Dear PGM Capital Blog readers,
In this weekend blog edition, we want to elaborate on the current commodities bear market that brought the Bloomberg Commodity Index (BCOM.IND) on Monday August 24th, to its lowest level since August 1999, as can be seen from below chart.
On Monday August 24, the Bloomberg Commodity Index of 22 raw materials from oil to metals lost 2.2 percent to end the day at US$ 86.3704, as can be seen from below chart.
Shares of miners and explorers including Glencore Plc (GLEN.L), BHP Billiton Ltd. (BHP.AX) and Exxon Mobil Corporation (NYSE: XOM). tumbled while Brent crude fell below US$45 a barrel for the first time since 2009.
THE BLOOMBERG COMMODITY INDEX:
The Bloomberg Commodity Index is a measure of returns that takes into account the loss or gain from holding futures contracts as well as the performance of the underlying commodities.
The index was originally launched in 1998 as the Dow Jones-AIG Commodity Index (DJ-AIGCI) and renamed to Dow Jones-UBS Commodity Index (DJ-UBSCI) in 2009, when UBS (NYSE: UBS) acquired the index from AIG (NYSE: AIG). On July 1, 2014, the index was rebranded under its current name.
GURUS BUYING FREEPORT-MCMORAN INC:
Stanley Druckenmiller:
Legendary hedge fund manager Stanley Druckenmiller, who runs Duquesne Capital, reported to the Security and Exchange commission that in Q2-2015, he bought 3,547,000 shares of Freeport-McMoRan (NYSE: FCX), making FCX, the sixth biggest holding in his portfolio on June 30, 2015.
Carl Icahn:
Activist investor Carl Icahn reported, after the closing bell on Thursday, August 27, that he now has a stake of 88 million shares or 8.46% stake in the copper and gold miner Freeport-McMoRan, making him its largest shareholder.
The company’s stock spiked 28 percent during the regular session on Thursday, before Icahn’s 8.5 percent stake became public, to close the week at US$ 10.53, up 32.07 percent from its 12-year low of US$ 7.92. of Wednesday, August 26, as can be seen from below chart.
FY-2015, Earnings Report BHP Billiton:
Australian oil and mining giant BHP Billiton Ltd.(ASX: BHP) reported earnings on Tuesday, August 25, for the full year ending in June 2015. The company posted its weakest annual earnings since 2003 in the face of a painful commodity price rout.
Highlights:
- Revenues for full-year fiscal 2015 totaled $44.6 billion, down 21.4% from $56.8 billion in the year-ago period
- Earnings before interest, taxes, depreciation, and amortization (“EBITDA”) were recorded at $21.9 billion for fiscal 2015, down 27.9% year over year.
- Cash and cash equivalents as on Jun 30, 2015 were recorded at $6.8 billion, down from $8.8 billion on Jun 30, 2014. Interest-bearing liabilities totaled $3.2 billion, down from $4.3 billion as on Jun 30, 2014.
- The board of directors maintained the dividend at US$ 1.24 per share, payable on September 29, to share holders on record on September 11. Based on the closing price of AUD 25.49 a share of last Friday, August 28, shares of the company now have a dividend yield of 7.28 percent.
Based on the the fact that the company kept its policy to steadily increase or at least maintain the dividend per share in US dollar terms, the shares of the company soared on the news as can be seen from below 5-day chart.
CNOOC Ltd, H1-2015 financial results:
On Wednesday, August 26, China’s 3rd biggest Oil Company CNOOC Ltd.. (HKE: 0388) reported its H1-2015 financial results.
Highlights:
- For the first half of the year, the Company’s total net oil and gas production reached 240.1 million BOE, up 13.5% YOY.
- The Company’s oil and gas sales revenue were RMB77.03 billion, representing a decline of 34.2% YOY, and net profit fell 56.1% YOY to RMB14.73 billion.
- In the first half of the year, the Company’s basic earnings per share reached RMB0.33.
- The Board has declared an interim dividend of HK$0.25 per share, payable on October 13, to shareholders on record on September 10, 2015. Based on the closing price of HKD 9.24 a share of last Friday, August 28, shares of the company now have a dividend yield of 6.17 percent.
Based on the fact that CNOOC Ltd. maintained its H1-2015, dividend at the same level as its H1-2014 dividend, in this low oil price environment, proved the company’s policy to steadily increase or at least maintain the dividend per share in HKD.
The company’s share price rose 11 percent on the news, to close the week at HKD 9.24 a share an increase of
14.5 percent from its opening price of its closing price of HDK 8.05 of Tuesday, August 25, as can be seen from below 5-day chart chart.
PGM CAPITAL COMMENTS:
Commodities have been badly beaten down, with many individual commodities trading at multi-year lows, for which reason the Bloomberg Commodity Index measures, now trades at its lowest level in more than a decade.
Yet the index values apparently overstate the decline. For one, the index tracks prices set on exchanges, subject to traders’ whims and speculation. Additionally, the indexes (for good reason) tend to give a lot of weight to oil, – as can be seen from below chart – which means oil’s collapse over the past year has magnified commodities’ woes.
In contrast, measuring prices paid by manufacturers – reflecting demand in the real world – commodity prices sit closer to 2011 highs than 2009 lows. In other words, the prices reflected in the exchanges seem to exaggerate the weakness.
Currently, 2.2 billion people approx. 30 percent of the total world population lives on less than two US$ a day, which means, that future world economic growth will come from the developing world, for them to create their own version of the American- or EU dream.
For these emerging economies to build-out their infrastructure in order to become a modern country they’ll need immense volumes of commodities to meet their construction requirements.
Economic development and demand for energy, – mainly oil – goes hand in hand, due to this the world’s growing energy hunger is driven to a large extent by population growth in Asia and ongoing industrialisation in the emerging economies. China, India and West Asian nations account for around 60 per cent of the world’s growth in energy demand.
Below chart, which gives a breakdown of the global use of oil per sector, the transportation sector consumes more oil than any other sector. Oil is also an important industrial input, e.g. in the chemical sector.
Based on above chart we believe that oil will be the key commodity to watch. Oil plays such an important role in the production, transportation, and processing of other commodities that when its price rises, so, too, will the prices of other commodities.
In our blog article of last week, we informed our readers to keep a good eye on what, Billionaire Gurus are doing currently with their money. The fact that Carl Icahn, as well as Stanley Drukenmiller have loaded up their portfolios with shares of Freeport McMoRan, can be seen as a sign that they believe that we are near the bottom of the current commodity rout and bear market in Gold.
We based our conclusion on the fact that FCX, owns over 90% Indonesian Grasberg Mine, which is the largest gold mine and the third largest copper mine in the world.
Another sign that we are near the bottom of commodities and Crude Oil bear market is the fact that BHP Billiton, as well as China’s National Oversea Oil Company (CNOOC Ltd), although they have experienced an substantial drop in their earnings, due to the current drop in commodities and Oil prices have maintained their policy steadily increase or at least maintain the dividend per share in US dollar terms.
Until next week.
Yours sincerely,
Eric Panneflek