re: Metals and Backwardation
Interesting research article on forward market structure issues concerning base metals and precious metals..
Contango should be the norm for all forward prices
gold.org
Interesting read also here:
en.wikipedia.org
In Treatise on Money (1930, chapter 29), economist John Maynard Keynes argued that in commodity markets, backwardation is not an abnormal market situation, but rather arises naturally as "normal backwardation" from the fact that producers of commodities are more prone to hedge their price risk than respective consumers.
Well now let's put this into perspective.. In the mining sector, we have been witnessing a lot of takeover activity in the recent past. Some market watchers, including sector observers here on SI correctly indicated that almost all the second tier companies (the smaller of the bigger fish) were already gobbled up.
Now, one might ask, how the financing was arranged. After all, the buyouts of Inco and Falconbridge were BILLION DOLLAR deals. Without having analyzed these deals, I could think that in the case of a cash-takeover, the financing could have been set up risk-free to the acquirer simply by SELLING FORWARD a good deal of the acquired production, if not sold forward already by the acquired company.
Also, the current bellwether companies .. CVRD and Xstrata are not US based. The former is at least an ADR in the US, the second is traded in London. I am 100% sure that at least Xstrata is not bound by the recent changes in U.S. GAAP rules that forced resource companies to show derivative ("hedging") losses as mark-to-market non-cash charges. Not sure about US listed firms domiciled outside the States. I think they are not bound by this requirement but I could be wrong.
If this is indeed the case, then we will know what happened. A look at the crude oil markets and their recent history might then reveal some interesting parallels: as soon as the bellwether players stopped their "hedging", customers had to move in. In Keynes argumentation, the cost of certainty was pushed from supplier to customer...
Well, now Nickel miners might not be bound by mark-to-market rules. But unlike oil producers, big Nickel miners are even more an oligopoly. Over time they might wise up on their own (an oligoply tends to learn quickly) and break free from former hedging requirements, imposed by financing "partners" (banks, etc..) on their legacy projects, that have been long converted to a mine since.
If this plays out, we might see Contango in Nickel before too long..
CROSSY |
