Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!

 

Governments lie; bankers lie; even auditors sometimes lie: gold tells the truth— William Rees-Mogg 

 

Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!  

 

Geopolitics is now a primary driver of the transitioning global economic structures.  Since commodities are one of its beneficiaries, the Philippine mining index should reflect this dynamic. 

 

Geopolitics is the Name of the Game: Philippine Enters the Geopolitical Hegemonic Contest via the Reinforcement of the VFA-EDCA Agreement with the US 

 

Unless one lives under a rock, geopolitics is the name of the game! 

 

And commodities are one of the primary elements of geopolitics. 

 

Signed in 2014, the Enhanced Defence Cooperation Agreement (EDCA) represents an agreement between the US and the Philippine governments to expand their defense alliance by allowing the United States government "to build and operate facilities on Philippine bases for both American and Philippine forces." (Wikipedia) 

 

From the original five (non-permanent) bases (Palawan, Cebu, Pampanga, Nueva Ecija, and Cagayan de Oro), the incumbent administration has added four more facilities for US military access (Palawan, Isabela, Lal-lo Cagayan, and Santa Ana Cagayan) early April. 

 

And it is no coincidence that the expanded "pivot" by the Philippine government towards the US occurred as the Chinese military's partial intrusions on Taiwan's border to test Taiwan's defense capability has grown with frequency and scale.   

 

China's military has also been aggressively encroaching on the maritime boundaries of different neighbors as the Philippines in the South China Sea. 

 

The Xi regime has accused the Philippine government of interfering with the China-Taiwan conflict. 

 

The broader picture is that these territorial disputes are an extension of the hegemonic contest between the reigning superpower, the US, and her (NATO) allies against her emerging challengers (the Global South/BRICs).  The Russo-Ukraine War is a ripe example of the manifestations of the unfurling power struggle via kinetic warfare.  

 

But this increasingly confrontational hegemonic conflict has stretched to cover many other areas, including but not limited to trade, investments, financing, money, commodities, social mobility, space, deep-sea, technology and information, and more.  

 

And this expanded friction will unlikely diminish even if contending parties miraculously find a settlement to the Russo-Ukraine War—the other areas of dispute will persist. 

 

That said, commodities will be a principal element in a fragmented world. 

 

And NO economic analysis will be complete WITHOUT the role of geopolitics. 

 

Why Commodities Will Play a Principal Role in the Era of Fragmentation/Inflation 

 

One crucial evidence of malinvestments from the easy money policies of central banks is the severe underinvestment in the commodity sector that has led to a shortfall in supplies. 

 

The liquidity bailouts of global central banks during the pandemic exposed this accrued imbalance. 

 

Figure 1 

 

For instance, the stockpiles of industrial metals, like copper, are at their lowest in history. (Figure 1, top and middle charts)  

 

Yet it requires massive amounts of capital and time to increase exploration activities to generate expanded output.  And this isn't happening anytime soon. 

 

Further, with the world standing on the precipice of an expanded kinetic war, global public spending on defense will likely take a lead role, reshaping subtlely the global economic backdrop to a quasi-war economy. (Figure 1, lowest window) 

 

In nominal terms, global defence spending has been on a strong upward trajectory over the last five years, increasing from a nominal USD1.7 trillion in 2017 to USD2.0tr in 2022. Until recently, the same could be said of defence spending in real terms, but this upward trend stalled in 2021 and 2022 owing to escalating inflation, leading to a widening delta between nominal and real spending. Using 2015 as the base year for real terms calculations, the difference came to USD101bn in 2020. This more than doubled to USD222bn in 2021 and increased again to USD312bn in 2022. (McGerty, 2023)  

 

More public spending to develop an end-to-end military system diverts resources and finances from the private sector, which leads to production inefficiencies and relative shortages of consumer goods—which means structural supply-side imbalances, ergo contributor to inflation. 

 

In this case, the build-up of armaments requires massive amounts of different commodities/metals, like copper, nickel, silver, and more.   

 

The increasingly fragmented world should aggravate such supply constraints through the various restrictive and protectionist policies anchored on nationalism and geopolitical alliances. 

 

Again, the multi-faceted aspects of this power struggle won't be limited to military and trade but will involve the currency and financial system.  

 

Ergo, a potential challenger to the de facto USD standard--should emerge with this transition to a multipolar world. 

 

As evidence, several countries have been realigning their geopolitical relationships in favor of the Global South/BRIC. 

 

In the past few weeks, earth-shaking announcements from several countries with the intent to join the bandwagon of the establishment of an emerging rival currency system. 

 

Here are some events as compiled by the Kobeissi Letter (Twitter) 

 

-Iran said they are reducing their dependence on the US Dollar for regional and international trade.  

-France said Europe should reduce dependence on the US.  

-Meanwhile, Russia, Saudi Arabia and China are now trading with Chinese Yuan. 

