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Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer.

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Sean Aylmer: It's hard to know what to make of the resources

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Sean Aylmer: sector at the moment. Iron ore has boomed over the

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Sean Aylmer: last 18 months, hitting a record high of around US$230

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Sean Aylmer: a ton, benefiting both the big miners and the national economy. But,

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Sean Aylmer: it's fallen sharply in recent weeks to below US$100 a ton,

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Sean Aylmer: before climbing back again in recent days. But the miners,

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Sean Aylmer: from Fortescue to BHP, have all taken a hit. Strange

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Sean Aylmer: things are happening to gold stocks as well. The price

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Sean Aylmer: of the precious metal itself has come off a bit recently,

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Sean Aylmer: but the gold stocks have fallen much further. I wanted

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Sean Aylmer: to see if we could make some sense of it all.

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Sean Aylmer: Evan Lucas is the Chief Market Strategist at InvestSMART. Evan,

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Sean Aylmer: welcome to Fear and Greed.

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Evan Lucas: Hello, Sean.  How  are  you?

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Sean Aylmer: I'm well. Now, let's start with iron ore. BHP, Rio, Fortescue,

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Sean Aylmer: they've all benefited enormously from high iron ore prices as

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Sean Aylmer: has the national economy and the budget bottom line. Of course,

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Sean Aylmer: iron ore has fallen off a cliff in recent weeks.

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Sean Aylmer: How do you see this playing out?

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Evan Lucas: Yes, but it's fallen off a cliff to what is still,

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Evan Lucas: I would consider, slightly abnormal prices in this point in

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Evan Lucas: the cycle. So, I think this is what we need

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Evan Lucas: to remember here when we talk about iron ore is

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Evan Lucas: that what has happened during the pandemic is abnormal. The

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Evan Lucas: price of iron ore is abnormal, and that needs to

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Evan Lucas: be your start point from this. Iron ore will still

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Evan Lucas: be a commodity that everybody needs for, not only the

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Evan Lucas: foreseeable future, but forever, if you know what I mean.

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Evan Lucas: Steel is still going to be one of the best

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Evan Lucas: construction products on the planet. It will still be required

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Evan Lucas: to do many, many, many things. The question that you're

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Evan Lucas: asking though is, "How sustainable is it?" And talking about the US$230

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Evan Lucas: a ton, and even now, sitting here and talking about

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Evan Lucas: US$100 to US$120 a ton, what does that mean? What are we

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Evan Lucas: doing here? And I think you need to look at the cycles of iron

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Evan Lucas: ore over the last 30 years, and you therefore, do need to

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Evan Lucas: have a pretty good understanding and looking at what China

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Evan Lucas: is and where China sits in that story. Because I

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Evan Lucas: think that's all part of this answer, because it's a very,

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Evan Lucas: very big question. Why I say that is, China is

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Evan Lucas: and has been slowing down since 2013 on the construction side. 29%

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Evan Lucas: of their GDP is based on real estate and based

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Evan Lucas: on construction, and for the last five years under Xi,

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Evan Lucas: that has been starting to be cracked down on. Regulation

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Evan Lucas: is certainly picking up, and all those kind of things. So, we'll talk

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Evan Lucas: about that in a minute. So getting back to your question about

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Evan Lucas: what is going on and how do I see it...

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Evan Lucas: I actually truly believe that a fair price for iron ore

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Evan Lucas: is probably more along the lines of about US$60 to US$80 a ton,

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Evan Lucas: on average. And I think that's how you should be

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Evan Lucas: thinking in terms of where it is, because that is

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Evan Lucas: where the aggregate demand over the next 10, 15, 20 years is

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Evan Lucas: likely to sit.

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Sean Aylmer: Okay. And that's what the federal budget actually estimates the price of iron

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Sean Aylmer: ore should be, was US$55. I think it's gone up

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Sean Aylmer: a little bit since then.

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Evan Lucas: It  has,  yeah.

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Sean Aylmer: Right.  So  in  actual  fact,  the  price  is  relatively  high 

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Sean Aylmer: still,  if  you  take  the  long- term  look  at  it.

