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Continuing our reading of internal RBA documents under FOI requests, we come across a warning.

Internal simulations conducted by RBA’s boffins suggested that returning inflation to target ‘could involve significant job losses even when monetary policy responds to developments’.

That’s not good.

If ever there was a circumstance for macroeconomic modelling to live up to its infamy, that would be it.

For a long time I didn’t know you can lodge freedom of information requests with the Reserve Bank of Australia.

I also didn’t know the RBA discloses these requests in a FOI disclosure log!

Yesterday, two such requests were released by the RBA.

One — bureaucratically titled RBAFOI-222342 — concerned the ‘analysis or other research by the Reserve Bank on scenarios or modeling for a recession or severe economic downturn in Australia as a result of the monetary policy tightening cycle’.

These documents dated since the 1st of May, 2022. What did they reveal? (By the way, you can read the full disclosure here).

The most interesting disclosures centred on a discussion of the likelihood of recession in Australia.

A lot of the discussion was technical and underwrites just how abstruse economic modeling is these days:

Source: RBA

Internal exchanges among RBA economists suggested risk of recession was high:

‘While the general view among private sector economists and financial markets is that recession in Australia is unlikely, it is nonetheless an important question to explore analytically. I assess the likelihood of a recession in Australia in the short term using two methods. Stochastic simulations using the MARTIN model and the August SMP forecasts suggest that there is a one in two chance Australia ends up on the ‘narrow path’ – where inflation returns to target without requiring a recession. In contrast, a probit model that incorporates longer‐run historical data estimates recession risk to be much higher, at 65 to 80 per cent. While the median unemployment outcomes in this exercise are only modestly above the central forecast, large changes in the cash rate (as now) appear to greatly increase recession risk.’

These internal memos included some interesting information on finding practicable definitions of recessions. For instance, did you know about the Sahm Rule?

‘The colloquial definition of a recession is two quarters of negative real GDP growth. The usefulness of this definition to policymakers is limited by the lags involved in National Account statistics. Plus, such technical recessions have been rare in recent Australian economic history.

‘A simple and timely alternative is the Sahm Rule, which signals a recession whenever the quarterly unemployment rate increases by ¾ percentage point or more above its minimum over the last 12 months (see & Rosewall (2020) for more). This has the benefit of capturing periods where unemployment was rising and GDP growth was low, but not persistently negative. In the US, the Sahm Rule has coincided with all NBER-defined recessions, but identified them more quickly.’

Applying the Sahm Rule yields ‘more recessions than under the technical definition, particularly in recent decades’.

Source: RBA

RBA’s internal modelling also addressed the likelihood of inflation coming down and Australia avoiding recession. The modelling showed:

‘How likely is it that inflation comes down and we avoid a recession? Across both sets of simulations, this joint probability is around 25 per cent for each inflation outcome. Adding these together, the likelihood of ending up on the ‘narrow path’ is around one in two. Allowing policy to respond increases this probability modestly, both because policymakers can tighten more aggressively to combat inflation and because they can cut rates to avoid a recession, when required.’

It’s been a frenetic couple of days for Australia’s energy future.

Things kicked off with the 2023 budget and Labor’s new $2 billion hydrogen fund. It’s a policy that’s small, but an important step toward further developing a localised hydrogen economy.

We’re sure Andrew Forrest, with all his hydrogen ambitions, is happy with that.

Then there was Dutton’s budget response, once again pushing for a new nuclear agenda in Australia — a push that seems to finally be lifting the taboo nature of the topic.

Whether we’ll ever see a proper nuclear option on the table still seems like a pipedream…but at least the discussion is being had.

And then there’s the mega-merger between lithium miner Allkem and lithium processor Livent. With a $15.7 billion valuation, it will make this corporation the third-largest lithium producer in the world.

Three very different developments for three competing energy solutions.

So, should you be jumping back into lithium stocks?

Maybe take a chance on uranium miners again?

Or bet the house on the few hydrogen plays available on the ASX?

You certainly could. Or you could choose to invest in the one material that is imperative to all three…

More solutions means more copper

As I mentioned yesterday, copper is still king when it comes to metals.

This common but important material is quickly becoming a scarcer resource than most realise. That’s because demand is not only picking up from sectors like new and renewable energy, but also due to waning supply.

Bloomberg covered the situation pretty succinctly last week, talking to several copper insiders. As one independent geologist put it:

‘There’s no way we can supply the amount of copper in the next 10 years to drive the energy transition and carbon zero. It’s not going to happen,

‘There’s just not enough copper deposits being found or developed.’

This is why Bloomberg estimates demand for copper will outstrip supply. By 2040, they expect to see a 53% increase in the need for refined copper, whilst we’ll only see a 16% improvement in mine supply.

In other words, there is a huge shortfall that is inevitably going to push up prices.

Worse still, the few new mines that are planned are taking longer than ever to bring online. As Bloomberg reports again, the average development time is now more than 10 years:

Source: Bloomberg

All these factors should stress to you just how dire this situation is.

Because as our own ex-geologist and commodities expert, James Cooper, is telling people: copper is the sector to invest in right now.

No metal is more important and more at risk of a shortage than it currently.

https://www.moneymorning.com.au/20230512/debate-over-australias-energy-future-continues-but-copper-connects-all.html

Almond producer Select Harvests (ASX:SHV) is now expecting lower crop volume than previously forecast due to lower orchard yield and crack-out rates (good kernel to waste differential).

2023 volume is expected to be 17,500MT, down from 29,000MT in 2022 and 28,250MT in 2021.

Why is 2023 shaping up to be a bad year for yields and crack-out rates?

Select Harvests pointed to cold and wet weather causing ‘unusual growing patterns’.

