One of the bigger worries continues to be the global economy.  The chart below shows the PMI (Purchasing Managers Index) for global manufacturing.  A number below indicates expansion while numbers below 50 generally indicate growth of 2% or less.  While we are seeing nothing like the economic collapse in 2008, the numbers have been either side of 50 for most of the past year with a bias to the downside.  The PMIs in the U.S. and China have turned up recently while Europe seems stuck down in the 45 range (which indicates recession).

Manufacturing Uncertainty

We continue to believe that investors are under-estimating the importance of the recovery in the U.S. housing market to both U.S. and global economic growth.  Moving from annualized starts of 500,000 homes to the 800,000 range and a projected level of over 1 million in 2013 will bring growth back to many ancillary businesses, including retail, construction, services and finance.  The U.S. remains the world’s largest economy so that any improvement there will have positive ‘knock on’ effects for the rest of the world, particularly Canada.

China is the other big unknown.  While that economy continues to slow down, it is still growing at close to an 8% annual rate and is about to inaugurate new leadership and a new 5-Year Plan that will most likely include some additional stimulus to make sure the domestic economy doesn’t slow down any further.  We think that we are already seeing stabilization and improvement in the Chinese economic numbers.  While 3rd quarter growth, at 7.4%, was the lowest since 2008, the monthly data last quarter showed strong sequential improvement.  The table below shows recent monthly data for the PMI, Retail Sales and other key indicators.  Basically all of them showed strong improvement throughout the quarter, suggesting that the Chinese economy entered the 4th quarter on much stronger footing.

Monthly Data (% Change)

July/12

August/12

Sept/12
Flash ISM Manufacturing Index

47.5

47.9

49.1
Retail Sales

0.9

1.5

2.3
Industrial Production

0.2

0.5

1.1
Export Growth

-5.5

3.3

2.1
Rail Freight

-5.7

0.8

2.9

Freeport-McMoran, the biggest publicly traded copper producer, supported the positive view on China in their 3rd quarter earnings report.  They said demand in China is being sustained even amid concerns that purchases by the second-largest economy may be slowing.  The CEO commented, “presently we’re not seeing physical evidence of a significant change.  Sentiment has certainly changed and the concerns about China both within the country and from outside observers are changing but China continues to consume significant copper.  There are questions about the Chinese economy but the continued investment into infrastructure projects is very positive for copper demand.  It’s inevitable the country will announce additional stimulus boosting demand.”

One of the tougher commodity calls lately has been Uranium.  The nuclear disaster at Fukishima in March of 2011 lead to the cancellation of many new reactors, most notably by the Germans and Japanese.  Uranium prices crashed from over US$70 per pound to under US$40 before recovering to US$54 late last year.  The price has drifted lower again in 2012 despite plans in Japan to re-start some facilities and a push-back in the shut-down of all German reactors to 2022 from 2017.  The big growth in reactors though is expected to come from China, which has 14 reactors on line now, 26 more under construction, 51 more ‘planned’ and 120 more ‘proposed,’ as part of its drive to move away from polluting fossil fuels.  China represents the last frontier of growth for nuclear power in the world, especially after the Fukushima disaster.  Because China is such a big, vast nation even a goal of a small portion of their energy demand could mean substantial growth for their nuclear power industry.  Last week, China announced it will approve small number of nuclear projects along its coast by 2015 and says it wants to steadily resume normal construction of nuclear power facilities.  Bottom-line: China definitively saying it will go forward with nuclear plans provides a huge and much needed boost to the uranium trade.  The most direct play on Uranium is through Uranium Participation Corp (listed as U on the TSX).  At the current price of $5 per share it is reflecting a Uranium price of US$34 per pound, about 20% below the spot price of $43 per pound.  Direct plays on the companies mining Uranium include Cameco, the world’s largest producer with mines primarily in Canada, and Uranium One, a Canadian-based company with key mines in Kazakhstan, South Africa, Austrailia and the U.S.  While Uranium prices have softened this year, we still like the outlook for the commodity and the stocks mentioned above.

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