The Aussie Stockpile


Australia has long been the friend of commodities investors and koalas alike. The Land Down Under produces everything from gold to coal to swine in massive numbers and, given that wine is approximately 150 times more expensive per ounce than oil, can be argued to produce some pretty valuable semi-commodities. Australia is set to make some investors either unhappy or happy depending on their holdings, however, because record low profit margins have caused some Australian mining interests to decide it is more lucrative to sit on their holdings and wait out the economic weather.

Fossil Fuels Fossilizing

If you thought that oil has taken a pounding in the market lately, you may have overlooked its close cousin getting an even rougher treatment. Coal has been through the ringer over the course of the past five years, having lost 50% of its value during that time. It's particularly bad news for Australia, who rely on coal for a full 21% of their exports, which is as much as the next two commodities of iron and gold combined (not that iron and gold are doing any better, as you'll soon read). A surge in prices of coal between 2005 and 2010 spelled economic bliss for Australia, who avoided the global economic crisis altogether by selling coal to the highest bidder in markets around east and southeast Asia. Twenty billion dollars of coal departed Australia in 2005 and sixty billion dollars of coal departed Australia in 2010 -- given that these figures are Australian dollars, they're less than impressive prior to 2008, really impressive during 2008, and so-so impressive today unless the Fed cut interest rates again. In 2014, however, coal accounted for only forty billion dollars in Australian exports and was briefly leapfrogged by iron. In 2015, the dollar value will drop further, but by choice instead of by market decree due to the fact that Australian coal suppliers are clamping down on what's theirs in order to drive up the prices and reverse a five-year trend. There's no way to know whether coal prices will react or whether Australian mining companies will cave in a game of chicken with their customers. Regardless, right now it's a good idea to get into coal for the first time in half a decade, whether buying as a commodity or investing long on the belief that it'll quickly spike up and down. Do it before you're the second victim of the coal stockpile, the first being a bulldozer swallowed up at the Gladstone mine.

Iron Will

You could replace the sob story of coal with iron nearly word for word and get just about the same account of what's been happening in the once-surging western mines of Australia. The abundance of iron makes it a far less valuable metal than gold (compare iron at $80 per metric ton to gold at $1250 per ounce) but a far more useful one for industrial and commercial properties. Australian iron has been at the heart of a number of economic resurgences in the far East, most notably China, India, Korea, and Japan. For a span of time, the getting was good, but getting out while the getting was good proved to be far easier for commodities investors than iron mining conglomerates. Iron dropped dramatically in late 2014, much like oil but much less publicized than oil, to the point where Australian producers decided that they had to cut their losses and ramp back production. The Fortescue Group shut down their Cloudbreak mines in western Australia (those who have seen the barren skies of western Australia know how ironic that mine's name is) after it became hugely expensive to dig iron out of the ground, ship it on rails, and send it halfway across the world. Fortescue estimates that it cost around $100 per ton to get iron to a customer five years ago, giving a comfortable profit margin of around 10-15%. Today, that figure has doubled while the cost of the commodity has been cut in half. With iron unprofitable in today's market, many Australians are considering sitting on their stocks until it becomes profitable. To illustrate how unprofitable it is, it should be noted that China is sitting on their own stockpile of iron purchased at bottom-barrel prices: there are estimated to be 100 million tons of unused iron at Chinese shipyards. That's partially a reflection of the cost in addition to the fact that the steel-producing center of China, Hebei have slowed their forges in order to combat pollution. The investment picture for iron is more palatable for Americans than Australians: as the U.S. economy recovers, demand for iron and steel will rise, but almost all iron consumed in the U.S. is domestic-mined. It's a great time to get in on iron commodities provided you don't have millions of tons in your backyard. Unless you're very conservative, this likely isn't the moment to short iron since the rise will be gradual.

Golden Years

Focus Minerals is directly responsible for bringing some of the most valuable substance on Earth to markets (most valuable status pending: check to see gold is currently not below platinum). Despite such lofty credentials, they're feeling the pinch of the downturn of gold. A recovering U.S. dollar means that the recession is no longer driving up demand for gold on a world-wide scale, instead sending the metal down by about 5% in the past year. Just like the Monday after the last week of the NFL season results in coach firings, so too does the open of the fiscal year result in mine closings. The Laverton mine of western Australia is set to fall on its sword after a horrible 2014. Their stocks are awaiting ruling on royalty relief, an Australian law that allows for the subsidization of poor-performing commodities. If Focus Minerals cannot get the government aid for their holdings, they likely won't release them onto the market, preferring to keep the gold under wraps and await, in complex fiduciary terms, the opposite of a rainy day.

Irons and Miners and Scares, Oh My

What can the American investor take away from the Australian condition? If the professionals think that it's time to wait out a storm, you can do much the same yourself by either shorting commodities with the expectation of short-term drop or longing in the expectation of gains over the horizons. Remember that the Australian market doesn't always reflect the American interests, however, especially since the two countries compete over many exports. In this specific case, it's not particularly wise to call off the dogs for iron or coal given the acceleration of American consumption as we approach a stronger 2015 that's expected to gain 2.8% growth.

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