Things just keep getting worse for commodities…
Regular Casey readers know the oil market is crashing. Oil closed below $39 yesterday, and is now down 64% since last summer.
But oil is just one of many commodities hitting multi-year lows. The price of palladium is down 13% since Friday…copper, aluminum, and silver are all at six-year lows…the price of oats, coffee, and sugar are all down 40% or more over the past year.
The Bloomberg Commodity Index, which tracks 22 raw materials, has dropped to its lowest level since August 1999.
• The commodities collapse is slamming the world’s largest mining companies…
BHP Billiton (BHP) is the world’s largest publicly traded mining company. It’s worth over $90 billion.
On Tuesday, BHP reported its lowest annual profit since 2003. The company’s earnings dropped 86% from a year ago. Its stock price hit a 10-year low on Monday, and is now down 48% over the past year.
BHP is far more diversified than most commodities producers. It mines iron ore, coal, and copper. It also produces oil and natural gas. Its diversity hasn’t helped shield it from the commodities crash since virtually all “hard” commodities are in a severe bear market right now.
Plunging commodities prices have also sent Glencore’s (GLEN.L) stock price to an all-time low.
Glencore is the third-largest publicly traded mining company. It also runs one of the world’s largest trading operations, which acts as a middleman between companies that buy and sell commodities.
Like BHP, Glencore has its hand in a lot of different commodities. It mines coal in Australia, copper in Africa, and zinc in South America. And its massive trading arm trades everything from grain to oil to metals.
Glencore lost $676 million in the first half of 2015. News of the loss triggered a massive sell-off last week. It erased $3.5 billion from the company’s market value in a single day…
Glencore’s stock sank 10%, and is now down 54% this year. Glencore is the worst-performing stock in the FTSE 100, an index that tracks the largest stocks on the London Stock Exchange.
• A vocal commodities bull thinks the market is close to a bottom…
Jim Rogers is telling investors not to “give up on commodities.”
Rogers is an extremely successful investor and a leading commodities expert. During the 1970s, he ran the Quantum Fund with George Soros. The fund returned an amazing 4,200% under his watch, according to Bloomberg Business. At the same time, the S&P 500 gained just 47%.
Rogers is most famous for buying beaten-down assets that most investors wouldn’t touch. In 1998, when investors loved tech stocks, Rogers launched the International Commodity Index. His timing was nearly perfect…tech stocks crashed a year later as a huge commodities boom began. The Bloomberg Commodity Index gained 114% over the next decade.
Rogers thinks the worst may be over for commodities. In an interview with CNBC this week, Rogers said commodities could bottom by early 2016:
…most commodities will be making a bottom in the next year or so if not before, even if we have economic problems worldwide because of the supply side. Remember, (with) commodities it is supply and demand; you then have prices going higher even with low demand if supply dries up.
• We’re seeing signs that supply could soon begin to “dry up”…
We’ve been telling you how oil companies are slashing spending to deal with plummeting prices. Oil companies have already delayed or canceled $200 billion worth of projects this year. Lower investment eventually leads to lower production and lower supply.
The same thing is happening with other commodities producers. Rio Tinto (RIO), the world’s second-biggest mining company, wants to cut spending by $1 billion this year. Glencore plans to spend $800 million less on capital projects in 2015 than it originally planned. And BHP plans to cut capital expenditures by $4 billion next year.
In a separate interview with BBC, Rogers gave more detail on why he thinks commodities are near a bottom.
As far as commodities are concerned, it’s all about supply and demand, and you’re having huge cutbacks in supply. We’re already having supply problems in some agricultural products and we’re going to have problems with oil products…
So I don’t think that the bull markets in commodities have gone away forever, because supply is going to be a [factor]. You can have a bull market with flat demand or even declining demand if supply is not there.
Rogers personally owns gold because he thinks “we are going to have a lot of turmoil in the world” over the next five to ten years. Like us, Rogers knows investors flock to gold when financial markets look shaky and dangerous.
We agree with Rogers that commodities are badly beaten down and could turn around soon. However, it also wouldn’t surprise us if global economic problems get worse and cause commodities to take another leg down.
Chart of the Day
You know a commodities bottom could be near when miners stop mining to sell eggs and marijuana.
According to Reuters, small mining companies are moving into other businesses to survive the commodities meltdown.
Reuters reports that one Canadian iron ore miner is now selling eggs. A small Brazilian mining company is getting into the haircare and cosmetics business. And one Canadian miner even applied for a license to grow medical marijuana.
You generally see this kind of activity when a bear market is close to its end.
The chart below compares the TSX Venture Index with the S&P 500. As you can see, the S&P has been rising since 2009. It’s gained over 194%.
Then there’s the TSX Venture, an index that holds a lot of small miners. It’s been falling since 2007…and is now down 84%.
Doug Casey says any asset down 90% is at least worth a look. The junior mining industry is “only” down 84%…that’s close enough to get our attention.
Delray Beach, Florida
August 27, 2015