Recently the IC's Trader produced technical analysis that suggested the copper price is primed for an upward swing of perhaps 20 per cent in the near term. Admittedly, the analysis still shows the metal in a downtrend from 2011's high-water mark. And although the findings don't necessarily chime with fundamental analysis, we still believe that the market will slip into deficit rather sooner than expected.
Copper's recent price rebound ground to a halt - along with that of other key industrial inputs - after it emerged that Chinese imports of goods and services in September had dropped by 20.4 per cent from a year earlier - an alarming rate of decline. Although many now predict that Beijing will step up infrastructure spending through 2016, the negative outlook on China's economy still holds sway. China accounts for around 42 per cent of global demand for the metal, so the stark fall-away in imports - and, presumably, consumer demand - further undermined investor confidence, but recent comments by industry insiders support the view that copper prices are being dictated as much by speculation as by market fundamentals.
The downward pressure on prices from the existing market surplus has been exacerbated by increased short-selling on the part of hedge funds. Prices on the London Metal Exchange (LME) have all but halved from a year ago, but the rush to cover copper exposure intensified following Beijing's unprecedented intervention in the country's equity markets at the end of July. This effectively reduced options to short China's ailing economic performance through shares trading in Shanghai and Hong Kong, so it's thought that traders and fund managers have simply transferred short positions on China's economy from equity markets to the bellwether commodity - copper. That's the theory, at any rate.
However, anyone minded to take out long-dated short positions in copper may find themselves badly exposed at some point. The likely supply/demand balance through 2016 is still difficult to call, although we now know that the LME believes copper inventories have dropped to a seven-month low. Large-scale suppliers, Freeport-McMoRan (US:FCX) and Glencore (GLEN), both recently confirmed that they were pulling lower-margin production, so we might reasonably assume that the market balance should tighten in coming months.
If you go down to the woods today...
Obtala Resources (OBT), an Aim-traded agri-business, is planning to spin off its timber operations via an IPO on London's junior market in the early part of next year. Management believes the underlying value of its timber assets will be best appreciated once they're traded as a separate independent entity. Maybe so, but arriving at a meaningful valuation on forestry assets isn't as straightforward as you might imagine; it's sometimes difficult to see the wood for the trees.
This was brought home last year, following a review of the asset base of the Phaunos Timber Fund by consultancy Stafford Timberland. The Stafford analysis warned of "significant uncertainty" in the valuation of some of the Phaunos portfolio, well over a third of which was deemed "higher risk". The Phaunos experience underlines how difficult it can be to evaluate a private commercial woodland purchase. And there are other considerations; with just 9 per cent coverage in the UK, compared with 35 per cent for the EU as a whole, the relative scarcity of woodland in this country leaves owners open to considerable public scrutiny. This was brought home in 2011, when the then coalition government was forced to abandon controversial plans to privatise England's public forests in the face of widespread public criticism.
The S&P Global Timber & Forestry Index (TR)
Nevertheless, the latest Timber Price Indices produced by the Forestry Commission show why there's increased interest in this asset class. The Coniferous Standing Sales Price index has been rising steadily over the past 12 years, following an overall decrease in earlier years. The index was 17.8 per cent higher in real terms in the year to March 2015, compared with the preceding 12-month period. Meanwhile, the Softwood Sawlog Price index has been on the up over the past six years. The index was up 7.5 per cent in the six months through to March, compared with the corresponding period in 2014; but how best to tap into these returns?
Investments in the forestry industry often take the form of specialist tax-efficient investment vehicles, such as those offered by Stellar Asset Management. It's certainly a cheaper option than buying a stretch of woodland yourself, and you will still benefit from the usual tax breaks, including zero-rate inheritance tax (subject to a two-year threshold on the death of the purchaser).