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Evan Lucas: Yes.  And  again,  that's  not  a  bad  thing.  What  I'm 

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Evan Lucas: trying  to  say  to  you  about  that  is  that  iron 

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Evan Lucas: ore  is  not  the  only  thing  that  we,  in  Australia, 

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Evan Lucas: should  be  thinking  about.  It  will  moderate  back.  It  is 

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Evan Lucas: dominated,  because  it  is  our  largest  export  by  value.  I 

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Evan Lucas: mean,  when  you  are  generating  a  190  million  tons  for 

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Evan Lucas: FMG,  and  well and truly into  300's  for  BHP  and  Rio,  and  then 

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Evan Lucas: you've  got  also  an  Aussie  dollar  that  is  near  enough 

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Evan Lucas: to  70  to  75  cents  on  the  dollar,  all of  those 

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Evan Lucas: things  make  that  number  look  incredible.  And  that's  what  you 

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Evan Lucas: talked  about  with  the  budget.  It  makes  the  economy  incredibly 

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Evan Lucas: powerful,  but  in  terms  of  what  it  is,  it  needs 

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Evan Lucas: to  be  thought  of  as  a  pool  of  our  overall 

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Evan Lucas: portfolio  in  this  country,  and  I  think  that  is  what 

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Evan Lucas: we're  now  starting  to  see.
 I  think  COVID  has  been 

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Evan Lucas: the  most  incredible  acceleration  of  economic  change  that  you  and I have 

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Evan Lucas: seen  in  our  lifetime,  and  I  think  it's  an  amazing 

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Evan Lucas: thing.  It's  actually  a  really  good  thing  because  it's  actually... 

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Evan Lucas: We  keep  talking  about  the  great  reset,  which  we  heard 

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Evan Lucas: last  year.  You  haven't  had  really  heard  it  this  year, but there's been 

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Evan Lucas: this  great  reset.  I  look  at  that  from  the  point 

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Evan Lucas: of  view,  not  from  government,  but  from  the  point  of 

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Evan Lucas: view  that  innovation  and  development  has  been  accelerated  rapidly  and 

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Evan Lucas: people  are  now  openly  expressing  the  views  about  where  they 

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Evan Lucas: see  the  next  50  years,  which  they  probably  weren't  doing  pre- pandemic.

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Sean Aylmer: Yeah.  Yeah.  Does  it  all  hinge  on  China?  And  just 

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Sean Aylmer: keep  in  mind,  I  suppose,  India,  for  example,  Modi  has-

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Evan Lucas: Bingo.

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Sean Aylmer: ...  incredibly  huge  infrastructure  spends.  Trillions  of  US  dollars,  literally.

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Evan Lucas: Yeah.

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Sean Aylmer: It  seems  like  a  big  world  out  there  for  Australia, 

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Sean Aylmer: for  iron  ore  particularly.

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Evan Lucas: Yeah, it does, and I'm so glad you highlighted India. I

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Evan Lucas: think also the other thing that this pivot, as I

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Evan Lucas: refer to it, has been going on for about 10 years.

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Evan Lucas: I mean, if you can remember back in, I think

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Evan Lucas: it was about 2013-14, pretty much at the end of

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Evan Lucas: Glenn Steven's tenure as RBA Chairperson, he stood up there

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Evan Lucas: and said very clearly, "Are we ready, and are we

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Evan Lucas: mature enough, to look to India as our future? Because

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Evan Lucas: it is." And not only that, the sub-continent and Southeast

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Evan Lucas: Asia has always been there, but they have those growth

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Evan Lucas: stories to really start targeting in. And in India, we're

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Evan Lucas: talking about 1.1, 1. 2 billion people. China is 1.3 to 1.4 billion people. And

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Evan Lucas: you would argue that China is probably about 15 to

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Evan Lucas: 20 years ahead of India in terms of their growth

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Evan Lucas: profile and that economic build- out that you're referring to there, Sean.

