Director’s Cut - Comfort from marginal cost ::Macquarie Research,

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Director’s Cut
Comfort from marginal cost
While commodity prices have held up better than other asset classes recently,
Colin Hamilton says most metals are now well below the peak levels seen this
year. Having said that, he says prices are still generally trading at a premium to
cost support with only Chinese domestic miners feeling the pressure.
In order to see the effect of falling prices, Colin has compared current spot price
margins for the producer at the top end of the cost curve versus those on March
1st, when commodity prices were close to their peak. >> Read Report
The first point to make is that given the strength of China’s economy compared
to Europe and the US, plus the fact that China has more policy options to
stimulate growth, we do not expect the same price fall seen in 2008. Still, for
investors seeking lower risk, Andrew Dale recommends to focus buying in
metals close to cost support. This is because downside pricing risk is lower when
the gap between spot prices and the marginal cost of production is smaller.
The major metal that’s closest to cost support is iron ore, and also one that has
had a relatively shallow correction in recent months. Given our bullish view on
China’s iron ore consumption, Andrew remains a buyer of Rio Tinto (RIO AU),
Mitsui (8031 JP) and Fortescue (FMG AU). While they are further from cost
support, he also favours the low cost producers in coal and copper. His
preferred picks here are Shenhua (1088 HK) and Bukit Asam (PTBA IJ) in
coal, plus Jiangxi Copper (358 HK