Part One: The Worst
Like most commodity investors, we at Resource Investing News are looking forward to booting 2013 — a year of relentless disappointments for commodities and mining stocks — out the door.
We don’t need to remind those who have parked money in resource stocks of the dismal year it’s been. Gold is about to suffer the biggest annual loss in 32 years and this year will be the first in 12 that the gold price hasn’t increased in value. Gold equities have fallen in lockstep with the price, with juniors, intermediate and major gold companies all caught up in the carnage. Silver was named the worst-performing metal in 2013, having shed a shocking 37 percent from its average price of $37.15 in 2012. It seems almost quaint to recall how analysts were, this time last year, predicting silver would be trading between $30 and $50 an ounce in 2013. How wrong they were. The prices of rare earths, which achieved dizzying heights in 2011 thanks to Chinese export restrictions, are off a depressing 60 percent. The prices of specialty metals like cobalt, tantalum and graphite have also declined or flattened.
To be fair, 2013 wasn’t all bad. There were notable success stories and standout sectors, all well covered in these pages. Before we get there, though, let’s take a walk through some of the worst-hit sectors this year.
1. Fed Toys With Gold and Silver Investors’ Emotions
Looking back on the year, it didn’t seem to matter what the supply and demand for gold or silver was doing; in 2013 precious metals prices were all about the U.S. Federal Reserve. Since 2008 the Fed has taken gold and silver investors on a pleasant ride, with gold increasing in value every year for the last 12 due to the central bank’s cheap money policy known as quantitative easing. QE, as most investors are aware, involves a massive program of monthly bond purchases (currently sitting at $85 billion/mo) designed to keep interest rates low and the U.S. economy from falling back into recession as it did in 2008.
Everyone knew the Fed would eventually look at scaling back QE when the U.S. economy improved and it was no longer considered necessary. And that’s exactly what happened this year. In the spring of 2013 the U.S. unemployment rate started falling, prompting the Fed to hint that it could start “tapering” QE by the end of the year. The Fed’s musings of a taper were by no means consistent, though, and with every negative jobs report came the suggestion that QE would continue — which of course was bullish for gold and silver. The Fed’s signal of a pullback of QE was the last thing that gold and silver needed after the horrendous drop that gold took in April, which had nothing to do with the Fed and everything to do with how gold is traded; its sudden $200 slide was largely blamed on the bullion banks for taking massive short positions in the precious metal.
The upshot of the Fed’s QE musings was a pullback of $10 billion a month, to start in January. But while gold and silver have taken their knocks from the Fed, they haven’t ended the year too badly; at last count, gold was trading just under $1,200 and silver was on the cusp of $20. Investors are hoping that the Fed’s taper is priced into these metals and that 2014 will see their prices being less Fed-driven and more based on their actual market values.
2. Coal: Looking for Love
If there is a persona non grata of the resource industry right now, its name must be coal. The coal industry has, not surprisingly, been a lightning rod for environmentalists due to the fossil fuel’s high greenhouse gas emissions, but in 2013, the industry was also hammered by critics within the United States government, including U.S. President Obama. In September the U.S. Environmental Protection Agency released a document containing new rules aimed at curbing pollution from new power plants, and while that seems to be a good thing, the coal industry is up in arms over the fact that the new standards require technology that does not exist — the industry prefers the admittedly unproven and expensive carbon capture and storage approach to limiting emissions.
Meanwhile coal-mining states like West Virginia and Kentucky, which are facing huge job losses and a rise in electricity costs as a result of the EPA measures, have become critics of what many deem President Obama’s “war on coal”. Their suspicions about Obama were confirmed in June when he announced that the government would no longer finance overseas coal plants through the U.S. Export-Import Bank.
Coal hasn’t made many friends this year outside of the United States, either. The World Bank and the European Investment Bank have also dumped their support for coal projects.
But while the Western world eschews coal, its developing world customers continue to need it, and buy it. According to William Durbin, president of global markets at Wood Mackenzie, coal will replace oil as the dominant fuel worldwide by 2020.
All of that is cold comfort to coal companies, however, most of whose market caps have been shredded this year. Taking a few U.S. coal producers as examples, Patriot Coal (OTCMKTS:PCXCQ) is down 99.8 percent, Alpha Natural Resources (NYSE:ANR) shed 27.1 percent, Arch Coal (NYSE:ACI) is off 39 percent, and Cliffs Natural Resources (NYSE:CLF) declined 31 percent.
Adding to coal’s negative PR image has been the price slide this year, both for metallurgical (coking) and thermal coal. Due to increasing supply from Australia, Indonesia and the United States, the price of thermal coal fell 7.5 percent to $81.20 a tonne in the second quarter. Moody’s Investors Services expects thermal coal prices to remain flat at US$80 to $85 a tonne in 2014.
