Due to the drop in metals prices, Peru is now probably a net importer

This little post gives a general ballpark idea of some cold, unpleasant realities in the pipeline for Peru (and for LatAm in general):

1) Despite propaganda to the contrary, Peru is still heavily dependent on metals exports to maintain its growing economy.

2) The recent drop in world metals prices will hurt Peru badly.

3) Peru is now probably running a trade deficit with the rest of the world, as its demand for imports to fuel its growth now outweighs its exports.

Here we go with a couple of charts. This first one shows Peru's exports Jan 2006 to August 2008.

(click to enlarge)

As we can see, although non-mining exports have increased in the period the dominant sector is still mining. In August 2008, for example, metals exports accounted for U$1592.27m of the U$2943.2m in total exports (54%). You'll also notice that at the end of the chart I've made some estimations for October 2008, and it looks likely that it will be the first time in a long time that mining exports are lower than their non-mining counterparts.

This is because the prices for metals have slumped since August 2008 (as anyone holding mining stocks will quickly tell you). To give you some idea, here is a little table that shows how much each of the "big five" metals made in export revenues for Peru in August 2008, and then on the right hand side we apply October 2008 prices to the August 2008 production levels (by which I assume copper at U$1.80/lb, gold at U$730/oz, silver at U$9/oz, lead at U$0.50/lb and zinc at U$0.50/lb).

	Aug Exports (U$m)	Aug Prod at Oct prices
cu	721.17	452.65
au	432.35	376.48
ag	48.31	29.43
pb	76.05	40.64
zn	113.49	149.80
TOTAL	1391.37	1049.00
Difference = U$342.37m

The result is that for the same amount of production, Peru loses over U$342m in revenues simply due to the spot price changes. That's a theoretical 12% of the country's export revenue gone up in smoke, people. That's a lot.

It also means that Peru's trade balance is likely negative. Here's the monthly trade balance 2006 to Aug 2008, and you'll note that the average monthly trade surplue for 2008 is all but gobbled up by the projected deficit from just four major metals exports mentioned above.

(click to enlarge)

Forget iron ore, molybdenum, asparagus, fishmeal, mangoes, and all the other things Peru sells to the world; just the price slumps in copper, gold silver and lead are nearly enough to put Peru's accounts into the red.

The bottom line is that financial crisis is going to hit everyone. Peru is the example in this post, but consider that 60% of Chile's export FOB is just in copper and it doesn't need a brain surgeon's intellect to work out the rest. This is true for Argentina's soya. It's true for Venezuela's oil. It's true for Brazil's multiple soft and hard commodities. This slowdown will make no exception for left-wing or right-wing politics. The simple fact is that if these prices stay where they are, ALL of South America is in the toilet.

Last week President Twobreakfasts announced to his people that Peru would grow 7% in 2009. I have a sneaky suspicion that he's being a touch optimistic about things. What do you say?

The world according to the goldbug newsletter writer

Any questions?

THE WORLD ACCORDING TO GOLDBUG NEWSLETTER WRITER
Event	goldbug analysis	recommended action
Broad markets lower	It had to happen	BUY GOLD!
Broad markets higher	manipulation!	BUY GOLD!
Gold higher	The upwave begins	BUY GOLD!
Gold lower	manipulation!	BUY GOLD!
Gold holds steady	it's a coiled spring	BUY GOLD!
dollar lower	fiat crap going to zero	BUY GOLD!
dollar higher	manipulation!	BUY GOLD!
Fed raises rates	inflation is rampant	BUY GOLD!
Fed lowers rates	inflation will be rampant	BUY GOLD!
LIBOR rate rises	systematic breakdown	BUY GOLD!
LIBOR rate eases	liquidity returns	BUY GOLD!
Silver higher	Short squeeze!	BUY GOLD!*
Silver lower	manipulation!	BUY GOLD!*
Gold lease rate up	banks not lending gold	BUY GOLD!
Gold lease rate down	easy to get cheap gold	BUY GOLD!
*or silver

A nice overnight rally in metals going on....

....with gold up 2.8% as I write, silver up 4.5%, copper and zinc and friends moving off these low numbers, too. Here's the spot gold chart....

click to enlarge

...now let's see what happens when London opens.

By the way, have you noticed the similarity between female staff members of the IMF and Latin American countries? They both assume the position to get what they want, but in the long run they finally realize that when you're screwed by the IMF you stay screwed.


UPDATE breakfast coffeetime: The rally didn't last.....surprised?

Dr Copper (or physician, heal thyself)

I could have sworn I saw $2.18/lb over the weekend.......

