Replies to post #4972 on The Rising Influence of Rising Affluence

[DewDiligence]

Re: Is the bull market in commodities over?

There's a long lag before supply responds to increasing prices and demand, which means that the system by its nature is very prone to overshooting. We've had enough years of higher prices for a lot of new supply to come on-line now, and I'm guessing it's time for the overshoot to happen.

I presume you mean that it’s time for the undershoot—i.e. the overshoot on the downside—to begin.

Perhaps; however, for many commodities such as iron ore that tend toward megaprojects, elapsed time per se is generally not the main driver of increasing supply in response to higher prices. Rather, there are substantial financial, environmental, and political impediments to project development even when the raw material itself is relatively abundant. For instance, VALE has been negotiating with the government of Brazil for what seems like half a lifetime to expand its iron-ore output in regions of the country where mining is already entrenched.

Moreover, contrary to the ordinary meaning of the word commodity, quality matters a lot in some commodity markets, so increased supply may not have as simple an effect on pricing as one might assume. (This was discussed in a thread a few months ago culminating in #msg-73414315.)

So, what does all this mean for such stocks as CLF, VALE, and HES? Are they now unduly cheap even if commodity prices do retreat to some degree? I would submit that they are, but I’ve been getting killed on these names lately.

[OakesCS]

But the new drilling techniques will presumably be exported to other countries...

sorry for parsing your comment but just because a particular technique is useful in one country/area does not mean that it can or will be used in another country. The constraints include: geology, technical skills, and variable property laws. For example, once the Canadians demonstrated the effectiveness of SAGD many other countries thought it would solve their heavy oil recovery problems. Nopy. Another example: I think France has outright banned hydraulic fracturing and while it's been tried in Poland, it hasn't proven to be as successful there. Until recently people thought Argentina would be a wonderful place to use new production techniques. Folks are now having 2nd thoughts that, of course, have nothing to do with physics and geology.

[DewDiligence]

Apropos to the point OakesCS was making in #msg-75618300:

http://online.wsj.com/article/SB10001424052702303448404577407401173565504.html

WSJ: The Australian government says shale gas could double the country's gas resource, up from an estimated 390 trillion cubic feet now. Does the potential excite you?

Peter Coleman (CEO, Woodside Petroleum): …all shales are not the same. The shales that we see in Australia are slightly different to those in the U.S. Equally the U.S. has been successful around a business model that is really based around the surplus facilities and support. We don't have that same sort of infrastructure in Australia—either in the service sector or with our distributions and being able to get it to market. These are long-term plays and I don't expect we'll see the step change in production that we've seen in the U.S. any time soon in Australia.