies. Oil/gas decisions tend to involve fewer people but have greater impact on the economy and taxes of the host nation.
Two current drivers of oil/gas prices
A primary market driver is the U.S. production picture. The United States is the world’s most significant oil/gas producer, consumer, refiner and storage provider. The health of each of these aspects is followed very closely by investors but, in Passmore’s view, the impact is likely to be more short-term than medium-term.
The coherence, or lack thereof, of OPEC is another significant influencer. Over time, OPEC had become less significant, seeming incapable of organizing itself effectively and sticking to its own deadlines and agendas. Now it appears to be resurging, and is in good order in setting caps and adhering to them. It has a magnetic pull and effect on non-OPEC producing areas as well, such as Russia and Venezuela.
Gold or bitcoins?
Gold supporters argue that as more uncertainty creeps into world dynamics, gold will re-establish its place as a currency and a commodity. Detractors say the world is looking to bitcoins and cryptocurrency at least as much, if not more than gold. Currently, gold remains at the mercy of a well-invested supply-side picture and is underperforming. Nevertheless, while Passmore’s personal preference is for gold, he ensures that his business’s approach to gold investment is not affected by his own predilection.