By pooling resources to buy and manage woodland, as opposed to going it alone, you might expect a five-figure capital outlay, while private purchases of commercial woodland often cost in excess of £1m. Viable returns in most forms of agriculture are generated through scale. Income from small woodland areas - effectively 'hobby plots' - is going to be piffling, especially with average asking prices at around £8,500 an acre. Don't forget: any privately purchased acreage still needs to be maintained; and those maintenance costs eat into returns. Probably the most realistic option for retail investors looking to profit from the global structural shortage in timber is a derivative play such as iShares II S&P Global Timber & Forestry (DWOD); a US dollar-denominated contract that is Sipp and Isa eligible.
Crude at the margins
We shan't dwell too long on the oil price this month as the geopolitical angle has become rather tiresome. Needless to say, the ongoing narrative is now bound up with reduced expectations of demand growth and US unconventional supply through 2016, coupled with the prospect of new Iranian volumes. Valuations still assume higher oil prices, but these are far from guaranteed. Meanwhile, the disunity at the heart of Opec has been laid bare by news that a number of members, most notably Kuwait and Iraq, have been undercutting the cartel's ersatz leader, Saudi Arabia, in a bid to secure market share in the Asian crude oil market.
We can say that most pundits now believe the oil market's rebalancing is firmly under way, although the point at which prices begin to trend upwards is still far from certain. And there are now some dissenting voices from the "lower for longer" mantra. A widely disseminated research report from Barclays suggests that current oil prices aren't high enough to warrant the capital outlay needed for the industry to guarantee adequate global supplies of crude oil over the medium term. The Barclays analysis predicts that Brent crude prices are likely to rise to $85 a barrel by 2020 - about $20 a barrel in advance of the current consensus.
The Barclays position is backed by separate analysis from Numis Securities, which confirms an earlier prediction that "oil prices had fallen below long-run marginal costs for a wide swath of projects". The broker believes that the lagged impact of capital cutbacks on non-Opec production should result in a firming trend in benchmark crude prices in 2016 - and beyond. But given the fluidity of the market backdrop, it's unsurprising that the Numis analysis is peppered with caveats; perhaps the most salient of which is that "shale oil development can be rapidly stepped up with relatively small capital outlays". Numis believes the effectiveness of Opec's strategy to quash US shale production "will become increasingly apparent in the coming months". That now seems likely; but the long-run dynamic that sets narrowing Saudi spare capacity against forecast annual demand growth of 1.4m barrels a day should underpin the growth of unconventional oil for years to come.
India to launch Gold Monetisation Scheme
India's government is pressing ahead with two separate wheezes designed to reduce the import of gold and shore up the nation's current account. The first involves the issue of gold bonds that punters can invest in instead of buying it in physical form; the second Gold Monetisation Scheme (GMS) is effectively a deposit tool that is meant to help people earn returns on gold lying idle in bank vaults.
The gold deposited through this scheme will be recirculated in the economy. The gold-backed bonds under the GMS are aimed at reducing demand for the precious metal in physical form - and consequent imports - while shifting investors to a financial instrument. The moves obviously don't augur well for gold prices, but the mechanics of the income component are suitably vague at this stage. And it remains to be seen whether a paper-backed scheme will gain much traction in a nation that places ultimate trust in the 'barbarous relic'.
Zinc in the balance
Good news has been rather thin on the ground for Glencore, but the share price of the commodities group clicked into overdrive, albeit fleetingly, after it announced that it would cut global zinc production by a third after a collapse in prices of the industrial metal. Glencore said that it would cut annual zinc production by 500,000 metric tons, including closing its Lady Loretta mine in Australia and Iscaycruz mine in Peru. Traders, predictably, got rather excited at the news.
Industrial metals on the slide
But before you rush out to buy a zinc-backed exchange-traded commodity (ETC), you might like to exercise a little caution - at least for the time being. From a technical angle, zinc's short-term resistance levels have been breached repeatedly on high trading volumes. A good sign on the face of it, with bullish rallies triggered by expectations of a more favourable supply/demand balance. But be warned: higher prices are not fundamentally justified as yet and may not be for some time. Following a lengthy run of solid prices, zinc supply started to outpace demand markedly in 2015. The main reason behind this is that Chinese zinc production has boomed, along with that of many other industrial metals. It will take more than Glencore's debt-induced housekeeping to bring the market into balance.
