The most pressing issue facing Morrison today

Monday, 27 August 2018
Melbourne, Australia
By Bernd Struben

  • Oil bulls running scared
  • Australia dominating lithium market

Meet the new boss. Same as the old boss…’

Peter Townshend, The Who

Welcome to a new week…with a new leader. Again.

We imagine that newly minted Prime Minister Scott Morrison is eager to show how his guidance will be different. How he’ll unite the fractured Coalition. And how he’ll convince Labor to back the government’s energy, migration, and taxation policies.

That’s right. We’re back on the path towards a functional government. One that will give businesses certainty for their future investment plans, and retirees assurances on their fixed income outlooks.


Good luck with that Scott!

If nothing else, last week’s antics in Canberra gave the mainstream media pundits plenty to write about.

With that in mind, we’ll largely give the subject a pass. Except to look at what may be the most pressing question facing the new prime minister and his family today.

Do they want to live in the 91-year-old, 40 room mansion that comes with the job?

You can see the Lodge, set on 4.5 acres of prime Canberra real estate, below:

chart image

Source: Hawkeye7
Click to enlarge

Granted it’s not quite the White House. But it does have a certain charm…as far as mansions go. And the vast majority of prime ministers have taken up residence in the Lodge during their tenure.

Tony Abbott is one of the few exceptions. With James Scullin and Ben Chifley rounding off the list of prime ministers choosing to live elsewhere.

Scott Morrison hasn’t made up his mind yet on whether he’ll be moving his family to the fancy new digs.

If he does, our advice is simple.

Don’t get too comfortable!

Now getting back our primary beat, we turn to the markets, where US stocks once again closed in record high territory.


Over the weekend the Dow Jones Industrial Average closed up 133.37 points, or 0.52%.

The S&P 500 gained 17.71 points, or 0.62%.

In Europe the Euro Stoxx 50 index finished up 8.18 points, or 0.24%. Meanwhile, the FTSE 100 gained 0.19%, and Germany’s DAX closed up 28.94 points, or 0.23%.

In Asian markets, Japan’s Nikkei 225 is up 229.44 points, or 1.02%. China’s CSI 300 is up 1.94%.

In Australia, the S&P/ASX 200 is up 16.67 points, or 0.27%.

On the commodities markets, West Texas Intermediate crude oil is US$68.64 per barrel. Brent crude is US$75.79 per barrel.

(More on oil below.)

Turning to gold, the yellow metal is trading for US$1,205.46 (AU$1,643.88) per troy ounce. Silver is US$14.82 (AU$20.21) per troy ounce.

One bitcoin is worth US$6,665.03.

The Aussie dollar is worth 73.33 US cents.

Oil bulls running scared

Granted oil prices haven’t crashed…yet.

In fact, WTI and Brent both gained a bit over US$1 per barrel since I wrote to you last Thursday. But that doesn’t shake my conviction crude remains set for a 10–15% fall in the months ahead.

As I’ve been writing to you since March, when oil was on a tear that saw WTI hit US$74.15 on 29 June, the supply and demand dynamics are bearish for crude prices.

On the supply side, short term declines in production can send the price spiking temporarily. Like the recent report of a decline in US crude stockpiles. Or the renewed strikes at Total’s North Sea fields.

But these are short term impacts. Long term, there is a lot of oil coming out of the ground, with record production in US, and both Russia and Saudi Arabia upping output.

On the demand side, fears are mounting that a slowing global economy will see less need for crude, particularly from emerging markets. And that’s got the oil bulls running scared. You can see the change in investor sentiment below:

chart image

Source: ICE Futures Europe / Bloomberg
Click to enlarge

From Bloomberg:

Over the past four months, investor optimism that global crude prices will rise has slumped by almost half.

Hedge funds’ net-bullish position on Brent crude, a measure of how positive money managers are that prices will gain, has plunged 49 percent since early April as trade wars cloud the picture for oil consumption.’

Now futures traders don’t always get it right. Nor does your editor. But I’m still expecting WTI to trade below US$60 per barrel before the end of October.