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Evan Lucas: So India, in terms of our next base now, again, the other

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Evan Lucas: argument comes though with India and the China story is

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Evan Lucas: that India tends to get its steel from China. So

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Evan Lucas: we still send our iron ore to China, it gets

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Evan Lucas: refined in China and then it gets sent to India. Is there

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Evan Lucas: an ability to actually get smelting and get that kind

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Evan Lucas: of material done and dusted in India rather than getting

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Evan Lucas: it done through China to have that direct link? That

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Evan Lucas: will be part of Modi's story and part of what

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Evan Lucas: he's trying to pitch. But we are coming up into

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Evan Lucas: a period also where the word clean energy and clean

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Evan Lucas: environment also starts to get in the way. So what

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Evan Lucas: China could do through the '90s and the early 2000s may be a

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Evan Lucas: harder story to do for India in the 2020s, '30s, '40s, and '50s.

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Sean Aylmer: Okay.  Evan,  stay  with  me.  We'll  be  back  in  a 

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Sean Aylmer: minute.


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Sean Aylmer: I'm  speaking  to  Evan  Lucas,  Chief  Market  Strategist  at  InvestSMART. 

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Sean Aylmer: Let's  move  on to    gold.  Gold  confuses  me  a  little  bit.

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Evan Lucas: Confuses  everybody.

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Sean Aylmer: Right! Throughout the uncertainty, the gold price has been steady, or

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Sean Aylmer: actually fallen, it's down around US$1,750-$1,760 US ounce, down from above US$1,800.

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Sean Aylmer: The gold companies haven't done so well; Newcrest, Northern Star, Ramelius.

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Sean Aylmer: Some of these sorts of stocks had really fallen. I

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Sean Aylmer: don't quite understand gold at the moment.

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Evan Lucas: I haven't understood... And I'm going to put my hand up and say this; I

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Evan Lucas: don't understand gold for the last sort of 10 years. And the

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Evan Lucas: reason I say that, is it a store of value?

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Evan Lucas: Is it a hedge against inflation? Is it a trade

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Evan Lucas: against US treasuries? All of the stuff you learned at university:

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Evan Lucas: what is gold in terms of what it is? Is

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Evan Lucas: it also, again talking about the two countries we've just been

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Evan Lucas: speaking about quite strongly, which is China, India, the two

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Evan Lucas: largest contributors of physical gold out there in terms of

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Evan Lucas: what they do. Is it driven by that? Is it

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Evan Lucas: driven by paper trading? And what's going on with regards

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Evan Lucas: to the rise of ETFs (Exchange Traded Funds) and using gold, of all that kind of thing.

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Evan Lucas: So there's so many inputs into gold over the last

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Evan Lucas: 10 years, that the original idea of what gold was

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Evan Lucas: has very much been diluted. Then there are also people

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Evan Lucas: that are trying to compare gold with cryptocurrency, and that

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Evan Lucas: is a whole another discussion. So let's look at it.

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Evan Lucas: Gold is still a very, very useful commodity. It is

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Evan Lucas: used a lot in tech and let's also be aware

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Evan Lucas: that tech is the future. The use of gold leafing

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Evan Lucas: and gold welding, et cetera, is the majority of what

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Evan Lucas: it's used for. So there is always going to be

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Evan Lucas: a need for it. The other thing you've got to

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Evan Lucas: probably look at with gold over the last two years

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Evan Lucas: is that again, the pandemic has played out into it.

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Evan Lucas: It made a record all- time high in, I think it

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Evan Lucas: was April last year where it punched through US$2,300 an ounce.

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Evan Lucas: And that was extraordinary. And I remember standing up going, "Guys,

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Evan Lucas: remember what happened in 2011?" when gold got to basically

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Evan Lucas: just shy of US$1,700 or just on US$1,700 US an ounce.

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Evan Lucas: It fell US$800 in the proceeding seven months. So gold

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Evan Lucas: also isn't as "risk-free" as it once upon a time was.

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Evan Lucas: So that is why I find gold hard. Then you've

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Evan Lucas: got the added benefit of looking at gold miners, and

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Evan Lucas: then you have structural issues inside it. So Newcrest and

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Evan Lucas: probably Northern Star, from my point of view, are slightly different.

