Metals correction cutting deep

[] — 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.

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“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.