40% Rebound In Bulk Commodity Minerals Prices Seen In 2010 By Deutsche Bank Securities Expert Equity Research Analyst Jorge Beristain
February 10, 2010 - The Wall Street Transcript has just published Gold & Precious Metals, Base Metals and Non Metals Mining Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Jorge Beristain is the Head of Americas metals and mining equity research for Deutsche Bank Securities, Inc. He previously served as Deutsche Bank's head of Latin American equity research. Mr. Beristain was recently ranked in Latin American Institutional Investor's survey as the number two analyst in the metals and mining industry. Over the years, he's ranked highly in multiple industries, including pulp and paper (number two) and conglomerates (number four). Before joining Deutsche Bank, Mr. Beristain worked at ABN AMRO. He was also a Management Consultant who specialized in the pulp and paper, and environmental engineering sectors in Mexico and Canada. Mr. Beristain is a CFA and holds Securities Principal and Supervisory Analyst licenses.
TWST: Why do you like iron ore and coking coal as near-term plays? Which names are your top picks there?
Mr. Beristain: Within the metals complex there are three main types of commodities: traditional base metals, which are your LME-traded coppers, aluminums, ones that every day change in price; precious metals are the other big group, which include gold, silver, platinum and palladium, and also have a daily price; and then you have bulk commodities, which tend to trade more on a negotiated basis and historically there has not been a daily price-setting mechanism. By definition they are "bulky" so they are huge metals in terms of physical space required to transport them. In fact, bulk metals are now the largest commodity by volume that transacts in the world. Literally hundreds of millions of tons travel all over the world.
The reason why we like bulk commodities is that it is historically a fairly small market in terms of the producers. You really can count three producers as being the global seaborne majors, and seaborne is a relevant market for iron ore. Roughly speaking, half of iron ore in the world travels over land or over lakes, as in the case of the Great Lakes region in the U.S. Over land, very much of it is integrated, and travels over land from Poland and Ukraine to Russia. But what we're focused on is really the third-party market - that is, from the merchant sellers based in countries like Brazil and Australia that ship their ore by sea. And increasingly China is becoming the destination for almost all of that ore.
The top three suppliers account for about 75% of this relevant seaborne market, and your largest end client is China, accounting for roughly 65% of the relevant end market for this commodity. So it's highly concentrated in terms of both sellers. Other relevant seaborne markets, like Europe and historically Japan, actually used to be the market five or six years ago before China's rise in terms of raw material needs. So what you're buying into by buying the seaborne iron ore-exposed companies is the trend in China of decreasing resource self-sufficiency.
In other words, the faster China grows, the more it needs to turn to imports by its shortfall of domestic supply of commodities. And that's no different than, say, in energy. Obviously, we all know China is oil short. But it's increasingly becoming evident in a lot of other raw material commodities - in not only base metals, but particularly in the bulk metals, where they are being forced to go further and further afield. You'll hear of the Chinese increasingly backing startup projects in Africa and startup projects in riskier Latin American countries in order to at least partially ensure their raw material supply.
So the reason why we are near-term bullish on the bulks is that we were concerned about the possibility for a near-term pullback in a lot of the base metals because this was a sector that performed the strongest in 2009 - basically metals and mining stocks were the top-performing sector within the S&P in 2009. And so they've kind of already had their day in the sun.
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