That said, some relief will come from the fact crop performance is ‘consistent with the broader Australian almond community’. It’s not just us, guys!

Managing director David Surveyor (perfect surname for an executive) said:

‘Assuming a return to more normal weather conditions we expect yields for the 2024 crop to bounce back to 2021/2022 levels (or better given the maturity profile of our trees). Assuming the status quo on almond and water prices, we expect a return to profitability.

‘We expect the financial impact of the volume downgrade is likely to be partly offset by recent increases in almond prices, from increasing world demand and an expected below average 2023 US crop, however, our focus now is firmly on our 2024 crop and returning to normal yields.’

For the almond latte drinkers of Australia, what will the lower crop volumes mean for almond milk prices over the coming months?

Surveyor didn’t say.

How are people engaging with News Corp’s (ASX:NWS) subscription services?

Streaming seems to be the future for News Corp’s subscription video segment as residential broadcast subscribers continue to decline.

Binge now has more subscribers than residential broadcast subscribers.

At the end of March, Foxtel’s total closing paid subscribers numbered at 4.5 million, up 6% year on year, mainly thanks to Binge and Kayo.

NWS said subscriber churn in the quarter shrank from 14.3% to 12.3%, the lowest level since FY16.

Source: News Corp

Here is the segment breakdown from a year earlier.

Source: News Corp

News Corp (ASX:NWS) saw total revenue fall 2% in the March quarter to $2.4 billion and EBITDA slide 11% to $320 million.

The Dow Jones was the outlier business segment — the only one to grow revenue and earnings.

Dow Jones revenue rose 9% to $529 million, with earnings rising 24% to $109 million.

Unsurprisingly, News Corp’s digital real estate services arm suffered the most in the quarter. Revenue was down 13% to $363 million while EBITDA fell 26% to $102 million due to ‘challenging housing market conditions in the US and Australia’.

All up, News Corp’s net income fell 43% to $59 million, driven by lower total segment EBITDA, higher depreciation charges, and higher losses from equity affiliates.

$NWS segment breakdown for the March quarter.

Dow Jones was News Corp's only segment to report EBITDA growth, with Digital Real Estate Services hardest hit. $NWS.AX #ASX pic.twitter.com/1Fn27yOzke

— Fat Tail Daily (@FatTailDaily) May 12, 2023

Ardent Leisure (ASX:ALG) — operator of leisure assets like Dreamworld, WhiteWater World and SKyPoint — is down over 10% at the open after a dour trading update due to a ‘slowdown in activity reported by some consumer discretionary businesses’.

It seems the Reserve Bank’s tightening is working in a way Ardent Leisure management wouldn’t appreciate.

ALG said year on year growth moderated in the second half of fiscal 2023, for several reasons:

‘As anticipated, year-on-year growth has moderated in 2H23 due to the business cycling an unimpeded 2H22 comparative period1, including its busiest Easter period for several years, combined with a reduction in consumer spending associated with the current macroeconomic environment (high inflation, rising interest rates and recession fears).’

Ardent Leisure’s theme parks & attractions business posted positive EBITDA in 1H23 of $4.3 million (excluding specific items) for the first time in six years.

But while ALG ‘continued to deliver a positive EBITDA (excluding specific items) for both the third quarter and April 2023’, this came ‘at more subdued levels’.

These subdued levels were not quantified.

Ardent Leisure pointed out current economic conditions are ‘episodic and not emblematic of the leisure industry’ and will use its $145.4 million cash balance to ‘heavily reinvest in the business’.

Anyone looking beyond the current macro concerns knows that there are even darker clouds brewing. Because while inflation and potential recessions are certainly important, long-term availability of key materials may be the real concern for the coming decades.

And it’s not just about the obscure metals most people have never heard of…

Back in March, the EU put forward some eye-opening legislation.

You see, like other nations — and particularly the US — it had a classification of ‘critical minerals’. A list that detailed a bunch of typically niche materials that are becoming harder and harder to source from reliable suppliers. In other words, metals that could be largely provided by nations other than China.

But in March, the EU did something unexpected by adding copper and nickel to this list. Because despite being relatively abundant base metals, it became clear to policymakers that demand is likely to outstrip supply.

As Bloomberg reported:

‘The new Critical Raw Materials Act — presented to lawmakers on Thursday [16 March] — could open the door to expedited permitting and financing of copper and nickel mining projects in the EU, as the bloc looks to boost domestic production and ease reliance on imports.

‘Copper, one of the largest industrial-metal markets, wasn’t included in the EU’s last list of critical raw materials published in 2020. Copper’s diverse uses in manufacturing, construction and industry mean it’s widely viewed as a bellwether for global economic activity, but surging usage in electric vehicles and renewables are fueling fears of deep shortages in years to come.’

In other words, Europe is worried that global supply won’t be able to keep up with demand. So, to get ahead of this shortfall, they’re trying to expedite local mining projects.

And you know what, they were right…

The latest data from the International Copper Study Group (ICSG) says there will be a 114,000-tonne shortfall of copper by the end of this year — an improvement over the 431,000-tonne deficit of last year at least, but nowhere close to the surplus that the ICSG had predicted back in October.

The problem isn’t limited to Europe…

A copper shortage would hit almost every major economy…and hard. Because as anyone familiar with the metal can tell you, it’s incredibly vital for a lot of modern industrialisation. Its conductive properties alone make it an imperative resource for many sectors.

The problem is, we’re all at risk of this copper shortage.

As James Cooper has been telling any investor who will listen, the world has just four days of this vital metal stockpiled at any given time. With demand rising and supply failing to catch up, it has all the makings of a classic commodity price explosion.

Which is why, as an investor, you need to be paying attention to this market.

https://www.moneymorning.com.au/20230511/from-surplus-to-shortage-copper-is-king.html