A Melman Minute
By: Leonard Melman
Every once in a while, it is worthwhile to take a
long look at just how powerful has been this relentless bull market in Crude Oil
and for that we turn to the historic chart of Crude, going back over the past
dozen years. As can be seen, for many years crude traded in a range - actually
going back to the late 1970s - from about $12.00 per barrel (all quotes US$
unless otherwise noted) on the downside to about $40.00 on the upside. However,
beginning in early 2004, crude broke through to new highs and, despite several
corrections including an important one in 2006 along the way, the price had
headed ever-higher.
Although the recent gains have been almost vertical
in nature and therefore certainly subject to correction, we believe that the
long-term trend remains to the upside and new record high levels will occur in
the months and years to come.
These high crude prices are beginning to bite hard.
The negative economic influence of dramatic oil-related price increases, plus
the fact that so much wealth is being diverted out of the industrialized world
and into foreign hands, can no longer be ignored. Just this past week, we
learned that the Producer Price Index increase in the USA for May came in at
plus 1.4% - or an annualized rate of almost 17 percent - a number which reflects
a situation growing more perilous with the passage of time.
This morning, we learned of several other stories,
typical of new and troubling forces at work. For example, here in British
Columbia, the BC Ferry Corporation (BCFC), which provides the all-important (to
Vancouver Island’s 800,000 residents) ferry connections from the Island to the
mainland and the rest of North America, just announced new and dramatic price
increases brought about by the rise in the cost of fuel.
Ferry Corporation Chairman David Hahn told the
Victoria Times-Colonist that the corporation’s fuel costs had soared from C$ 45
million in 2003 to an estimated C$135 million this year. In order to make up
for that shortfall, BCFC has just proposed a huge increase in their fare
structure amounting to eight to nine percent this summer and this comes on top
of huge increases just enacted earlier this year.
Two immediate consequences of these increases can be
anticipated. First, the costs of all goods transported to the Island from the
Mainland will increase in direct proportion to the rising transportation costs.
Second, the tourist industry is likely to suffer as the “stay near home” style
of vacation planning takes further hold. The combination of both is likely to
reduce employment, cause business activity to slow, reduce government tax
revenues and further undermine the already-weakening real estate market on
Vancouver Island.
Next, we learned that Air Canada, like several
American airlines, is now planning to reduce their route structure, impose new
surcharges on everything from fares to baggage handling and lay off about 2,000
of their workers before year-end 2008. Air Canada President Montie Brewer told
Canada’s Canwest News Service that, “…If fuel prices remain at current levels,
we can anticipate further capacity reductions.” Again, these higher
transportation and travel costs are likely to negatively impact the entire price
structure as well as diminish the tourist and convention industries.
In America, giant air delivery corporation FedEx
reported dismal earnings this morning, and an Associated Press article noted
that not only did their earnings for the just-reported quarter fail to meet Wall
Street expectations, but the company also, “…offered a gloomy outlook for its
shipping business that showed how much higher fuel prices are eating into
profits.”
Most important to our own mining industry, giant
accounting firm Price Waterhouse Cooper (PWC) just released an annual report on
the mining industry which showed that costs were rising faster than revenues at
major mining corporations. PWC’s Senior Partner for mining activities, Len
Boggio, was quoted by Canwest as saying, “…So, the margins are getting eroded
and you see that in the increase in prices of all inputs in the mining sector:
steel, tires, fuel - everything.”
The report commented on the fact that these rising
prices impacted future plans for mining ventures including the well-publicized
shutdown of the joint venture between Teck Cominco and NovaGold at Galore
Creek. They also noted that in many cases, budgets which were created two or
three years ago now have to be re-tooled to reflect new cost structures,
“…because the cost of every single component of input has increased.”
Our own observation is that these rising costs
structures - with higher fuel costs playing a major part - are responsible for
the relatively poor performance of mining shares compared to the still robust
prices of the metals themselves. By the way, Boggio did conclude with the
statement that he believed mining still had room to grow and, “…It’s a cyclical
industry and eventually we will hit a pinnacle.”
We hate to bring up negative influences toward
mining, but reality is reality. We are referring to the relentless assault on
new mining projects by the environmental community and their ally, Canada’s
government-owned communications network, the Canadian Broadcasting Corporation -
or “CBC”. An article on CBC’s website carries the provocative title, “Lakes
across Canada face being turned into mine dump sites” and, in our judgment, is
utterly and consistently biased against mining.
The article is filled with unproven tales of woe of
how mining activity will ruin fishing lakes, how aboriginal sacred areas will be
defiled and includes a quote from anti-mining organization Mining Watch that
refers to tailings impoundment areas as, “…It’s a waste disposal site. It’s an
industrial waste dump.”
Nowhere does the article offer detailed information
about the enormous strides in tailings area designs and nowhere does it offer
specific details about the advances which have been made in the science of water
treatment facilities relating to tailings. It is simply a one-sided anti-mining
barrage, interspersed with sub-headlines such as “Open season on Canadian water:
environmentalist”
This type of article relates to a specific growing
concern for mining. As the number of environmental laws grows and as the length
and procedural requirements of those laws expands, the opportunity for
environmental organizations to find minute, tiny arguments to object to the
approval of projects expands apace. It is a difficult situation for mining to
overcome, and it is getting more challenging with each passing year.
However, despite being somewhat cautionary this
morning, we do want to repeat our growing belief that the absolute necessity for
ever-rising quantities of metals, coal, gravel - any mined product - if the
world is to progress economically and socially, will become so apparent that the
public will eventually demand a saner and sounder approval process for new
mining projects - just as a new and strong wave of public support for
once-rejected nuclear power projects is developing.
As of 8:20 AM PDT, markets this morning have been
generally positive for mining with gold up by about $8.00 to near $890, silver
ahead by over 30 cents to $17.33 and both platinum and palladium much stronger
over the past few days as Pl has again reached near the $2,100 per ounce level
and Pa is again above $470 per ounce. Financial markets are lower with the Dow
Industrials off by about 100 points and the TSX down by about 70. Crude is down
over one dollar to near $133 per barrel and the currency markets are generally
quiet. In the base metals, copper, zinc and lead are higher but nickel is
showing some weakness.
◄ Previous Minute
Next Minute
►
