Energy and base metal prices are up slightly on bargain hunting as investors take a breather from the commodities market’s continued slide. Throughout the week, both oil and copper demand were pummeled as investors worldwide grappled with a slew of downside risks, from a slowdown in global manufacturing to growing concerns about the international banking system. Gold, however, is gaining ground as demand for safe haven assets increases.
Commodities prices are expected to remain sluggish at least until next week’s European summit meeting in Brussels from June 28; leaders hope to find a way to resolve the Eurozone’s financial crisis once and for all. Still, most base metals producers continue to expect global demand to pick up later in the year as the economic outlook improves, especially in emerging markets. For instance, earlier this month Goldman Sachs projected a 29 percent return led by strong demand in energy and base metals from Standard & Poor’s GSCI Enhanced Commodity Index over the next twelve months.
For now, Chinese manufacturing hitting a seven-month low and Eurozone manufacturing reaching its lowest level in three years have only stepped up the slide in commodities prices. US manufacturing slumped to its lowest level in eleven months. Moreover, Moody’s downgrading of its rating for 15 major global banks has shaken confidence in the international banking system, especially as Europe continues to struggle with getting the euro back on firm ground.
In Australia, Fortescue Metals Group (ASX:FMG) is challenging the Australian government’s plans to introduce a mineral resource rent tax beginning July 1. Over the next three years, the tax is expected to net the nation’s coffers about $10.7 billion from major mining companies including BHP Billiton (ASX:BHP), Rio Tinto (ASX:RIO), and Fortescue. The company argues that the tax is unconstitutional and will hamper mining activities.
Oil and gas
Crude prices hit an eight-month low, and many analysts expect prices to fall still further amid worries about a continued slide in the global economy.
ExxonMobil (NYSE:XOM), Royal Dutch Shell (LSE:RDSA), and Rosneft faced the wrath of Greenpeace International – as well as celebrities including Paul McCartney and boy band One Direction – as the environmental group lambasted the oil giants’ plans to drill in Arctic waters.
The drop in energy prices has not dampened oil giants’ appetite for new sources; Chevron (NYSE:CVX) in particular has not been affected, and recently decided to move forward in exploring offshore of Suriname. Specifically, Chevron will buy a 50 percent stake in two deepwater leases held by Kosmos Energy (NYSE:KOS). Also this week, Chevron said it will be supplying more liquefied natural gas and will sell an eight percent stake in its Wheatstone project in Australia to Tokyo Electric Power Company (TSE:9501).
The US government’s first auction for offshore petroleum leases brought in a total of $1.7 billion, indicating strong interest in the region, which suffered from an oil spill disaster two years ago. BP (LSE:BP), which was partially responsible for the disaster, won the bid for 43 leases to drill in the Gulf of Mexico for a total of $239.5 million. Shell won 24 bids for a total of $406.6 million.
Copper prices have taken a beating on sluggish manufacturing data across the globe, but the red metal is expected to rebound by the fourth quarter, especially as the Chinese economy gets back on track, according to TD Securities.
Jeffries maintained its buy recommendation for Freeport-McMoRan (NYSE:FCX) with a price target of $60. Analyst Peter Ward stated that “[f]ears of global economic weakness, substantial speculative selling and the strong U.S. dollar materially weakened the copper price in the second quarter. Nonetheless, FCX remains our top pick in North American Metals and Mining. In our opinion, the current valuation fully discounts further material weakness in copper.”
Rio Tinto said that financing to expand its Oyu Tolgoi copper mine in Mongolia will likely be locked in by the end of this year. The $13 billion project is expected to begin commercial production in 2013.
Toronto-based Bell Copper (TSXV:BCU) said it plans to option or enter a joint venture for its Sombrero Butte project in Arizona. If such arrangements cannot be made, Bell Copper will put further exploration on hold “until the capital markets improve and the company is able to finance exploration on acceptable terms.”
Gold is gaining ground as investors seek out safe haven assets amid growing global economic uncertainties. Yet Brazilian mining entrepreneur Eike Batista will sell a 49 percent stake in his AUX gold operations to the Qatar Investment Authority for about $2 billion.
Kyrgyzstan may revoke the operating license of Centerra Gold (TSX:CG) amid growing concerns about environmental damage from open-pit gold mining. Kumtor Operating Company, which is wholly owned by Centerra, has come under attack from legislators concerned about the company’s operations. In addition, many lawmakers are calling for greater returns for the government from mining activities.
Securities Disclosure: I, Shihoko Goto, hold no direct investment interest in any company mentioned in this article.