The price of met-coal, normally a bright spot in the coal sector, has also suffered from oversupply, along with less demand from Asian steelmakers, and that has impacted the price.
“With the first quarter 2014 hard coking coal settlement at $US143 a tonne, the lowest in the history of quarterly contracts, the stage is set for another tough year in 2014,” Macquarie wrote in a recent research report. In 2011 following the Queensland floods, the price of coking coal was sitting at about $300 a tonne.
3. Russia Shakes Up Potash Market
At the World Resource Investment Conference in May, Steve Yuzpe from Sprott told us that agriculture’s supply-demand fundamentals make it a compelling long-term investment. Many investors see potash — a key ingredient of fertilizer — as a critical sector to be invested in, through potash and fertilizer companies.
In July of this year however the potash market was turned on its head when Russia’s Uralkali broke away from Belarussian Potash Company (BPC), the European potash marketing arm. The market presumed that Uralkali, no longer part of a cartel, would undercut its competitors with a flood of cheap supply. That worry caused potash price to be hammered alongside the share prices of North American potash producers. With the expectation that potash prices could land below $300 a ton, the Uralkali news was heralded as ”the end of the potash world as we know it,” by BMO Nesbitt Burns analyst Joel Jackson.
While that hasn’t happened — the price remained about $300 — things did go from bad to worse for PotashCorp. (NYSE:POT,TSX:POT). In December the Saskatchewan-based potash producer cut its price outlook to $307 and was forced to lay off 1,045 employees. As far as what 2014 holds, all indications are that the potash price will remain soft, although the market is not expecting Belarus to flood the market and push it down further.
4. Rare Earths – Still Down in the Dumps
It was a tough year to be an investor in a rare earth company, with most explorers and the two non-Chinese producers, Molycorp (NYSE:MCP) and Lynas (ASX:LYC), all experiencing cross-the-board share declines, on the back of flat or worsening prices of most rare earth oxides and metals. Taking a measure of the industry, the Market Vectors Rare Earth/Strategic Metals ETF (NYSE:REMX) shows a year-to-date decline of 31.9 percent. Market leader Molycorp was even worse hit, plunging 43 percent year to date due to a host of problems including the announcement in October that it was selling $200 million worth of stock to fund operations, and the disclosure that almost half of its resource at Mountain Pass is cerium, a relatively low-value light rare earth. Lynas also had a tough year, declining 49.17 percent, as the company’s Malyasian rare earths processing facility was beset by delays and ongoing opposition from local residents and environmentalists.
But while rare earth equities suffered in 2013, REE prices held up relatively well. A snapshot of light rare earth elements (LREE) and heavy rare earth elements (HREE) listed on Metal-Pages shows most were flat. For example terbium, a HREE, had a low of $800 per kilogram and a high of $850/kg, while europium, another HREE, traded at a low of $950/kg and a high of $1,000/kg. Praseodymium oxide, a LREE, was at a low of $115,000 per metric ton in 2013 and a high of $120,000/mt, while cerium, another LREE, was trading at a low of $5,300 per metric ton and a high of $5,800/mt. Compared to their 2011 highs, however, these oxides are at dismal lows. That year, europium hit a high of $5,880/kg, terbium crested at $2,820/kg, praseodymium peaked at $170,000/mt, and cerium reached a height of $45,000/mt, almost 9 times its current price.
All is not lost for rare earth investors, though. Prices are expected to rise in 2014 as demand picks up and supplies continue to tighten in China, where the government has implemented a crackdown on illegal rare earth mines and products. As REE prices go up, expect rare earth equities to follow suit.
5. Platinum- No Price Jump, But Maybe Next Year
Back in June, David Franklin of Sprott Asset Management predicted that 2013 would be the year that platinum prices made a big breakout, based upon the poor economics of platinum mines in South Africa and impending strikes, which have previously affected supply and had a positive impact on prices. Six months later, however, the platinum price has actually headed in the other direction, and looking at it on an annual basis, has dropped from a 2013 high of $1,703 an ounce reached in February, to yesterday’s close of $1,357/oz.
So what happened? Well for one, the predicted wave of platinum strikes didn’t materialize. Platinum Investing News noted in a December article that strikes in South Africa’s platinum industry have become so commonplace that they have effectively become baked into the price, and as far as the supply crunch mentioned by Franklin, South Africa is beginning to lose out to other lower-cost jurisdictions such as neighboring Zimbabwe.
Patient investors however would be advised to hold onto their platinum stocks, ETFs or physical metal. According to our 2014 outlook piece, the prices of both platinum and palladium are expected to head back up next year due to rising demand, particularly from the auto catalysts sector, and falling supply.
Securities Disclosure: I, Andrew Topf, hold no investment interest in any of the companies mentioned.