Fund Manager
Craig Porter
Stock markets, and commodity based ones in particular, went on a literal roller coaster ride during the quarter. Many global stock markets hit record peak levels in October. However, fears of a global recession sparked by the U.S. housing slump and its sub-prime crisis drove markets significantly lower in November, only to see markets recover most of their losses towards year end. We feel that these fears of a global recession sparked by the U.S. are overblown. If you look over the last five years, the impact of US growth has been minimal on overall global growth. It has been emerging countries, often in Asia, that have been the key drivers of global growth, and they donʼt appear to be slowing significantly. Large commodity producers such as BHP continue to state that whatever quantities of commodities they can produce, Asia is willing to buy. When we look at consumption of base metals, we notice that the U.S. now only consumes about 10-12% of world supply down from close to 25% at the start of the decade. A slowdown in the U.S. will not have the same impact on commodities that it once did. People also question whether the world will be tipped into a recession with oil at $100 US a barrel or greater. However the only country feeling the effect of $100 oil is the US. Due to the fact that the dollar has depreciated about 35-40% against most other currencies over the past few years, most economies are facing an equivalent price in the $60 range. This effect is being felt with all commodities, in that although prices have risen dramatically this cycle its impact on consumers has been muted by the currency impact. We can also get an impression of a changing of the guard in terms of economic powerhouses when we look at global equity markets. On the day that PetroChina's shares IPO'd in November it had a market cap of one trillion dollars, almost twice the size of the next largest company in the world, Exxon Mobil.
The price of oil hit an all time high above $98 per barrel during the quarter. Prices were driven higher by factors such as lack of refining capacity, speculative investing and continued strong demand from Asia. Prices were also buoyed as there was increasing tension in the Middle East in countries such as Iran, Iraq and Pakistan. Natural gas performed well also, rising 9% during the quarter. On a relative basis gas has been much weaker than oil through the year as we appeared to have significant gas in storage. But there have been some structural changes which have led us to have a more favourable outlook for gas. Exploration for gas has declined quite significantly due to economics which should lead to lower future supplies. As well, we have noticed that natural gas usage by industrial users has been picking up as many utilities are switching to gas as a cheaper substitute for oil. Although oil prices were at all time highs, the TSX Energy index rose only 1.2% during the quarter. The out performers in the sector were those involved in oil production, particularly the oil sands. Losers were typically natural gas producers, service companies and those companies most affected by the new Alberta royalty schemes. Numerous companies have announced significantly lower exploration budgets in Alberta as a result of the taxes, and we would likely focus our future investments elsewhere as well.
The price of gold rose 13% during the quarter closing out at $842 per ounce, approaching an all time high. Investment demand for gold increased during the quarter on the back of rising inflation, a dramatically declining U.S. dollar, and continued political instability. We also saw a number of central banks increase their holdings in gold during the quarter; many were Middle Eastern countries looking to diversify out of the massive amounts of US dollars they have accumulated through oil sales. Going forward, if the U.S. was to dramatically cut interest rates to avoid a recession, gold would normally perform quite well, acting as a store of value. The TSX Global Gold index only rose 2% during the quarter, much less than one would have expected with the move in gold. Most companies didnʼt fully benefit from the increase in gold as rising cost structures, such as fuel, electricity, steel and labour, ate into corporate margins.
Although it was the one of the strongest performing sub-groups on the TSX in 2006, the metals and mining group was the hardest hit by recession fears in the fourth quarter, falling 14%. We feel the fears are overblown. In addition to some of the factors mentioned above, new mine supply is getting increasingly difficult to bring on stream. Delays in permitting, shortages of equipment and ballooning costs structures are putting a cap on new projectsbeing constructed. In fact TeckCominco halted construction of a major project in the quarter when the capital costs rose from less than $2 billion to over $5 billion. This is why we feel that the stream of consolidation will continue in the sector. Companies would rather buy assets that are in or near production to help eliminate some of the risks involved in constructing a mine. Obviously corporate entities donʼt forecast a slowdown in global growth; otherwise you wouldnʼt see BHP bidding for Rio Tinto, near an all-time peak, to create a global powerhouse.
One of the areas that performed particularly well during the quarter was the agricultural sector. Record prices for grains and fertilizers drove share prices to all time highs. With a greater portion of the world moving towards more protein based diets, in particular the emerging economies of Asia, there are increasing demands for feeds such as corn and grain for livestock. As well, with oil prices over $90 per barrel there is great pressure to look for cheaper alternative forms of fuel. In particular the growing of corn for ethanol production, is consuming vast amounts of farmland that could otherwise be used for food production. These trends are leading to food related inflation in many countries, China in particular.
