Peter Major: Cadiz Corporate Solutions

In this week's edition of te weekly News Wrap, we take a look at the iron ore and coking coal negotiations in China; US jobs data, the gold price and a decoupling of gold and the dollar.

GEOFF CANDY:  Welcome to the Mineweb weekly news wrap podcast and joining me on the line is Peter Major of Cadiz Corporate solutions.  One of the week's big stories has been the continuing price negotiation in both iron ore and coking coal.  Then Monday we saw BHP Billiton announce that it's reached agreements all around the world for a significant portion of its coking coal volumes for 2010 and some of the prices as high as $200/ton.  Are these prices an anomaly do you think or is this perhaps the new base?

PETER MAJOR: Well these prices looked like an anomaly until about two years ago.  Now that the world is pretty convinced that China is going to overtake the world as the big dominant user of all metals, all energy - it's not an anomaly any more and these prices were higher back in 2007-2008 and when they cracked we thought well, maybe they're going to go back to what was assumed to be realistic levels but they didn't stay at these realistic levels very long.  We talked about a V-shaped recovery in the stock market there's been an even sharper V-shaped recovery in commodity prices, and especially coal and iron ore.  No, it's not an anomaly - the big change is instead of going to yearly negotiations, most of the world is now agreeing to quarterly negotiations.  BHP Billiton has been looking for spot for a long time, they've been leading the charge against yearly negotiation for quite a few years now and we're seeing the bigger players like Vale, Rio Tinto and even Anglo American - they're now starting to fall in line and admit they would rather get closer to spot.  They're probably going to go to quarterly negotiations as we're now seeing from yearly just to spot.  I think spot, or close to it, is on the horizon, probably in the next year or two.

GEOFF CANDY: What's that likely to do to the market going forward - how will that change the revenues for example, for these companies?

PETER MAJOR: The people who probably get hurt the most are the final users of these products - that means the final users of steel which is the auto industry and the construction industry - because if the producers of steel are buying things on a spot basis, they're going to start selling things on a spot basis.  So you're probably going to get a 150-year history of the end users agreeing to prices that are stable for at least a year.  And now, the steel producers are going to have to adjust their buyers to a shorter-term price horizon - that's where the upset is going to come.

GEOFF CANDY: Is this perhaps a shift in power between the buyers and the sellers?

PETER MAJOR: If you talk to most of the industry players, they'll tell you the big change came about with this credit crunch financial crisis of mid 2008 and until that time, people pretty much honoured long term agreements - whether it hurt them or not - they pretty much stuck to it and they found out in 2008 that people did not honour agreements.  Even the Europeans who may have been thought to be very honourable, they just stopped sending ships.  They just stopped picking up products that they ordered and the Chinese were very notorious for this before it happened and they were definitely notorious for it during the crunch.  They just started refusing things and walking away.  The big producers said this is just an option, these guys say they've got a long-term agreement and that applies as long as it's to their benefit.  And when it goes against them, they don't honour it - so that is the big reason that this has now shifted.  People just plain don't honour the long-term agreements any more.

GEOFF CANDY: Peter, there is a story on mineweb at the moment, talking about the economic recovery Bart Melek of BMO saying that while it should boost metal prices the recovery is likely to be slow. Are we likely to see much higher prices fromthis point on?

PETER MAJOR: We've had a really robust recovery in metal prices and some of them are very close to their all time highs, like the spot iron ore price now and OK, copper is back up to $3.40 - I think it did touch $4.00, but gee that came off about $1.20 to $1.30/lb and now it's $3.40/lb.  So these are amazingly big bounces in commodities - and they don't look like a bounce, it just looks like an uptrend because you get lots of little pullbacks along the way that we call it base building - but it's always building higher bases.  I'm a little scared at these levels Geoff - I actually cant believe that they'd go much higher in view of the overall world state of economic affairs.  I just think there's more weakness out there in all these economies than these metal prices are indicating.

geoff candy:  Moving to gold now, we saw better-than-expected jobs data out of the US on Friday. The dollar went up and so did the gold price. What is your view of the decoupling argument?

PETER MAJOR: You can get uncoupling with the dollar off and on during a month, and you definitely get it uncoupling and then coupling back during the year.  Those were surprising job figures - they may have been fudged, but the fact the US unemployment is falling below 10% - that is such a big number that 10%.  People see it down there at 9.7% or 9.8% - they say wow it's definitely peaked, it's definitely on the way down, and psychologically it's such good news, that even if it stays at 9.7% or 9.6% for another year, it shows we have reached the worst and yes, is the gold price going to react negatively... you know the dollar is so strong now I think the dollar has got a lot better chance than weakening from here.  It got to 1.35 mostly because of the Greek crisis and they will resolve that crisis, even if it's a partial default, so I think the dollar is likely to go back to 1.40 or 1.45 which would probably be good for gold, especially when the States says they're not going to slow down printing any money or not going to start tightening up on credit.

GEOFF CANDY:Just to close off with, last week we saw a lot of focus on copper after the earthquake in Chile, how do you see that market placed now?

PETER MAJOR: It's surprising that none of the copper mines seem to have been affected - not physically.  So yes, there was a knee-jerk reaction - copper went up even more because it was such a massive earthquake we would have thought it's got to have some effect on the copper mines.  It sounds like it had a minimal effect and yet the copper price hasn't come back down very much, so it shows its underlying demand regardless of an earthquake taking out mines in Chile - I'm very surprised it's this high Geoff - I'm actually scared, but it's holding in there...

Print story    Email story

Back