Aussie stocks are set for a decent day today after commodity prices had a strong session in the US on Friday.
Can you believe that the iron ore price just breached US$100/tonne? Just over 12 months ago it was sub-US$40/tonne!
Iron ore is all about China, and China’s economy continues to do well…or at least surprise observers with its resilience.
It’s certainly surprised me. The reality is that China is the first communist country in modern economic history to experience a massive credit boom. And it’s now actively trying to manage the other side of that boom.
So far it’s doing a good job. In capitalist economies, busts generally follow booms, even with central banks working hard to avoid a downturn. But in China, the banking system is state run, so it makes it that much easier for authorities to control the flow of credit into the economy.
China’s ability to control — and to reinflate — its credit market over the past year has had a direct effect on Australia. Most obviously that has occurred via a roughly 150% increase in the iron ore price, Australia’s most valuable commodity.
That iron ore has breached the US$150/tonne level tells you that China’s monetary policy is too loose…that’s why it tightened lending conditions a few weeks ago.
Given monetary policy acts with a lag, expect to see the iron ore price pull back in the coming months. But anywhere above US$80/tonne indicates decent Chinese economic growth, so you’d need to see a decent fall from here to worry about a sharp slowdown.
Bullish for global economy
Another commodity doing nicely from stronger than expected growth in China is copper. In US trade on Friday, it surged 4.6%, and is now at its highest level since May 2015.
Copper surged on Friday as striking workers forced a halt in production at BHP’s massive Escondida copper mine in Chile. While this supply disruption is likely to be short lived, the copper price surge looks extremely bullish.
Check out the chart below. As you can see, copper just broke out to new highs (the highest in nearly two years). You can discount this move by saying it’s just the result of a short term strike. But that would be a mistake.
Click to enlarge
The trend for copper is unequivocally on the up. It doesn’t matter what the day-to-day reasons are for pushing prices higher. What matters is the direction. And the direction for copper is bullish.
This bodes well for the two copper producers in the Crisis & Opportunity portfolio. Subscribers bought one copper play last year in anticipation that prices were bottoming and would turn higher. They bought another just recently. Both will have a good day today!
We’re in a commodities bull market, folks. If copper is breaking out to new highs, it tells you that the outlook for the global economy (and not just China) is doing well.
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This commodity is next to run
Here’s a prediction for you: oil will be the next commodity to break out to new highs. Let me show you what I mean. Take a look at the chart below:
Click to enlarge
It’s a chart of Brent crude, the international oil price benchmark. As you can see, the price has traded in a range for the past few months. The closing high for this range was US$57.10 per barrel on 6 January.
It’s bumped up against this level a few times since, but has failed to close higher. If this commodities bull market is genuine, then it’s only a matter of time before crude has another leg up. It could rally to around US$62/barrel very quickly.
The supply/demand equation looks favourable for higher prices in the weeks ahead. As the Financial Review reports:
‘Oil rose as the International Energy Agency said OPEC has achieved a record 90 per cent initial compliance with a production cut accord, while demand grew faster than expected.
‘Futures advanced as much as 2.1 per cent in New York. In the first month of the Organisation of Petroleum Exporting Countries’ agreement, key member Saudi Arabia reduced production by even more than it had committed, while higher demand is aiding the group’s bid to re-balance world markets, the IEA said.’
Energy stocks should have a good day on the back of that news. But as I said, there is more to come.
This is especially relevant for the three Aussie gas plays that I’ve tipped in this special report. As you probably know, I’ve been going on about this recently. That’s because there is a tremendous opportunity to make some big returns in the sector this year.
This transformation is happening now
But many investors have yet to realise the transformation that is going on. Let me explain it to you briefly…
In years gone by, Australia’s gas market has been separated from the international gas market via distance. In addition, the domestic market has always had plenty of gas supplies, meaning the gas price has always been low relative to international prices.
But with the construction of three massive LNG terminals in Queensland, which all started exporting gas last year, the market has been transformed. This new LNG industry has linked Australia’s gas market with the prices the rest of the world pays.
That means Australia’s domestic gas producers now see international prices as the benchmark. When a contract comes up to resupply a business, that business will have to pay a price that is more in line with international prices. The days of cheap domestic gas (for the east coast, at least) are over.
And as most LNG contracts are linked to the oil price, higher oil prices means higher gas prices.
That’s not good news for businesses and households who use gas. You will see prices rise for usage this year.
But it is good news for the companies who produce gas.
I’ve picked three companies that I think will do very well this year on the back of these favourable tailwinds. Click here to check out my report…
Editor, Money Morning