Renowned investor Don Coxe asks an interesting question: Why are miners ranked lower than oil stocks as long-term investments?
The key difference, he says in his latest report titled The Metals Take Centre Stage, is scrap.
"Since the Industrial Revolution, the constraint on sustained metals price gains has been the supplies of scrap from products sold in earlier cycles," he writes. "There is no scrap gasoline or natural gas."
"Iron ore, copper , nickel and aluminum producers have faced perpetual contests between virgin metals produced by the miners and recycled metal from scrap.
"We believe the scrap/virgin ratio will be more favorable to metal miners in this and future cycles than it has been throughout the past."
Mr. Coxe points out that the ratio of scrap metal to current consumption is minimal in the fast-growing Asian economies which are buying the most metal, and that after more than a decade of drawing down junkyards in North America and Europe to fill ships bound for Asia, scrap is becoming scarce.
"Once investors realize that a world in which more than half of the demand for industrial metals comes from countries which have minimal supplies of scrap, they will be ready to revise upward their forecasts of longer-term metal prices and to assign a higher investment rating to the shares of the metal miners," Mr. Coxe says.
He is also critical of the financial community's "fixation" on miners' short-term earnings.
Mr. Coxe recommends global commodity exposure along the following lines:
- 29 per cent in precious metals
- 31 per cent in agriculture
- 19 per cent in energy
- 21 per cent in base metals and steel