What's more important: upside or stability?
That debate constantly rages amongst commodities producers. Especially when it comes to deciding whether to sell gold, copper or oil at spot versus long-term pricing.
Long-term pricing is the stable option. Like being in a good marriage. A seller has a decent price, one they can count on. There probably aren't going to be any big surprises. An acceptable profit will be made.
Spot pricing is the "one-night stand" of the sales world. Each day you're going to get something new and different. There's a certain thrill in knowing tomorrow could be the "big score" when prices go through the roof (investors love this).
But there's also uncertainty. A seller never knows what tomorrow will bring. Prices can fall as easily as they rise. Making planning for the future difficult.
Commodities producers go back and forth on spot versus long-term. When commodity prices are rising, calls always emerge for more spot pricing to take advantage of a surging tide. Investors want to buy producers as a bet on the commodity itself. And to do that, the company must have unhedged production.
Witness the recent wave of hedge book buy-backs by gold companies like Barrick. These producers spent billions the last few years to give themselves and their investors more exposure to spot pricing.
Calls for more spot pricing have also come in the base metals sector. Iron ore producers in particular were last year seeking greater spot selling opportunities, especially for sales to large customers in Asia.
But with commodities prices having moderated, the pendulum is swinging back toward long-term pricing.
Yesterday, the incoming president of one of Japan's largest steel companies said that spot pricing may not be the best way to go for miners. Eiji Hayashida, who will take over the top job at JFE Steel on April 1, said, "It is the trend nowadays to reflect the spot price moves on pricing, I would not deny this is happening. But you must consider that development of steel-related resources, requires a tremendous investment. Is it good as spot prices tend to move left and right in the short term?"
With the global financial system remaining unsteady, suddenly pricing stability is looking more attractive. Miners are wondering if they can sacrifice some upside to make sure they're not caught in the downdraft if another bout of price deflation rears up.
It makes sense to be concerned about price volatility these days. Growing speculation in many commodities is making prices extremely jumpy. More and more unsophisticated investors are getting in on the action through ETFs and other structured products. Even China's sovereign wealth fund recently announced it has invested over $400 million in energy-related ETFs.
With more buyers in the market, prices are increasingly influenced by sentiment. Any perceived bullish news sends prices rising. Recent political problems in Nigeria gave an almost immediate boost to oil. And negative news can knock prices back just as quick.
Anyone who doesn't believe speculation is an important factor in pricing for exchange-traded commodities need only look at the uranium market this week. Unlike oil, gold or base metals, uranium is a commodity that's harder for regular investors to buy. There are a few public vehicles that hold physical uranium. But the amount is much, much smaller than for other commodities.
And uranium prices are commensurately steadier. Last week, we learned that the government of Niger, the world's fifth largest uranium-producing nation, was toppled in a military coup. Licenses for foreign uranium operators are now in limbo (although there is talk that key licenses held personally by former president Mamadou Tandja will now come available).
This is big news for uranium. Imagine if there was a revolution in Iran, the world's fifth-largest oil producer. Crude prices would react swiftly and upwardly.
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And yet, uranium prices have remained subdued. This week, U.S. price monitors TradeTech and Ux Consulting announced the spot uranium price fell $0.25 to $41.75 per pound. The few sophisticated players who trade in the uranium market are obviously not as moved by developments in Niger as other investors certainly would have been.
There are good things about having a market like this that doesn't "fly off the handle" at every global political tic. Prices stay more stable. Long-term planning is easier.
Such advantages may drive more companies to return to contract pricing, and avoid full exposure to spot. Time to get married and settle down.
Here's to commitment,
By. Dave Forest of Notela Resources
