RSG (ASX) Ann: FY17 Unaudited Financial Results

Originally posted by eshmun ↑

I'm a big fan of all physical commodities going forward as they are counter positioned to the asset bubbles.

Traditionally economic fundamentals dictate that demand for Cu is the function of the health of economies and this is the base case scenario. Demand for Cu under normal circumstances will increase with higher economic growth rates in the world. But there are also other dynamics at work in markets that don't fit in neatly with traditional concepts of demand and supply or any measure of "normality". The markets have divereged to ridiculous extremes with intangible assets being valued significantly higher than tangible assets, like commodities. For example there are reliable estimates of the value of derivative financial products in the world that measure the gross exposure at US$190 trillion. No one actually knows the actual liabilities (net exposure) attached to this number, ie the cost of closing out all these positions. In fact it is even nonsensical to talk about closing out these positions as the market would instantly suffer a catastrophic and uncontrollable dislocation if it was to happen. It can't happen.

Nevertheless it is still a valid idea to thing about the mismatch in value between these asset classes. I like physical commodities for this reason as they are the most decoupled things you can find from the asset bubble. The world can go to hell and high water but the world will still use copper to transmit electricity and in pipes for our drinking water etc. In the event of a normalisation of the asset bubble, economies might bit hit hard and so along with this demand for copper and other metals but the divide between tangible and intangible assets will narrow even more dramatically, meaning that people holding physical commodities will become richer relative to their poor cousins who are stuck with intangible assets. You see, wealth is not an absolute time independent concept, it is a relative thing and on the world scale this war between the tangible and intangible is being faught out every day. How quickly a value swing can happen between the tangible and the intangible is the big unknown but even if it happens slowly (a slow creep) that is where I think we are heading. In fact it could have started already.

From a more nuts and bolts perspective I think Ni might beat Cu out of the starting blocks. I like Ni for a number of reasons. It already has a deep market through long standing demand as an alloying metal and that's unlikely to be susbstituted in a major way. As the Chinese move to higher per capita incomes so does their demand for stainless. Ni is also a technology metal with more usage in battery anodes than lithium. The other thing I like about nickel is that most of the current production comes from the wet areas of the world (wet laterites), in basket case economies countries like Indonesia, the Philippines, New Caladonia and Cuba etc Most of the Ni production from these countries ends as low quality final products and the process to refine these ores is dirty. What's more all these supplies are largely state subsidiized so what these countries are doing is effectively give China a big old free kick to stay in business. Australia's' nickel deposits on the other hand are high grade and comparatively low cost and produce better end products. We also stand on our own two feet when it comes to the commerciality of production. Our production is not government subsidized. The big commodity players have largely moved out of the nickel game in Australia, leaving the industry to mid-tier companies. The consequence of this is that nickel is now a small man's game and nickel exploration is all but dead but the need for higher quality product is not. The basket case economies need to make their production commercial as no one will just keep sending cash loads of money to China in suitcases forever. Eventually everyone hasn't to pay the piper and when that day comes the Ni price will have a dramatic rise. Esh

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Agree Nickle is important. I work in sales selling white goods and electricals and the amount of stainless in my showroom is amazing, but not all of the highest quality . Some stainless i suspect will rust in a couple of years and its not the cheaper brands i am sometimes worried about. A free tip, always carry a magnet when shopping for stainless steel fridges, its amazing what you can tell with a simple magnet. Do you have any nickle producers you favour esh?

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