(yep, this is chart of the day)

The other base metals are coming along for the ride, too. There are even one or two that will start to become profitable to mine if this keeps up :-)

On the PM front, silver is again outperforming gold (and me with SLV at $9.70..woohoo!). And to show that blind charting and beginner's luck does count for something in this game, after calling present levels a bottom in Palladium two nights ago it's rallied 9%. I haven't followed it much, but I'd suppose the other "industrial PM" platinum has done the same....I really don't know, though.

Still largely cash, here. I may try a small trade or two today, but it will be strictly "take ST profits" stuff.

New Site Sponsor: Vena Resources (VEM.to)

To visit the Vena Resources website, click here

The new site sponsor is Vena Resources (tickers: Toronto Canada VEM.to, Lima Peru VEM, Frankfurt Germany V1R), a junior mining company with many and varied operations in Peru. Before continuing I'd like to remind readers that I'm choosy about who advertises here, and particularly choosy when it comes to juniors. Therefore, you can be sure that VEM.to has my personal seal of approval as a company. I've written on Vena Resources several times over the course of the past few months, this because I like what I see (and that includes going on unpaid site visits to VEM.to properties and being impressed by both project potential and teamwork).

Some basic bullet points on the company to consider as positives:

• Projects covering gold, silver, copper, zinc, lead, uranium and coal

• Dynamic, respected, professional management and highly qualified employees

• Important working relationships and joint ventures with international-scale miners such as Glencore and Cameco

• Deep local knowledge of Peru, its socioeconomic situation and resulting opportunities

• Near-term production start-up at its Azulcocha mine

• Aggressive drilling campaigns at several of its project sites

• Proven ability to raise funds, even in the current tight market

This is the kind of beaten-down junior that will not go under due to the present credit crunch. Its current share price valuation offers a tremendous bargain to both the long-term investor and the shorter-term trader looking for a small company that's ready for a sizeable rebound. I urge you to click through to the company website and find out more for yourself, or maybe start with the company's information pack, available at this link. You'll also find (as I have) that its investor relations staff (up to and including CEO Juan Vegarra) are helpful, friendly and knowledgeable, so don't be afraid of finding out more straight from the horse's mouth.

Outcropping at Esquilache Project

Strong silver potential

Disclosure: I liked VEM.to long before it became a site sponsor, and there is plenty of proof about that in previous posts. I do not accept advertisements from any old miner and I'm very happy and comfortable about the fact that Vena Resources has decided to support this humble corner of cyberspace. However I urge you to do your own due diligence and do not take this as a direct recommendation to buy their stock. Junior miners offer high potential rewards, but along with that comes high risk. Please be aware of that. It is important that you decide for yourself or take advice from your own securities advisor before making any investment.


UPDATE JANUARY 25th 2009: Vena no longer pays for advertising space on IKN, but I am continuing the advertising banner. This is because I applaud the company decision to cut as many non-essential costs as possible and I still fully believe VEM.to is a good investment. Therefore this free advertising space is my small way of supporting the company in the future.

How to confuse a group of silverbugs

We'll do this as a step-by-step bullet point thing, otherwise they might find it difficult to follow:

1) Show them a 1923 Silver Dollar (I have one right here).

2) Ask them how much silver is contained in the coin.

3) Congratulate the first one that says 24 grams (precisely it's 26.7g and 90% pure silver = 24.03g).

4) Ask them how much the contained silver is worth today (making sure you're not talking about its collector's value; my example has been valued at around U$300, but a truly perfect mint example of the "freedom dollar" can go into the thousands).

5) Congratulate the first one that says "over ten dollars" (in fact, using today's $13.76 London silver fix and doing the necessary calculations, it works out at U$10.63).

6) Ask them how much it seems the silver in that dollar has risen in dollar value in the 85 years since it was minted.

7) Congratulate the first one that says "over 90%" (90.6% if my quick math is correct, but there are a couple of variables), and then go on to say that apparently, and according to the pretty empirical evidence shown by that silver coin, it sure looks like the dollar has lost 90% of its value in the last 85 years.

8) Ask them to look around. Check the room, the street where they're standing, the city and the people. Ask them whether there has been a general improvement in the standard of living in the last 85 years, considering the economy, healthcare, education and any other measurement by which we tend to gauge that thing called "progress".

9) Ask them why they think the financial system will collapse if the hated fiat dollar loses another 90% of its worth in the next 85 years.

10) After a few minutes, I will guarantee that you need to tell one of them, "No, it's not a trick question."