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October 17, 2008 Dear Friend, As share prices decline seemingly beyond belief, bad news flows too. On October 15th the Fibre Box Assn. reported the square footage of corrrugated box shipments in September fell 11.3% from September 2007. This is a highly ominous data point suggesting much deeper drops in retail sales than government data, little stocking in advance of Xmas and bear in mind that half of all cardboard boxes arrive at supermarkets and drug stores. The box data is entirely domestic, bypassing trade impacts or tonnage paper inventories. Copper, perhaps the strongest market of the past five years, appears tenuous. We cut our 2009 price estimate to $2.00 from $3.25 in concern that a 4% mine output gain and 3% consumption decline could build upwards of 1.2 mmt of new inventories in 2009. Earlier this month we saw 5 companies gradually adding 1 mmt of new output in Congo and Zambia. We are encouraged that Escondida's 3Q output fell 28% from last year as mill grades fell 20% to 1.32% and BHP Billiton announced a $3.5 billion desalination plant, but expect demand to lag supply next year. We introduce a new data metric in the attached Vale report, "football fields per day" of inventory. We estimate that Vale's daily iron ore production approximates 3.66 football fields piled 30 feet high, including end zones, and that Vale can store 2 days of output on ships and 10 days on land as a temporary measure until shutting down. We estimated 25% of October to March 2009 tonnages cannot be sold, that 25% of the "Southern System" output is idled, that next April 1 iron ore pricing falls to $60 from $80 and that 2009 prices of nickel are $6, copper $2, aluminum $1.05 and so on. We raised our 2011-12 nickel price estimates to $12 from $9 as current nickel prices appear to "wipe out" about one-fourth of current supply to create a tremendous future boom scenario. We continue to rate Vale Overweight. We have attached our November 12, 2008 agenda and tentative planning for March 31, 2009 conference as well. Faithfully, John C. Tumazos |
Copyright © 2008 John Tumazos Very Independent Research,
LLC
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