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commodities stronger forever

  1. 365 Posts.
    Eureka Report....extract only

    The Ox rocks
    By Charlie Aitken
    26th Feb.

    As you know I have a soft spot for Oxiana and Owen Hegarty??s management team. These blokes have backed themselves, backed a view, and are building the company most likely to fill the gap Western Mining Corporation left. They always said they would build the company that replaces the index gap left by the takeover of WMC and they are well on the way to doing that. Call me biased, but I want this company to be a genuine large-cap success. It will be good for the equity market and good for Australia.

    Stronger forever

    Hegarty coined the phrase "stronger forever" to describe his view on the commodity cycle. Not "stronger for longer?? but ??stronger forever". At the time of these remarks a few years ago he was dismissed by many as just another resource company spruiker trying to get their stock price up. Incorrect, this is his view and my view is that he is right. How else can you explain today's commodity prices? This is structural change in commodity pricing for all the reasons I have written about for the past five years. This is about the world being structurally short all soft and hard commodities and the supply response being anaemic. This is about pricing power swinging to the producers.

    If we truly are in the "stronger forever" scenario, and the fact is commodity prices have dismissed the US recession and moved to record highs, then there is no top 100 metal stock with the absolute earnings leverage to that scenario than Oxiana. The Ox is the leveraged way to play "stronger forever", not just for unhedged commodity price leverage but for clear production growth in politically stable countries.

    In a similar fashion to BHP Billiton and Rio Tinto, Oxiana management put out some of their own charts highlighting the decreasing influence of the US economy on commodity demand, particularly for their key commodity copper. Even to this day, with copper at record highs, I still see almost every night, on US financial news channels such as CNBC, some clown telling me "demand for copper will fall because of the US housing cycle". We are now two years into the US housing construction cycle collapse and the copper price is at record highs.

    Copper stockpiles on the London Metal Exchange continue to be drawn down at an accelerating rate. Stockpiles have fallen by 31% this year already. Interestingly, the World Bureau of Base Metal Statistics said the copper market saw a record deficit in 2007 of 161,000 tonnes compared with a 278,000-tonne surplus in 2006. You can bet 2008 is another record deficit with supply interruptions all over the place. What a perfect time to bring on new production.
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