The Commodity Investor Q&A
With Matt Badiali
May 28, 2008
Q: Any new comments on the refiners? – C.
Record high oil prices are brutalizing refiners. They can't pass along the rising costs to consumers, so the companies' margins are down to whiskers.
In April, I thought things couldn't get worse. The price of a barrel of oil cost more than the amount of gasoline you can make from it. It didn't make sense... It was like a bushel of wheat becoming more expensive than the bread you could make from it.
But that's exactly what happened two months ago. So I figured gas prices had to rise, increasing the refiners' margins, and jacking up their share prices. But since then, the price of oil has risen faster than the price of gasoline. The "crack spread" – the difference between the cost of oil and the price of gas or diesel – has worsened, and refining stocks have fallen further.
I was too early, but the situation still looks good for big gains... when and if the price of oil declines. If you own refiners, keep holding with an eye on your stops.
Q: I hear the same argument for natural resources as for agriculture – short-term peaks and long-term demand. What's a short-term versus long-term strategy? – R.A.
I look at the long-term argument for agriculture investment as a function of population and modernization. The world has more people living better, and many of those people want to live like Westerners. That means eating more beef, chicken, and pork, which in turn takes a whole lot more soybeans and corn. So agriculture will continue to rise in the long run.
In the short term, agricultural stocks will face the same ebbs and flows of any market. And right now, I think we're seeing a short-term peak.
Look at the current situation in fertilizer stocks, for example. Intrepid Potash (IPI) trades for more than 100 times earnings. Potash Corp (POT) trades for more than 40 times earnings.
These are mining companies... They usually trade at a discount to the overall market (which has a P/E of 18). How do you expect to make money as in investor when you are buying a depleting asset at 40 times its current earnings?
My inclination is to stay away from these stocks at these valuations. I'm sure you can find a few gems out there, but the big, easy money in most ag stocks has been made.
Q: What's going on with copper? Is it too late to buy copper producers? – L.M.
Copper is a critical component of housing, cars, air conditioners, plumbing, and electricity transmission. If you don't have copper, you don't have modern civilization. So copper prices, much more so than gold and silver, reflect the health of the global economy...
From 2000 to 2007, the world's copper production grew 14%. Global demand has risen at a steady 4% a year for the last 100 years, but Chinese demand for copper doubled between 2001 and 2007.
In fact, from 2000 to today, China's growing demand for copper has accounted for 99% of the global growth in copper consumption.
China holds 16% of the world's copper-smelting capacity, so turning copper ores into copper pipe is clearly a major industry in China. But very little of that finished copper leaves the country. Of all the raw copper China imported in 2006, it exported about 26% of it as finished goods. In 2007, that number dropped to 9%. This year (through March), China only exported about 3% of that copper. That means domestic demand for finished copper is growing.
In other words, China is solely responsible for the rising copper price. At $3.75 per pound, copper is trading near all-time highs... up roughly 400% in the last five years.
I know you don't read Growth Stock Wire for my analysis of China's economy... And I'm not going to try to guess what the suits at Goldman Sachs have trouble guessing. I'll just say I believe copper prices are going to remain high enough for us to make terrific gains in base-metal producers.
Good investing,
Matt
