Commodity markets come full circle

Brandon Snow's picture
  1. The fall of Eike Batista

    Eike Batista became the commodity baron of Brazil, amassing a significant fortune investing in gold, oil, oil services, iron ore, logistics, and power.

    One year ago, Eike was ranked the world’s eighth-richest person with a net worth of US$34.5 billion, and at that time he publicly stated he would become the wealthiest person in the world based on the success of his EBX group of companies. With dramatic declines in the value of key assets (based on falling commodity prices and poor execution), the value of his holdings has declined to $3.7 billion (one-year returns: MMX -70%, MPX -35%, OGX -85%, LLX -67%, OSX -90%). At the same time, Eike has pledged his personal assets to back loans for his holding companies, leaving his estimated net worth at $200 million. We have talked about how hard it is to come back from a 50% loss (you need to double to get to even), but Eike is facing a 99.5% decline! (http://mobile.bloomberg.com/news/2013-07-25/brazil-s-batista-loses-billionaire-status-as-debts-mount.html).

  2. The potash cartel collapses

    Two selling groups (Canpotex and BPC) dominated the international trade of potash for many years, driving prices up while controlling capacity expansion. At the peak of the potash market in 2008, the nutrient was selling for US$1,000 a tonne, Potash Corp. (POT) became the largest company in Canada with its market cap surpassing RBC's for a brief period, and its CEO Bill Doyle was making comments that people will be eating ''bark off of trees'' without potash. Over the last five years, the industry continued to add capacity with no net new demand materializing, and capacity utilization fell to 80-85% and prices fell to $400/t, which is still healthy versus marginal cash costs of $250/t but well off of their peak. Earlier this week, the stage was set for a collapse in prices when the larger member of the Russian cartel, OAO Uralkali, decided to go on its own. It announced it would increase capacity to run full out and suggested prices could fall another 25% to $300/t, close to marginal cost. POT reacted negatively, falling 17%, off 50% from its peak in early 2011 and 65% off its peak in 2008.

We have seen an amazing turnaround in fundamentals and sentiment in the commodity and emerging markets areas. It is stories like these that get us interested in investing in cyclical industries. The work has begun: We are looking for unique business models, low-cost producers where commodities are trading close to marginal cost, strong management teams and, as always, risk-reward skewed in our favour.

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