Reader Response on Chile and Oil

Rob Mackrill - Fri 28 Mar, 2008

Almost 60% of Chile’s exports are copper and its stock market has not escaped the global downturn.

Online stockbroker TD Waterhouse says customers “go for gold”…

Investors have fled the banking sector and commodity plays BHP Billiton and Randgold Resources have been among the beneficiaries.

A less welcome consequence of the soaring gold price makes the front page of newspaper The Chiswick...

Hounslow police have noticed a new trend. Burglars read the news too. “Asian families are being targeted” warns the headline, as house break-ins have ignored more commonplace items and gone for gold jewellery.

As Detective Sergeant Kevin Martin notes, it’s a good deal easier for burglars to shove jewellery in their pocket than a 40” flat-screen TV. Okay, I think we can picture that one. If the gold price eventually reaches its inflation adjusted high at more than twice its present level, the local force is going to have its hands full.

Back at DR HQ, colleague Warren Green passes on reader feedback on a couple of topics of interest...

“Anyone know about Chilean stock market? Chile has an abundance of natural resources: wood, copper, etc. And the stock market there keeps going up.”

Well, we did a little homework. The Santiago de Chile stock exchange got going back in 1884, says its website. The main index recorded by Bloomberg is the IGPA Industrials (Indice Generale de Precios de Acciones) which comprises most of the companies traded on the Santiago stock exchange (138 by our count) and dates back to 1980. From this we can see that far from “keeping going up”, it too has feet of clay. The bull market in recent years has been strong but came to an end in late 2007 when it hit a high in late October. It’s currently around 13,400 down from a high of 15,600 - about a 14% fall from the top.

As countries go, Chile is a particularly strange shape. Its land mass resembles an anorexic that’s been brutally stretched on a rack – around 2,700 miles long and an average of 110 miles wide. What does Chile export to the world? Copper mainly, and nitrates sourced from the Atacama Desert in the north. In 2006 total exports amounted to $58bn of which copper accounted for more than half at $33bn. The south is rich in forests producing pulp and paper and providing grazing land. Other exports include fruit, fish, chemicals and wine.

So the fate of Chile and copper are intertwined. To invest in Chile it’s worth thinking about the prospects for copper. Bar an old-style military coup, copper going up should be good news for the economy. Copper recently made an all time high in the face of slowing global growth, but the market has still gone down. Which just goes to show there’s more to it than our simplistic rationale. The ripples from the credit crunch flow to all corners.

Still, if you like the idea how does a UK investor access Chile? Well, Chilean copper miner Antofagasta Plc. is listed on the FTSE and also has rail and water interests. Buying direct into IPSA stocks may be possible via a stockbroker, but expect to pay for the privilege. Easier ways in can be gained through a fund investing the region. For UK investors for example, there is one specialist Chile fund run by Credit Suisse we’ve uncovered - an investment trust. More widespread exposure to the region can be gained by more generic Latin American funds, both unit trusts and investment trusts.

Another reader comment hits on someone we like a lot here. Texan oilman Matt Simmons...

“I am an avid reader on another free site, on oil by Mr Simmons, the chances he is right are rather high. His commentary is from a technical background on oil, not financial.”

What will he be right about? Well in addition to the interesting information on his website, Simmons’s book Twilight in the Desert is well worth the time, though quite technical it gets a powerful message across about its main subject: Saudi Arabia.

It’s no news the Saudis are the big daddy of the oil patch. In 2006, they accounted for over 13% of global production, producing 10.8m barrels per day according to the BP Statistical Review. The bulk of that total comes from one giant field – Ghawar. Yet, says Simmons, it’s been pretty much a closed shop since the West got booted out and the Saudis started running their oil business under the state-owned, Saudi Aramco. With independent external verification, he joins the dots of technical reports over time and concludes it may not be able to increase production as expected in future. Worse, one day it soon maybe it will start to run out. An accusation denied by the Saudis. He adds too, in spite of intensive efforts, there have been no major new discoveries in other parts of the country. We’ve heard from one oil industry source that the water content from Saudi oil has been on the increase. A sign that oil production is falling. More broadly, of course, with crude at $100 plus, Peak Oil theory is a hot topic, hence the link.

*** Alistair Darling may be trying to simplify tax but the tax code is longer now than ever. It now runs to 10,200 pages, says Paul Stainforth of LexisNexis publisher of the accountant’s bible, Tolley’s Tax Guide. The additional 421 pages this year are the result of a “raft of anti-avoidance” legislation. It’s going to get longer still in future due to a Tax Law Rewrite Project. This will make the legislation easier to understand but do nothing to counter the complexity. Tax doesn’t have to be taxing. Yeah, right.

*** Another downer for the housing market. House prices fell 0.6% in March and increased only 1.1% over the past year, says the Nationwide building society. This is as it and the Halifax shut the door to all but the most creditworthy mortgage customers by upping their rates to new borrowers.

On these numbers, with CPI at 2.5% and rising and RPI at 4.1%, house prices are losing value in real terms. Still, it’s a home first, right?

Regards,

Rob Mackrill
The Daily Reckoning