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Evan Lucas: They're obviously well- developed, they are tier one gold mining products,

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Evan Lucas: so they are a bit more sustainable. But then when you

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Evan Lucas: start looking at the juniors, they have structural, stock specific,

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Evan Lucas: company specific issues coupled with what is now a very,

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Evan Lucas: very volatile, in my words, commodity. I think also then

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Evan Lucas: once you start looking at those individual stocks, if you

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Evan Lucas: can tie copper to them, then there's also a level

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Evan Lucas: of stability rather than just being a pure gold play.

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Sean Aylmer: Okay.  So  let's  move  on  to some of  the  more  energy  based 

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Sean Aylmer: companies.  You  think  of  oil  prices at  the  moment,  gas  prices 

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Sean Aylmer: at  the  moment,  coal  prices  at  the  moment,  yet  the 

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Sean Aylmer: stocks  aren't  rising  anywhere  near  as  much  as the  price  of 

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Sean Aylmer: the  commodity  itself.  Presumably  that's  around  the  fact  that  people 

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Sean Aylmer: are  just  scared  about  getting  into  fossil  fuels.

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Evan Lucas: Yeah. And I think that's the answer. So we are, actually technically, in

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Evan Lucas: one of the strongest bull markets oil's ever seen right now.

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Evan Lucas: And that is astounding. I mean, don't forget at the

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Evan Lucas: end of the April contract last year, there were settlements

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Evan Lucas: in that April contract that were actually negative, which means

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Evan Lucas: that the oil companies paid people to accept their oil.

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Evan Lucas: So we were coming from not just a low base,

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Evan Lucas: we're talking about through the floor and underneath it in

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Evan Lucas: terms of where we are now, sitting at between US$64 about

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Evan Lucas: if you look at WTI (West Texas Intermediate) or even as high as

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Evan Lucas: US$79 to US$80 US a barrel for Brent. So that

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Evan Lucas: is an incredible acceleration and movement. There is also big

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Evan Lucas: arguments being made by some really big investment houses. Goldman

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Evan Lucas: Sachs is one of them Morgan Stanley as well, that

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Evan Lucas: we now are actually possibly in a really strong and very,

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Evan Lucas: very solid cyclical bull market inside oil. So that is

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Evan Lucas: the here and now story though. And I think that's

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Evan Lucas: the other part to answer your question is that the

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Evan Lucas: here and now story versus as you highlighted, not just

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Evan Lucas: fossil fuel, but the energy mix over the next 10,

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Evan Lucas: 15, 20 years is not that story. And I think you

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Evan Lucas: need to highlight, and the best one I've ever heard

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Evan Lucas: about doing this is... I remember going and I've been

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Evan Lucas: to it three times... Shell are always very, very strong

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Evan Lucas: on the front foot when they do their presentations from

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Evan Lucas: their executive leadership team. And in 2011, they were forecasting that

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Evan Lucas: the peak of oil as the main consumption in the

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Evan Lucas: world as our primary source of energy would probably finish

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Evan Lucas: in 2035. Last year, they brought that forward to 2025.

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Evan Lucas: So when you've got the top two largest energy provider

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Evan Lucas: on the planet telling you that their product is coming

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Evan Lucas: to an end... Not to an end, but will no

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Evan Lucas: longer be the main use of energy in the planet.

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Evan Lucas: That is the signal. And I think, again, let's talk

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Evan Lucas: about BHP because you spoke about that at the start of the podcast. There is

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Evan Lucas: an absolute underscore here when the largest Australian oil and

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Evan Lucas: gas producer, which is BHP, not Woodside, as some people believe,

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Evan Lucas: is selling out of it. And after having Andrew Mackenzie,

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Evan Lucas: who was the head of that division as CEO seven

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Evan Lucas: years ago, to where it was with Mike Henry now,

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Evan Lucas: all that spending all that investment for a company that

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Evan Lucas: thinks in decades to do that, I think is also

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Evan Lucas: the signal that tells you why energy is no longer going to

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Evan Lucas: be this risk, sexy stocks scenario to being a more

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Evan Lucas: traditional long, slow burn as we move away from it.

