This is why COMMODITIES will be the defining sector over the NEXT decade

Thursday, 30 November 2023 — Melbourne, Australia

Twitter: @JCooperGeo

[6 min read]

Dear Reader,

Today we’re unpacking the poorly understood world of commodity inventories.

We’ll look at the critical role they play in maintaining market stability and why it could come unstuck in the years to come.

But first…what are inventories?

Simply put, it refers to the stockpiles held at various commodity exchanges.

Storehouses for industrial metals like nickel, copper and zinc.

These facilities act as an intermediary between supplier (the miner) and buyer (manufacturer).

The London Metal Exchange (LME) is one of the world’s oldest exchanges.

Now, the LME doesn’t own or operate warehouses…it doesn’t own the physical inventories either.

It acts as an authority that allows warehouses to store LME-registered brands of metal.

While the LME’s role has diminished over time, it still offers useful data for tracking global stock levels.

It releases a daily stockpile record for common industrial metals including copper, zinc, nickel, lead.

All the information is freely available and you can access the data in chart form.

It offers a glimpse of where the market might head over the medium term.

Now, declining inventories CAN signal future supply problems.

That can result in higher commodity prices if the root cause is structural…

That’s what I believe is happening in today’s market. A key problem we’ll attempt to unpack today.

But first, check out the LME inventories for nickel, below:

As you can see, stock levels are well down in 2023.

But have declining inventories resulted in higher prices?

Absolutely not!

Nickel has fallen around 40% over the last 12 months, or around US$10,000 per tonne.

So, what gives? Have the fundamental rules of supply and demand flipped?

Well, in some ways yes.

Thanks to a period of record-breaking rate rises, markets have become distorted.

Today’s global economy is one in which many miners are bleeding cash.

From rising cost of capital, diesel charges and staff shortages, pulling a tonne of ore out of the ground, processing it, and converting it to profit has never been harder!

In an attempt address these challenges miners are rushing metal onto the market, rapidly converting stock into cash.

This masks the impact of low inventories.

Buyers can still access raw materials.

While miners continue to rush metal onto the market, supply remains balanced.

But this is not sustainable.

As it stands, current stockpiles are unlikely to absorb supply shocks or any meaningful increase in demand.

In other words, when supply is tight, a jolt to the system could have a very destabilising effect.

Perhaps inducing a positive feedback loop…where we see a run of panic buying forcing inventories lower still.

It’s critical to understand that a tight market makes the system incredibly vulnerable to disruption.

But where could a destabilising event come from?

On the demand side, China remains the most likely contender.

Government stimulus has the effect of pushing more buyers onto the market.

But this could arrive alongside supply disruption…mine shutdowns, strike at a major operation, geopolitical tensions…any number of short-term catalysts COULD undermine metal markets.

Take the Cobre Panama mine…an operation supplying around 1% of global copper supply.

Protestors recently forced its owner, First Quantum Minerals, to shut down operations.

But according to analysts at Macquarie, permanent closure could move the copper market into deficit as early as next year.

A global deficit arising from the closure of just one operation!

That’s why we say the system is vulnerable to disruption.

Watch out for the catalyst event

While supply continues to walk an extremely tight rope, investors SHOULD be positioning for a possible re-pricing event.

We have a clear structural set-up that could move commodity prices higher in the years to come.

So, what happens when a catalyst sets off disruption in this tight market?

Recall, March 2022, Russia’s invasion of Ukraine.

A devastating breakdown in diplomacy that also set-off fireworks on the LME trading floor…

In just THREE days nickel shot up 270%!

The world’s largest and oldest metals market terminated billions of dollars of nickel trades following chaotic price action and suspended trading for the first time since 1988.

Events like this expose vulnerability.

While investors have stayed clear of resource stocks in 2023, it seems the major miners understand what’s at stake.

Mergers and acquisitions have been rampant over the last 18 months.

Yet, M&A activity adds nothing to future supply. It simply changes the ownership structure of an asset.

It’s why this problem is set to linger…most professionals agree that it takes at least 15 years to move a deposit from discovery to production.

But the countdown hasn’t started yet…

Explorers and developers are key to meeting future supply and addressing low inventories.

Until we see meaningful investment in brownfield development or greenfield discovery, the 15-year time lag continues to push further into the future.

It’s why COMMODITIES are set to become a defining investment theme over the coming decade.

And it’s why I believe we remain in the early phase of a secular bull market.

Until next time,

James Cooper,
Editor, Fat Tail Daily

[4 min read]

Dear Reader,

Out of the crooked timber of mankind, no straight thing has ever been made.