Australia dominating lithium market

Since we’re on the topic of energy, lithium is facing its own headwinds.

You’ve likely followed the lithium story over the past few years.

The world’s lightest metal, and a highly combustible one at that, lithium has long been used in the ceramics and glass industries. But in recent years lithium has seen interest and demand soaring because of its potential for energy storage. Namely in lithium-ion batteries.

The growth in electric vehicles and in-home power storage for solar and wind energy practically ensures a strong demand for lithium in the foreseeable future. Chile’s SQM chief executive Patricio Solminihac, for example, expects global lithium demand to continue growing by a healthy 20% per year.

Of course sudden tech breakthroughs — think hydrogen fuel cells — could unexpectedly knock the stuffing out of lithium demand. But that’s an outlying chance in the mid-term outlook.

Nonetheless, lithium prices have been falling throughout 2018. The decline has nothing to do with a lack of demand, but one of ramped up supply. And much of it is coming out of Australia.

From The Australian Financial Review (AFR):

Surging lithium exports from Australia will likely drive prices lower over the next six months, according to one of the world’s biggest producers of the boom commodity.

The commentary from Chile’s Sociedad Quimica y Minera (SQM) echoes predictions made eight months ago by the likes of Roskill and UBS

Australia’s largest and longest-standing lithium mine at Greenbushes has been planning further expansions, but the real growth in recent times has come from new players like Galaxy, Mineral Resources, Neometals and Tawana Resources.

Two more lithium mines, operated by Pilbara Minerals and Altura Mining respectively, are currently in the final commissioning stage at Pilgangoora south of Port Hedland, and industry intelligence firm Roskill believes the collective surge in exports could ensure Australia’s market share rises as high as 62 per cent of the global lithium market in 2018.’

A 62% slice of the global market is nothing to sneeze at. But Australia’s producers may want to sit in on OPEC’s next meeting if they want to avoid an even greater glut.

You can see the marked downturn commencing at the start of this year in the chart below:

chart image

Source: Trading Economics
Click to enlarge

The tumbling price has already impacted some of Australia’s largest lithium stocks.

Orocobre Limited [ASX:ORE], while up 0.99% in intraday trading, is down 39.9% in 2018.

Galaxy Resources Limited [ASX:GXY] is down 28.4% over that same time.

Both of these companies have market caps of just over $1 billion. So falls of this magnitude have wiped a lot of wealth off investors’ portfolios.

Both companies are due to report their financial results this week. The AFR notes that:

UBS expects Orocobre to report a 6 per cent rise in full year profits to $US20.6 million, but does not expect a dividend.

Galaxy Resources will publish half year results on Thursday, with UBS expecting a net profit after tax of $US16.4 million and no dividend.

Clearly there’s money to be made in lithium. And perhaps the recent share price routs of ORE and GXY mark an end to their investors’ woes. Much of that will depend on the competition and how much new product is rushed to market.

I don’t expect either ORE or GXY to see a return to the heady share price growth they enjoyed towards the end of last year though.

For example, if you’d bought ORE on 11 August 2017 and sold out on 5 January this year, you would have walked away with a 136.6% gain. If you’d done the same with GXY on those same dates, you would have bagged a 121.1% gain.

It’s a good reminder of the importance of getting in on breaking trends early, rather than waiting for the hype to build first. By the time your neighbours have bought and profited from the stock and your partner is nagging you to buy a bundle of shares, it’s usually too late.

Questions, comments or ideas?

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Finally, here’s the latest from The Australian Tribune:

‘Fear for Illegal Migrants as Crocodiles on Border Patrol’

When it comes to big, beautiful border walls, Donald Trump’s wildest plans for the US’ southern border with Mexico don’t come close to Australia’s natural barriers.

Not only do would-be illegal migrants need to cross treacherous seas — and navigate past Australia’s marine border patrol — to reach our shores. But if they do reach the promised land they may find themselves facing some of Earth’s oldest predators.

That is the fear for…

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