Executives at JPMorgan Chase (NYSE:JPM) are thinking about entering the markets for coking coal and iron ore. The bank would start trading futures for those commodities in a plan under consideration, JPMorgan executive Jeffrey Kabel told Reuters.
Instead of derivatives, JPMorgan would own the iron ore and coking coal directly, Kabel said. He said the move is designed to give the bank more knowledge of the markets. Kabel also said that some of his bank's customers, such as hedge funds, are more interested in coal and iron ore as commodities. JPMorgan already trades steel and thermal coal.
The entry of banks, hedge funds, and other finance industry players into the coal and iron market could hurt big producers like Vale (NYSE:VALE), Billiton (NYSE:BHP), and Rio Tinto (NYSE:RIO) by increasing volatility. One result of this is that coal and iron could start seeing the kind of wide price fluctuations already seen in the market for metals such as copper. The wide fluctuations in prices can make it difficult for miners to maintain earnings per share and dividends.
Metals miners' stock values often fall when metals prices fall. If an iron market develops, then iron miners' stock values would increasingly be based on the price of iron, rather than their actual revenues. That could create opportunities for value investors, but it can also artificially inflate some stock values.
Some other large banks, including Deutsche Bank (DBK) and Macquarie Group Limited (MQG), are already trading in iron and coal. JP Morgan also trades in iron ore and coal derivatives.
Ivanhoe Starts Shipping Copper and Gold from New Mine
Ivanhoe Mines Limited (IVN) has started shipping copper and gold concentrate from its Osborne mine in Northwestern Queensland. The mine is operated by Ivanhoe Australia, which is 59% owned by Rio Tinto.
Ivanhoe's Chief Executive officer told Dow Jones that the beginning of production at Osborne should boost his company's cash flow. The launch of a new gold mine, at a time when gold prices are rising, should boost Ivanhoe's stock value. The gold being shipped from Osborne is worth $5 million Australian ($5.03 million U.S.). The copper is worth $15 million Australian ($15.09 million U.S.).
This could make Ivanhoe a good long-term buy because it has demonstrated its ability to successfully develop productive mines. It could also boost Rio Tinto's stock value by giving the company another successful Australian copper producer.
The stock value of gold miners like Ivanhoe and Barrick Gold (NYSE:ABX) should be boosted by rising gold prices. Ironically enough, gold prices are being pushed up by the increasingly dismal global economy. On June 13, bullion rose to a high of $1,624 an ounce, but fell to $1,622 on June 14. The price spike was apparently driven by volatility in the currency markets created by the debt crisis and poor economic news from the U.S.
Expect gold prices to remain high throughout the summer because of the lousy economic news. This should continue boosting gold mining stocks for the foreseeable future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.