~ Immanuel Kant

What a delight….what a stroke of luck…for the elite, that is. And for us.

We beg Dear Readers to bear with us….as we peel back the layers of this prickly fruit…no doubt stabbing more than a few fingers as we go. We promise no ‘pay-off’…no takeaway…no call to action. Instead, like a condemned man looking in a mirror, maybe we can catch a glimpse of who we are.

And here we see the future and the past…the face and fate of our whole species…of ourselves, who always were…and who we shall be forever.

We begin with ominous, but inevitable news. Barrons:

November’s last auction of Treasury notes ended with a whimper, rather than a bang.

Nearly $40 billion of government debt that matures in seven years was up for sale on Tuesday. The highest yield accepted by investors was 4.399%, well above the average of 4.258% for the prior six such auctions.

…the government had to offer higher yields to entice investors to buy the debt.

Treasury issuance through October this year is 32% higher than at this time in 2022.

Crooked Timber

How did we get in this situation — with $33.7 trillion of debt…annual interest payments of $1 trillion per year…and rising? Why did voters go along with so many crack-pot schemes and jackass programs?

We’ve seen that it’s not always easy for the ruling classes to get the square pegs of their subjects to go into the round holes they’ve prepared for them. Immigration, for example, may or may not be a good thing…but bring in too many immigrants and ‘The People’ won’t like it.

Still, it is amazing what they will put up with. Yes, that is another characteristic of our kind: the crooked timber bends with the prevailing winds.

The masses are so gullible…so child-like; they are so ready to believe anything — even the evening news! Easily bamboozled, they can be formed into a lynch mob or convinced to heave a giant stone across the Egyptian desert. We saw Monday with what zest they went after protestants in France in the 16th century…and how they fought for seven centuries to rid the Iberian peninsula of the moslems.

But they often were held cowed and captive themselves….docile and dumb for generations.

Outnumbered, Outgunned

The rabble can be roused to heroic acts of sacrifice and absurdity. But they also make good slaves. Have you ever wondered why slaves remained slaves? Herodotus tells us there were seven Helot slaves in Sparta for every Spartan soldier. They were treated worse than mere slaves…hunted and killed merely to keep their population down. Yes, the Spartans were armed and well trained. Still, why did the Helots never rise up? In the state of Mississippi, there were 450,000 slaves in 1860 — more than half the population. During the war almost all able bodied White men had left the state to fight against the Yankees. In Mississippi, slaves were valuable property, worth about as much as a new car today. Owners were eager to spare them, not to kill them. Why didn’t the slaves take advantage of the situation…while their masters were away at war?

The masses — Black or White…free or enslaved — can be convinced of almost anything. Easy to mislead, a piece of cake to embezzle or boss around…most play the roles given to them. But there are limits.

That is the ‘more to the story’ of the Dublin riots. The anger was not directed only at immigrants. There is rising anger (especially among the young) against the whole elite class…their wars…hypocrisy…double dealing…self-serving grifts...and a $308 trillion global debt pile that is to be loaded on the backs of the young.

A Greater Conspiracy

We’ve seen that immigration is a clear benefit to the elite. And here, we turn to Karl Marx for insight. Wrong about so many things, he was right about this: there is a difference between the people who work on assembly lines (the proletariat) and the people who own them (capitalists, bourgeois…investors). The former live on wages. The latter (grosso modo) live on the difference between wages paid and revenues received. The working class may rue the day the immigrants arrive; their wages will be held down by competition, while their housing costs go up. But asset owners rejoice; both sides of their ledgers improve. Their sales go up and their labour charges go down.

But it is not just immigration. Wars…trade barriers…sanctions…giveaways to favoured groups…subsidies…regulations…fake money and fake interest rates — all benefit a subset of voters with political power. Rarely do they improve things for the majority of honest working stiffs.

In America, for the last 70 years, our revulsion at communism was so great, we missed the point. The interests of the sweating classes are not the same as those of the capitalists. Given an opportunity, the factory owners and politicians will conspire against the public, just as Adam Smith said they would. And then the public policies of the government twist towards the self-interest of the powerful few, at the cost of the powerless many.

Here at Bonner Private Research we are about as far from Marxism…or any sort of political activism…as you can get. But, culling the facts from the propaganda and noise, we can’t miss a kind of ‘class struggle’ going on right now. An arrogant and incompetent elite have rigged the system in their own favour. What’s surprising is that ‘The People’ have put up with it for so long.

Regards,

Bill Bonner,
For Fat Tail Daily