Res Ipsa Loquitur
August 18, 2014
Since the start of 2014 gold has been strong, copper and oil weak. The Latin saying “Res Ipsa Loquitur” means the thing speaks for itself. So what might these commodity indicators mean for the northern economy?
Consider the following:
- Europe is not growing economically. Take Italy. Italy is back in recession following the 0.2% GDP contraction in the second quarter. The problem is that Italy has an appallingly low trend GDP growth rate – possibly negative at this point – and nothing which has happened since the financial crisis ended suggests it is going to to improve radically anytime soon, in fact there are good reasons to think that growth could even deteriorate further. The result is bound to be that the gross government debt to GDP ratio rises above the 135.6% it hit in March.
- China is worried about weakening growth. China’s central bank said on Wednesday that it will continue to implement a targeted approach in monetary policy in the second half of 2014 and shore up weak links in the economy.
- Japan’s growth will likely fall short of BOJ’s projections, prompting the central bank to accelerate QE or at least maintain it over a longer period. Credit Suisse: “We see additional BoJ easing coming in November.”
- US economic growth has been anemic (2%) yet credit growth continues to accelerate, reaching the highest year-over-year pace since the Great Recession.
- The level of monetary accommodation in world’s major economies remains quite high, with little indication of near-term withdrawal. That has provided substantial support for gold prices and may continue to do so in the near future.
The implications for the area ‘north of 56’ can be noted:
- The study by the Carbon Tracker Initiative highlighted 20 of the biggest projects around the world that need a minimum oil price of US$95 a barrel to be economically viable. High on the list were Houston-based ConocoPhillips’ oil sands operations, which include joint ventures with Cenovus Energy Inc. at Foster Creek and Christina Lake and with Total E&P Canada at Surmont. CTI also flagged Shell’s Carmon Creek project and ExxonMobil’s Aspen and Kearl projects. In May, Total and partner Suncor Energy Inc. decided to indefinitely defer their $11-billion Joslyn North mine in Alberta because the economics just weren’t good enough.
- The Canadian Association of Petroleum Producers predicted oil sands production would grow at a slower pace than previously expected because of rising costs and capital constraints. It sees output hitting 4.8 million barrels a day by 2030, about two and a half times higher than last year’s output of 1.9 million barrels.
- Obviously developing Alaska’s North Slope becomes less economic as the price of crude oil slides below $100/barrel.
- There is only one producing copper mine ‘north of 56’ Capstone’s Minto mine in Yukon. The mine is close to its break-even production cost. Certainly lower copper prices raise the specter of a potential mine closure.
- The brand new Red Chris copper-gold mine in northern BC is due to start production in September. Unfortunately, the operator, Imperial Metals had a major tailings dam failure at its Polley Mine operation. It is unclear the impact of this catastrophe will have on the planned Red Chris production start.
The loose monetary policies of the world’s major central banks have failed to spur economic growth. Oil and copper prices have weakened as a function of weak economies. Gold has gone up as investors see an inflationary future ahead.