I'm sure the story for the base metals is more complex than I can do it justice, but I like it for the same reason energy caught my eye last year - cheap shares and a favorable supply/demand story.
I've excluded two base metals because the demand side seems unclear and there's a big overhang in supply - Lead and Tin.
Those that interest me; Nickel, Zinc, Copper.
Of course any interest in base metals pre-supposes that we are heading into somewhat of a soft landing. The biggest growth in base metal demand is coming from Asia. If our economy continues to support their growth this is the best possible worlds for a bullish trend in metals. (It is also a bullish case for global inflation, BTW - much of the new demand for oil also comes from Asia). A sharp recession would slow those economies down enough that any supply/demand imbalance could be easily reversed.
Currently there exists supply demand imbalances in all three, with the greatest ratio of deficit/inventory in Zinc. If anyone goes over the numbers again and finds some problems, I'd want to hear about it.
The question, of course, is; how much and how fast can additional supply be brought to market if higher prices are seen by the industry?
Looking at the speed of inventory loss from zinc and copper, and looking at the number of mines either idle or able to rapidly expand capacity - I'd say "not enough, not fast enough" about Zn and Copper.
This is also an excellent opportunity to take advantage of some currency strength and buy shares of Canadian or Australian miners. I giving T.BWR, N, and Falconbridge a close look right now, haven't taken a position in any. But I notice that Copper wants to move up and zinc, which is normally dead in the summer, is also sporting some horns.
Let me know if you want to take this further - there's some complexity to the mining bisness that needs to be addressed head on before I move in.
One concern I have is that higher fuel costs will hurt margins. I'm trying to get specific information from co's about fuel hedging, % of operating costs, etc. It's a double edge sword - there was a large copper miner in Montana that had to shut down because the high cost of fuel would make the mine unprofitable. |
