The ASX: A Fun Place to Be Right Now

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Hear that whistling noise? That’s the sound natural gas is making across the world as the price hurtles lower. It’s like it’s dropping from the top of a skyscraper.

Bloomberg reports[1] that the LNG benchmark in Asia has been cut in half since the start of the year. Europe and the US are getting a similar treatment.

You should be grinning.

Why the smile? Lower energy costs are a blessing for the economy. It lowers the cost of business and living. It leaves more money in the pockets of consumers to spend on other things. Especially those things that are a lot more fun, like doughnuts and drag races.

It could also be a welcome reprieve…

One fear that’s niggled for a while is a rising international LNG price. That’s because it would incentivise the LNG plants in Queensland to export as much of Australia’s gas as possible. 

That would suck up Australia’s domestic supply and drive the price higher here at home. There was a lot of angst over this in 2017. In hindsight, there was a lot of hyperbole as well. The massive energy disaster never arrived — yet, anyway.

A falling international LNG price means the energy operators up in the Sunshine State won’t mind leaving more gas for domestic reservation. It also takes the pressure off the federal government to directly intervene in the market to keep Australia’s energy costs competitive.

We must admit something. We’ve been wrong-footed here somehow. We had a working assumption that a higher oil price would take up LNG prices as well. That’s because a lot of long-term LNG contracts were, historically at least, linked to the price of oil.

Why is that? We either never knew or don’t remember. But clearly oil and LNG have separated in some way. Oil was up 29% in the first quarter of 2019. Natural gas has taken a spanking.

Perhaps it’s another example of how the US energy resurgence has reshaped global trade flows and geopolitical calculations. US natural gas is now competing on the world stage. That idea would have seemed preposterous when Australia’s gas projects were commissioned years ago.

We can return to that line of thought another day. For now, we can infer that the big, energy-hungry economy of China is getting the equivalent of a tax cut via a lower cost of gas.

The global dragon rises again

This should help get the big dragon of the global economy back on its feet after a rough stumble last year. The government in Beijing is also delivering income tax cuts. The Chinese central bank appears to be on the verge of cutting bank reserve requirements again[2].

We return to a familiar theme of 2019. The Aussie dollar may rise as China revs up again and takes commodity demand with it. We have an interesting point on that for you. 

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A research analyst at one of the investment banks suggests the stimulus moves China is making now usually take six to nine months to fire up the demand for industrial metals. China’s ‘total social financing’ hit a record high in January this year. That puts the second half of the year in the firing line.

Some metals are moving already. Zinc inventories just keep going down while the price just keeps creeping up. There’s a chance related stocks could really run if that price decides to breakout.

We know. We know. Zinc neither has the good looks of gold or the interesting past. But we see a lot more profit opportunity in the former over the latter.

We even have a clue as to what might send the price firing — an official cessation of the trade war. The hints keep coming that this is the way the world is headed. News came out late last week that China is purchasing more US soybeans.

Previous to this, China was deliberately sourcing those from Brazil to give Trump the finger and hurt his political base in the American Midwest.

Point being: It looks to us like the trade war is keeping a lid on a pressure cooker when it comes to several commodity prices, including zinc. If the lid comes off, watch out for some serious upside.

Don’t forget that Twiggy Forrest came out recently and said iron ore could go to US$100 a tonne. That’s because so much supply has come off the market due to accidents and cyclones.

That alone has the potential to drench a stock like BHP Group [ASX:BHP] in profit and make Australia’s politicians appear to be fiscally responsible.

The ASX could be a very fun place to be this year. It already has been. Are you taking advantage of it

We’re having fun, that’s for sure.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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