 

Figure 2 

 

In any event, in conjunction with the drawing of the financial and monetary divide, global central banks amassed a record amount of gold in 2022. (Figure 2, topmost window) 

 

And instead of mimicking the current USD system, structured on a Triffin dilemma of debt and inflation-financed twin deficits, the competing currency standard will likely be backed by a basket of commodities.  A Bretton Woods 3 template as proposed by Credit Suisse's Zoltan Pozsar, perhaps? 

 

Commodity reserves will be an essential part of Bretton Woods III, and historically wars are won by those who have more food and energy supplies – food to fuel horses and soldiers back in the day, and food to fuel soldiers and fuel to fuel tanks and planes today.  

 

… 

 

This is serious: Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left). (Pozsar, 2023) 

 

Central banks will also play a significant role in financing public spending.  And in the backdrop of supply tightness, such monetary expansion should extrapolate to higher inflation, which also implies rising rates. 

 

And though the demand for metals in the electric vehicle industry may also be a part of the narrative, the focal point of the economics of commodities is the increasing fragmentation of the global economy. 

 

So decades of underinvestments that led to shortfalls in supply, the fracturing of the international division of labor and its geopolitical realignment, the quasi-militarization of the global economy, principally through central bank finance and partly via private sector participation, and finally, the emergence of competition to the US standard, heralds to higher demand and increased prices of commodities.  

 

The era of globalization, financed by easy money, will likely usher in the eon of fragmentation, marked by a milieu of high inflation and elevated rates. 

 

The Philippines will not be exempt from this seismic global transformation.   

 

The complementary bases under the VFA-EDCA, the Balikatan exercises, and other related participations constitute crucial economic and geopolitical drifts, which along with their corresponding risks, will likely come with consequences—as history has shown. 

 

The Philippine Mining Index in the Era of Fragmentation/Inflation 

To an observant eye, the subtle shifts have already been happening.  The unspoken changes in the performance of the share prices of listed commodity producers illustrate such developments. 

 

While USD coal prices rocketed from 2020 through September 2022, it had given up most of its gains.  But it is still above the highest level since at least 2010. (Figure 2, middle chart) 

 

As in the case of Europe, Japan, and elsewhere, the ESG thrust to replace coal with renewables as baseload supply will likely backfire.  Natural gas and nuclear power could be the future of Philippine energy.  The Philippines saw its first LNG import this month. 

 

Despite the short-term oscillations, USD prices of copper and nickel are in a long-term uptrend but below their recent highs. (Figure 2, copper-lowest diagram) (Figure 3, nickel topmost chart) 

Figure 3 

 

On the other hand, while USD gold prices have also been on a structural uptrend, it has yet to show a convincing breakout. (Figure 3, middle pane) 

 

But it did so against 5 ASEAN currencies (Philippine peso, Thai baht, Malaysian ringgit, Indonesian rupiah, and Vietnam dong) last April 6th. 

 

In any case, coal (Semirara SCC), Nickel (Nickel Asia NIKL, Global Ferronickel FNI, and Marcventures MARC), and Gold-Copper (Atlas AT, Philex PX, and Lepanto LC and LCB) comprise 96.32% of the Philippine Mining index as of April 14th.  Oil exploration firm PXP completes the 9-member roster.  (Figure 3, pie chart) 

 

The Philippine mining index is the most unpopular and possibly the "least owned" sector.   The institutional punters have likely ignored the industry.  

 

Figure 4 

 

As proof, the industry has had the smallest share of the monthly trading volume since 2013. (Figure 4, upper window) 

 

Local participants perceived this as highly speculative (higher beta), thus subject to intense ebbs and flows.   

 

Nota bene: Though several other mining and oil issues have not been part of the index—a rising tide usually lifts all—if not—most boats. 

 

More, its lack of correlation with the PSEi 30 should make it a worthy diversifier.  

 

But with the current climate of overindebtedness and rising rates seen with most mainstream issues, the market may likely have second thoughts about this disfavored sector. Soon. 

 

In the 70s, mines constituted many members of the Philippine Phisix, presently PSEi 30.   

 

That 70s show, marked by the age of inflation, may yet stage a comeback. (Figure 4, lowest pane)  

Figure 5 

Despite the low volume and a depressed sentiment in the general market, a divergence has emerged between the Mining index and the headline index. (Figure 5, upper chart) 

 

In fact, as a ratio of the PSEi 30, the mines have been reservedly outperforming since March 2020. (Figure 5, lowest diagram) 

 

If the advent of the era of fragmentation or the age of inflation materializes, could the consensus eventually be chasing a new bubble? 

 

Disclosure: This author holds exposure to some of the mining & oil issues. 

 

____ 

References 

 

McGerty Fenella Global defence spending – strategic vs economic drivers; Military Balance Blog, February 15, 2013, International Institute for Strategic Studies 

 

Pozsar, Zoltan: Money, Commodities, and Bretton Woods III; March 31, Credit Suisse Economics 

 

Nota Bene: The newsletter intends to apprise readers of the market conditions based on the information available at the time of the items’ writing, whose accuracy and timeliness of the issues concerned are subject to change without prior notice.   Solicitation to trade is neither intended by the contents. In the meantime, the discussion of occasional positioning on particular issues are opinions of this author. 

