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November 1, 2010 Dear Friend,
China's second-half energy
controls restricting energy use by 4.48% per unit of
GDP, the slow recovery in the U.S., euro
appreciation crimping the EU rebounds and some other
factors begin to point downwards.
First, the rates of change of
October nonferrous metals exchange inventories
suggest demand across-the-board was 2% less in
October than September globally. Normally October
is a strong month in all regions of the world.
Second, 5 of the 6 four week moving averages of
nonferrous metals exchange inventories point down,
with aluminum the sole decliner exception. The
rises in nickel and zinc are huge, while the rises
in copper, lead and tin are smaller. Zinc, lead and
nickel inventories are nearing multiyear highs once
again. Third, steelmaker guidances suggest a U.S.
recessionary demand climate even though the weak
U.S. dollar is supposed to stimulate heavy
manufactured goods such as steel and its customers.
We expect the quantitative
easing surge in some metals prices to reverse,
particularly nickel where the excess supply appears
epic with 8 major new mines entering production with
four greenfield new, 1 refurbishment in Australia
and 3 restarted after long idlings.
We have downgraded BHP
Billiton, Vale and Rio Tinto to Neutral, which are
the three largest capitalization metals companies.
Iron ore oversupply, excess capital outlays and poor
cost escalation performances owing to the
appreciations of key currencies like the Brazilain
real or A$ were our concern. We have stayed away
from the steel sector.
However, we worry a worse
environment could develop. Expectations have built
around the Fed's Quantitative Easing, but we are not
sure metals prices can levitate higher from here in
the near term.
Faithfully
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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