Craig Porter - Q4 2007 Commentary
Date Published
Fund Manager
Stock markets, and commodity based ones in particular, went on a literal roller coaster ride during the quarter. Many global stock markets hit record peak levels in October. However, fears of a global recession sparked by the U.S. housing slump and its sub-prime crisis drove markets significantly lower in November, only to see markets recover most of their losses towards year end. We feel that these fears of a global recession sparked by the U.S. are overblown. If you look over the last five years, the impact of US growth has been minimal on overall global growth. It has been emerging countries, often in Asia, that have been the key drivers of global growth, and they donʼt appear to be slowing significantly. Large commodity producers such as BHP continue to state that whatever quantities of commodities they can produce, Asia is willing to buy. When we look at consumption of base metals, we notice that the U.S. now only consumes about 10-12% of world supply down from close to 25% at the start of the decade. A slowdown in the U.S. will not have the same impact on commodities that it once did. People also question whether the world will be tipped into a recession with oil at $100 US a barrel or greater. However the only country feeling the effect of $100 oil is the US. Due to the fact that the dollar has depreciated about 35-40% against most other currencies over the past few years, most economies are facing an equivalent price in the $60 range. This effect is being felt with all commodities, in that although prices have risen dramatically this cycle its impact on consumers has been muted by the currency impact. We can also get an impression of a changing of the guard in terms of economic powerhouses when we look at global equity markets. On the day that PetroChina's shares IPO'd in November it had a market cap of one trillion dollars, almost twice the size of the next largest company in the world, Exxon Mobil.
The price of oil hit an all time high above $98 per barrel during the quarter. Prices were driven higher by factors such as lack of refining capacity, speculative investing and continued strong demand from Asia. Prices were also buoyed as there was increasing tension in the Middle East in countries such as Iran, Iraq and Pakistan. Natural gas performed well also, rising 9% during the quarter. On a relative basis gas has been much weaker than oil through the year as we appeared to have significant gas in storage. But there have been some structural changes which have led us to have a more favourable outlook for gas. Exploration for gas has declined quite significantly due to economics which should lead to lower future supplies. As well, we have noticed that natural gas usage by industrial users has been picking up as many utilities are switching to gas as a cheaper substitute for oil. Although oil prices were at all time highs, the TSX Energy index rose only 1.2% during the quarter. The out performers in the sector were those involved in oil production, particularly the oil sands. Losers were typically natural gas producers, service companies and those companies most affected by the new Alberta royalty schemes. Numerous companies have announced significantly lower exploration budgets in Alberta as a result of the taxes, and we would likely focus our future investments elsewhere as well.
The price of gold rose 13% during the quarter closing out at $842 per ounce, approaching an all time high. Investment demand for gold increased during the quarter on the back of rising inflation, a dramatically declining U.S. dollar, and continued political instability. We also saw a number of central banks increase their holdings in gold during the quarter; many were Middle Eastern countries looking to diversify out of the massive amounts of US dollars they have accumulated through oil sales. Going forward, if the U.S. was to dramatically cut interest rates to avoid a recession, gold would normally perform quite well, acting as a store of value. The TSX Global Gold index only rose 2% during the quarter, much less than one would have expected with the move in gold. Most companies didnʼt fully benefit from the increase in gold as rising cost structures, such as fuel, electricity, steel and labour, ate into corporate margins.
Although it was the one of the strongest performing sub-groups on the TSX in 2006, the metals and mining group was the hardest hit by recession fears in the fourth quarter, falling 14%. We feel the fears are overblown. In addition to some of the factors mentioned above, new mine supply is getting increasingly difficult to bring on stream. Delays in permitting, shortages of equipment and ballooning costs structures are putting a cap on new projectsbeing constructed. In fact TeckCominco halted construction of a major project in the quarter when the capital costs rose from less than $2 billion to over $5 billion. This is why we feel that the stream of consolidation will continue in the sector. Companies would rather buy assets that are in or near production to help eliminate some of the risks involved in constructing a mine. Obviously corporate entities donʼt forecast a slowdown in global growth; otherwise you wouldnʼt see BHP bidding for Rio Tinto, near an all-time peak, to create a global powerhouse.
One of the areas that performed particularly well during the quarter was the agricultural sector. Record prices for grains and fertilizers drove share prices to all time highs. With a greater portion of the world moving towards more protein based diets, in particular the emerging economies of Asia, there are increasing demands for feeds such as corn and grain for livestock. As well, with oil prices over $90 per barrel there is great pressure to look for cheaper alternative forms of fuel. In particular the growing of corn for ethanol production, is consuming vast amounts of farmland that could otherwise be used for food production. These trends are leading to food related inflation in many countries, China in particular.