[DEBATE] : (Fwd) From world commodity boom to bust

[Patrick Bond]

(Moving the bubble around: "investors in commodities and resource shares 
must be wondering where to go next.")

http://finblogs.24.com/ViewBlog.aspx?blogid=e736a9b3-f9d0-459b-bba8-6b076531764d

Patience pays in resource correction
2:42PM, Tuesday, 09 Sep, 2008

The liquidation last week of Ospraie Management LLC’s flagship hedge 
fund made big news internationally but was perhaps a bit underplayed 
here in South Africa. But it’s worth taking some notice of this event 
owing to its meaning for commodities, a sector on which this country is 
so reliant for jobs and foreign exchange.

The owners of Ospraie Management closed the fund on the back of 
significant investor redemptions. It seems investors preferred the 
attractions of investing in the dollar rather than metals and other 
resources such as paper and the so-called softs such as grain.

Ospraie Management’s owners were formerly the principal behind the Tiger 
Fund which shut shop in the early part of the 2000s and heralded a slump 
in the commodities market. I’m not saying the closure of the Ospraie 
hedge fund precedes a similar fate for commodities but I do wonder 
whether a healthy correction seen in commodity markets a few months ago 
has actually transformed into something more painful, and more prolonged.

By Friday, copper had sunk to a seven-month low while lead and tin 
dropped around five percent, according to Reuters. Aluminium was under 
pressure too. For many metals, it was bad economic data out of the US 
that was depressing the outlook for metal demand. Surely demand from 
China will keep the long-term outlook positive for commodities but the 
current turmoil is dismaying?

Take platinum stocks which took another beating last week. Miningmx’s 
Brendan Ryan, quoting JP Morgan analysts, said interest in exchange 
traded funds, so-called ETFs, was a reason for the volatility in the 
platinum market. Investors were preferring to show their enthusiasm for 
commodities through the metal not the stocks. In a tight market, this 
accounted for the volatility.

There may be something in this. Didn’t Polaris Capital, which manages 
the Nedgroup Investments Rainmaker Fund, say recently that its interest 
was in gold, but not gold shares? And the pain isn’t limited to major 
mining houses. Miningmx’s Brendan Ryan said junior mining shares had 
been murdered in the past year.

Ultimately, you’ve got to back the impetus of China to breathe life back 
into commodity market, as Brenton Saunders, one of my favourite mining 
analysts (and now a hedge fund manager in Oz), has noted.

Saunders reckons the recovery of the mining sector is a question of 
timing. Let’s just remember what China is about. It accounts for 60% of 
the marginal demand for most industrial metals like steel, copper, 
iron-ore, cement, zinc and aluminium.

“Consider this,” said Saunders. “The process underway in China is 
expected to take 500-600 million people over the next 10 years and move 
them into cities – the single biggest mass migration in the history of 
mankind – that’s equivalent in population terms to a mid-to large-sized 
European country every year for the next 10.” It’s a brilliant article 
and is well worth the read.

Here’s hoping, but in the meantime, investors in commodities and 
resource shares must be wondering where to go next. Junior mining shares 
seem out of favour. They’ve been hammered this year. Me? I love 
reporting on the high-risk players but I’d be investing in the solid, 
salt-of-the-earth dividend players.

And don’t be dismayed when commodity prices fall because it’s normally 
accompanied by an inverse weakening in the rand, the currency in which 
our miners receive their revenue.