The best time to buy commodities is when most producers are losing money.
Such unprofitable periods reliably mark cyclical lows in metals and energy. Because when no one is breaking even, production will inevitably decline--putting supply and demand back in line. And setting the stage for a price rebound.
We're seeing this happen in a number of sectors today. Including gold and uranium.
But the most acute example is coming from one particularly commodity: coal.
And the government of the world's top coal producer, China, last week started making some big moves to fix the situation, according to Platts. Tacitly admitting that the industry is a complete bust right now in terms of profits.
The developments came from China's National Development and Reform Commission (NDRC). Who met to discuss problems facing the Chinese coal sector of late.
Following the get-together, sources on the scene reported that the NDRC is planning some policy changes. Which are likely to include major steps to get the coal business (and prices) headed back in the right direction.
One of the major shifts will reportedly be a cut in coal production from the country's largest miners. With the 14 largest firms expected to be told to curb 10% of their output.
That would be a significant figure. Amounting to a reduction of 48 million tonnes of annual supply.
Such a cut would certainly help in improving prices across the Chinese coal market. But the larger question for international investors is--what effect will it have on coal imports?
The answer isn't immediately clear. With reports suggesting that NDRC may also implement controls on imports--aimed at discouraging foreign supply coming into the country.
But such a complete ban on coal imports could run afoul of World Trade Organization rules.
Leading some analysts to suggest the Chinese government will circumvent this issue by simply banning low-quality coal imports. A measure that's been discussed for some time here.
That would be bad news for Indonesian coal exporters--who are the major supplier of lower-quality coal into China. But could be a boost for other exporters like Australia and the U.S. Who would no longer have to compete with the explosive supply growth that's come out of Indonesia the last few years.
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We'll see what the final result is. In any case, it appears something has got to give in the coal space.
Here's to making things right,
Dave Forest
