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Commodities vulnerable to burnout - Roach Posted: Mon, 09 Oct 2006 [miningmx.com] -- INTEREST in commodities, which has seen metal prices climb over the past four years, has been likened to the technology bubble of the late nineties. Stephen Roach, Morgan Stanley macroeconomist in New York, says in an interview with Miningmx that uncritical faith in China’s growth rate might be the common thread in the metals investor bubble. That will surely be worrying to miners. A rule of thumb is that share prices of mining firms normally anticipate the six-month future price of the metals they produce. So it’s alarming to see that Morgan Stanley’s MSCI index shows that materials companies recorded the largest fall from their high over the past 12 months, down to around 10,5%. Are metal prices, and the share prices of companies that produce them, about to fall off a cliff? Roach certainly wants to explode the notion of “an open-ended super cycle. Investors are so enamoured of a super-cycle that it becomes a one-way bet. Every dip becomes a buying opportunity. I’m not talking about the speculators here; I’m taking about pension funds and university trusts,” he says. China is deliberately attempting to slow down its economy, says Roach. “It’s not a one-way bet” – though he concedes there isn’t a series of data from China to show its economy is slowing. And even if there were, statistics from China can be “suspicious” as Roach terms it. In the absence of solid evidence that China’s growth rate – and its subsequent demand for metals – is slowing, it’s worth dwelling on Roach’s other major point: that metals are now subject to the investing habits of general investment funds that have climbed into commodities recently. Since general funds buy commodities as an asset class and not on each metal’s individual merits, they also run the risk of getting dumped as a pack. That means platinum, which has solid industrial fundamentals and a long-term supply deficit, might be as likely to be sold by a pension fund as, say, aluminium, where supply/demand is much closer to a balance. One exception might be gold. Says Roach: “It has a different set of factors underpinning it. Gold is more a hedge against geopolitical disturbances rather than driven by the business cycle.” Ian Henderson, who manages JP Morgan Natural Resources, was reported in Reuters recently as saying the metals market was currently 30% undervalued. The disagreement is marked. But it may be that, as a macroeconomist, Roach has a broader scope than shorter-term investment managers. He’s certainly not concerned that BHP Billiton CE Chip Goodyear is positive on metals. For South African investors, the picture isn’t all gloomy – far from it. Wayne McCurrie, deputy MD of Advantage Asset Management, is fond of pointing that the US dollar/rand exchange rate often compensates for metal price weaknesses. Take the climb down in the copper price: 15% lower than on 11 May, when it recorded its all-time high of $8,600/t. At the time, Palabora Mining – South Africa’s major copper producer – would have received a price of R54,180/t on a cash, three-month delivery basis.Free news alerts: click here to subscribe
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