Last week’s salient developments

THE PASTORAL visit of Pope Francis in the country last week—the third by a pope in 45 years—overshadowed all local news.

Behind this historic event, however, was an equally momentous development that happened a day before his arrival on Thursday:  The market broke into higher grounds as the Philippine Stock benchmark index established a new intra-day high of 7,530.41 before closing just below it at 7,490.88.

One factor that may have driven the market up was the turnaround of foreign investors’ position last week to become net buyers.

Also, the average daily foreign investors’ trading transaction for the week rose by some 50 percent to P15.36 billion from P10.30 billion the week earlier.

The huge block transaction on Ayala Land Inc. on Monday could also have contributed to the growth.  At P15.36 billion, this was 64.84 percent of the total transaction for the day which also marked the entry of a long-term investor into the market.

Due to this, the property sector’s total value turnover last week rose by 451.56 percent, making it one of only two sectors to sustain its growth momentum in the last two weeks.

Oil prices

The market’s performance last week was also attributed to the impact of lower oil prices on the country.

The cost of production of the Galoc oil consortium last year was reported to be about $20 per barrel.  With additional capital inputs needed to sustain the programmed accelerated output of Galoc’s remaining reserves, this will increase to roughly $30 per barrel this year.

It goes without saying that sales and production from the only oil producing well in the country will have to stop at these prices.

Saudi Arabia’s decision not to reduce its production is seen to further pull down oil prices to as low as  $20 per barrel.

In an interview by the Middle East Economic Survey, Saudi Oil Minister Ali Naimi said in no uncertain terms that “Saudi production cost is no more than $5 a barrel, and that marginal costs of development are ’at most’ $10 per barrel.”

Other Opec members seem to have similar costs structures that they did not object to Saudi Arabia’s decision.

However, certain quarters noted that if oil bottomed at $35 a barrel in less than nine months after hitting a record high of $147 in 2009, it could rebound just as fast.

This can be hastened by the closure of shale sources if prices fall further. While they have contributed to the drop of oil prices, they are highly leveraged that they are vulnerable to volatile price and interest rate movements.

Iraq’s output is still growing fast.  It needs cash to rebuild and defend itself from threats besetting its government.  Russia, as well, is suspected “to continue pumping at any price above operating cost” to have the hard currency needed to prop up its so-called Potemkin (fake) economy.  Venezuela and Iran are also hard pressed for cash that they are not about to stop pumping oil just yet.

Other threats

The World Economic Forum (WEF) came out with what it termed “the biggest and baddest threats” the world faces over the next 10 years.  Foremost of which are the risks from international conflicts. These conflicts among states will lead “to severe water crises across the planet.” “Environmental risks are far graver than any economic ones,” it added.
WEF also came up with 10 top global risks:  interstate conflict, extreme weather events, failure of national governance, state collapse or crises, unemployment and underemployment, natural catastrophes, failure of climate-change adaptation, water crises, data fraud or theft, and cyber attacks.

In terms of impact, the 10 top global risks are re-arranged as follow:  water crises, spread of infectious diseases, weapons of mass destruction, interstate conflict, failure of climate-change adaptation,  energy price shock, critical information infrastructure breakdown, fiscal crises, unemployment and underemployment, and biodiversity loss and ecosystem collapse.

Bottom line spin

China’s shift from a highly industrial growth regimen to a consumption-led economy to feed its next phase of development growth is, however, expected to bring in “fantastic opportunities.”  This is expected to result in, among others, an increase in demand for minerals (bauxite, zinc and copper), natural gas and uranium.

As reported, about 90 percent of Chinese households, equivalent to 470 million by 2030, will have disposable income of $15,000 or more.  This is at least 254 percent higher than the 133 million estimated for the US on same time frame.

In view of this, experts see a clear resurgence in the demand for minerals and natural resources lending to the production of aluminum, copper, zinc and electricity.

Bauxite is an ore used to make aluminum.  Copper and zinc are used to make three main appurtenances namely, washing machines, air conditioners and cars.  Natural gas and uranium, on the other hand, produce power.

The Euromonitor reported that China accounted for about half of the global sales of small appliances.

It is estimated that a typical washing machine contains 7 kilograms or 15lbs. of aluminum and 2 kg of copper.  Refrigerators contain 7 kg of copper and 4 kg of aluminum.  It is also estimated that a typical home needs about 125 kg. of copper in wiring, tubes and other hardware.

China’s policy to cut pollution in building power stations is seen as another growth driver for copper.  A power station is said to require 2.5 tons of copper for every megawatt of capacity.  China will add about 132 gigawatts of nuclear capacity by 2040.  This will be more than the current combined capacity of the US and Russia.

In the face of the huge opportunities that China offers, we may see a resurgence and expansion in the mining industry in the country.  Real growth in stock prices may come from this sector.

The writer is a licensed stockbroker of Eagle Equities Inc.  You may reach the Market Rider at [email protected] , [email protected] or at www.kapitaltek.com