Here Come The Speculators – Not Again!

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This is Part One of a two part series.  

I thought I would write a blog post to try and make sense of a few articles I took a look at over the weekend. I’ll try to relay the quick facts behind each article. They all appeared last week and all came from the Financial Times. To save you a little time, if you are a buyer of steel, you’ll want to read on. Hopefully the rest of you will find this interesting.

The first article discusses a new freight futures index created by UBS bank (poor UBS hasn’t had much favorable press these days…what with impending job cuts and constant subprime references like this one.

This new freight index, Blue Sea, covers freight futures. According to the story, “UBS Blue Sea index will be highly correlated with and so act as an accessible proxy for coal and iron ore prices and the Chinese economy,” according to Ilija Murisic, executive director of hybrid derivatives trading at UBS. What has become very interesting to us since we launched MetalMiner back in December of 2007, is the relationship between the finance/investment world and the industrial markets world. The other feature of the index of course is that institutional investors and private banking clients will have a new channel for investments. Yes, you can read that as ‘more speculation’. But this story did make us think a little harder.

As former metals traders and current strategic sourcing advisors, we tend to place a greater emphasis on supply and demand or fundamentals if you will, over ‘other’ elements which I will come to in just a moment. The notion that traders, institutional investors etc can use a freight index as a proxy for determining the health and future prospects of China seems a little over the top to me. But alas, it is perhaps that lack of emphasis on the ‘other’ factors – such as the movement of dollar flows amongst countries, various indexes, funds, futures markets etc. that we industrial metals buyers ought to be paying a lot more attention to. Because the examination and analysis of fundamentals just doesn’t seem to correlate to today’s metals prices.

We’ll cover the third article in tomorrow’s post and summarize the potential impact on metals prices.

–Lisa Reisman

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