Robinsons Land’s 2022 Record Revenues and Income Bolstered Mainly by Consumer Credit Expansion

 

The world is full of foolish gamblers, and they will not do as well as the patient investor—Warren Buffett 

Robinsons Land’s 2022 Record Revenues and Income Bolstered Mainly by Consumer Credit Expansion 

 

What is the common denominator of Robinsons Land revenues, Robinsons Retail Sales, and the CPI? Answer: Consumer Credit. 

 

Bank Consumer Credit Powered 2022 Robinsons Retail Sales, Robinsons Land Revenues and the CPI 

 

"The whole is greater than the sum of its parts," the great Greek Philosopher Aristotle pointed out. 

 

Figure 1 

The 2022 annual performance of Robinsons Land [PSE: RLC], along with its sister retail chain, Robinsons Retail [PSE: RRHI], gives us a clue of the conditions of the real estate industry and consumers. 

 

A quick glimpse of their topline reveals that the 2022 consumer borrowing boom, primarily credit cards (+26.32%), financed consumer purchases.  

 

The rapid (+16.63%) sales growth of RRHI manifested part of this teeming consumer activity.  And the bristling retail sales coaxed entrepreneurs to take up more spaces at their RLC's malls, which spiked rental revenue growth by 42%. (Figure 1, topmost chart) 

 

Since the oscillations of all three factors—CPI, RRHI sales, and RLC rental revenues—have chimed since 2017, it implies an interrelationship—again, consumer spending fueled by intensified borrowing. (Figure 1, middle window) 

 

Meanwhile, the rental segments' profit margins have reverberated with the CPI growth today and in the 2017-2018 episode. (Figure 1, lowest diagram) 

 

Real Estate Sales: Bigger Share as Profit Margins Plummeted 

 

Manila Times, March 11: ROBINSONS Land Corp. (RLC) on Friday said it had posted record growth in 2022, exceeding pre-pandemic results following robust results across all business segments. Net income attributable to the parent company rose by 21 percent to P9.75 billion compared to 2021, and the result was also 12 percent higher than in 2019, the firm said in a disclosure. The Gokongwei-led firm's consolidated revenues totaled P45.51 billion, up 25 percent from 2021 due to sales recognition of residential projects, leasing activities and mall consumption recovery. 

 

Figure 2 

 

Nobody seems to question how the breakthrough in revenue and income ever occurs. (Figure 2, highest pane) It is all assumed as positive. The question is: are current developments sustainable? 

 

Unlike rents, real estate revenues generated marginal growth of 5.7% in 2022 to Php 20.104 billion.  Yes, in peso, it was also a record high.  But the growth rate has slowed from 60.5% and 31.3% in 2021 and 2020—the pandemic era.  (Figure 2, middle chart) 

 

The sector's % share of total revenues dropped from a high of 52.05% to 44.2% in 2021 but remained substantially higher compared to the pre-pandemic era.   

 

Having been prompted by the unmatched low-interest rate regime, many diverted savings toward real estate speculations during the pandemic. 

 

And due to rising costs, profit margins have plunged in the last two years.  That is to say, while real estate sales continue to grab a bigger segment of RLC's revenues, rising costs have compressed its margins.  (Figure 2, lowest window) 

 

Or, the RLC's record income was primarily a product of its rental business—dependent on consumer credit.  

 

Of course, the other contributors that helped boost the topline were the spillover effect of public spending and a small piece or a minor part of it, productivity gains. 

 

How will Robinsons Land’s Real Estate and Rental Business Fare with Higher Rates? 

 

Interestingly, the real estate GDP and bank loans seemingly echo RLC's operations.   

Figure 3 

 

As it is, seen from a macro dimension, the real estate GDP pie has been in a downtrend even as the share of bank loans remains close to the pinnacle—suggesting lower economic value added as leverage mounts. (Figure 3, upper chart) 

 

From RLC's perspective, debt grew 8.8% to Php 51.16 billion to approach its 2020 record of Php 53.6 billion even as the segment’s margins declined.  

 

That is, the economic value added for RLC from its Real Estate business resonates with the GDP—the segment is plagued by diminishing returns.

 

In the meantime, despite rising rates, RLC's interest rate expense slid 22% to a 2019 level of Php 1.23 billion.  (Figure 3, lower chart) The BSP's rate hikes have barely percolated into this segment. 

Figure 4 

 

Also, the growth slowdown in the BSP's consumer bank real estate borrowing appears to resonate with RLC's YoY decelerating sales growth. (Figure 4, upper window) 

 

So, aside from higher input costs, will higher BSP rates and increasing debt levels erode further the RLC's profit margins via the interest expense channel? (Figure 4, lower graph) 

 

And will mounting debt loads and or higher rates also scrape on consumer borrowing, which should impact adversely the retail chain sales and the FOMO in the rental occupancy?  Will the shopping mall and real estate industry see the same dynamic unfold?

 

And so, everyone's hope or bet is to see inflation and rates fall—The return of the easy money era. 

And that should make 2H 2023 fascinating.