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Sean Aylmer: Evan,  we're  running  out  of  time.  There  are  a  couple 

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Sean Aylmer: I  still  want  to  get  to.  You  mentioned  copper  before. 

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Sean Aylmer: The  base  metals  are  doing  really  well:  nickel,  copper,  zinc, 

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Sean Aylmer: lead.  Those  sorts  of  commodities.

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Evan Lucas: Yeah. And they're the futures. And that's what I think

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Evan Lucas: we will finish off on this, which I think is a

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Evan Lucas: beautiful thing. Is that make no mistake, what we're seeing

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Evan Lucas: is just a mix switch. So you can't deny BHP making

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Evan Lucas: a really big song and dance about doing a sign-up

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Evan Lucas: with their nickel mining to Tesla, is something to be seen.

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Evan Lucas: The fact that you're starting to hear about Ford and

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Evan Lucas: SK innovation have just announced in the US an US$11

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Evan Lucas: billion joint venture to basically develop EVs (Electric Vehicles) and EV battery production plants.

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Evan Lucas: That is nickel. That is copper. That is also things

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Evan Lucas: like cobalt. It is rare earth. That is what is,

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Evan Lucas: from my view, is the exciting thing into the future.

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Evan Lucas: And that is where we're seeing the pivot happen. It's not

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Evan Lucas: going to happen overnight. It's not going to happen in

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Evan Lucas: five years. But over the next 20 years, they are

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Evan Lucas: going to be the ones that are going to offset

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Evan Lucas: the fall in iron ore in my view. So that

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Evan Lucas: also means that you can start taking advantage of the

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Evan Lucas: clean energy mix. You're hearing it from the idea of green hydrogen,

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Evan Lucas: which I think is a fascinating story. But you're going to

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Evan Lucas: have to develop that story and that's going to require

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Evan Lucas: those kinds of minerals and exports to do that. You're also

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Evan Lucas: then talking about... The future of batteries is a fascinating

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Evan Lucas: thing because there is every chance, with what we're hearing at the moment,

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Evan Lucas: is that Australia could be one of the largest exporters

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Evan Lucas: of EV battery energy. We actually make EV batteries. So we're talking

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Evan Lucas: about making environmentally friendly energy, store it in batteries, and export it.

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Evan Lucas: So you've got the double whammy there. You've got the

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Evan Lucas: actual product, because nickel, cobalt, et cetera... We're in the

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Evan Lucas: top three largest holders of that underground. We'll be able

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Evan Lucas: to export it, have it manufactured, bought it back, charged

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Evan Lucas: those batteries up through the fact that we have incredible

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Evan Lucas: space in our country and then export that out. So

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Evan Lucas: that I think is the story that you're going to

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Evan Lucas: hear over the next 30 years. And that I think

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Evan Lucas: is the really exciting thing. And you're already seeing it.

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Evan Lucas: You cannot deny that a company like BHP, that you

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Evan Lucas: start to hear, and Andrew Forrest, are trying to pivot, and FMG, towards

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Evan Lucas: that idea that it's not going to happen. And then

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Evan Lucas: you look to the US you look to Europe and

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Evan Lucas: the amount of money that has been thrown into this industry...

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Evan Lucas: If you agree with it or not, it doesn't matter. Change

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Evan Lucas: happens because it just does. And you have to get

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Evan Lucas: on board with it. People hate change, but it happens.

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Evan Lucas: And if you try and fight it, you'll miss it.

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Evan Lucas: And that's what I think is now happening is that

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Evan Lucas: there is so much voice around this space that it

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Evan Lucas: is going to happen. It's just about being ready for it.

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Sean Aylmer: Evan,  Thank  you  for  talking  to  Fear  and  Greed.

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Evan Lucas: Thanks,  Sean.

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Sean Aylmer: That was Evan Lucas, Chief Market Strategist at InvestSMART. This is the Fear and Greed

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Sean Aylmer: Daily Interview. Join me every morning for the full Fear

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Sean Aylmer: and Greed podcast, with all the business news you need to know.
I'm Sean Aylmer. Enjoy your day.