>> How does the current trend in oil and nat gas prices fit with your bull market for commodities thesis? <<
i think higher energy prices will drive up the cost of other commodities. it takes energy to mine, smelt, refine, and transport commodities etc. like was mentioned by canuck dave, some companies are cutting back production because power costs are so expensive it's not profitable to mine, smelt, or refine. some companies are selling power because it's more profitable than their core business. as more and more raw materials start rising in price the more corporate profit margins will be squeezed. that will hurt corporate earnings and more investment will flow out of these new economy stocks and into the raw materials industries which will be showing nice profits from the rising prices. not only that, but miners/farm workers have had a tough time of it the last decade, so if they see skyrocketing prices they will demand higher wages because they will want their piece of the pie. if they don't get their share of the profits they will go on strike causing more cuts in production which will exacerbate the rising prices. this is the kind of stuff that happens when people wake up one day and realize there are serious shortages. all of a sudden there aren't very many producers out there and everyone wants what they have. you begin to develop a virtuous cycle where money leaves paper assets and flows into hard assets as people scramble to get their hands on stuff before it goes hgher in price. of course the ever rising prices and shortages will take a while to rectify, (you can print money but you can't print natural resources), and speculators will be drawn in. this will of course push prices higher and it will feed on itself until we have another bubble. also, people will see how much hardship it causes when there isn't enough to go around, so they will buy and hoard too much of everything because they don't want to go through another shortage for a long time. at first this will fuel even more demand, but eventually that will cause over-stocking of inventories and will lead to the next bust in commodities. but that's a long ways off.
examples.
Wednesday March 28, 4:15 pm Eastern Time
Cominco to reduce zinc production
Cominco Ltd. announced today that, in order to provide additional power for sale, it will reduce zinc production at its refinery in Trail, B.C., by 25 percent for the months of April, May and June, 2001. Sufficient power has been sold to ensure the same level of profitability for Trail as if full production of zinc had been maintained during these three months.
Friday June 1, 9:33 am Eastern Time
Alcoa cuts production at Brazil smelter by 25 pct
PITTSBURGH, June 1 (Reuters) - Aluminum giant Alcoa Inc. (NYSE:AA - news) said on Friday it cut aluminum production at its smelter in Pocos de Caldas, Brazil by 25 percent, or 22,500 metric tons per year, to reduce
electricity usage. The Brazilian government requested that electricity consumption at that plant be reduced by 25 percent, starting in June, the aluminum manufacturer said. |
