Mexico Hedges Itself Out of Trouble

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Though Mexico will come under some industry criticism for contributing (ever so slightly) to the drop in the price of oil you
have to admire the foresight and confidence that has lead them to taking put options for the whole of their 2009 export capacity. As put options build up they have the effect of placing a downward pressure on the market simply by virtue of the negative sentiment they reflect. Convinced the oil market had only one way to go back in the summer Mexico began buying put options (the right to sell at a predetermined price) from the end of July onwards. The country has now hedged some 330m barrels or 900,000 b/d from January to December 2009 equal to the whole of Mexico’s net crude exports at between $70 and $100/barrel.

Well done Mexico! But it got us thinking at MetalMiner, to what extent have the metals producers hedged their 2009 positions and whether:

 a) the taking out of all those put options has helped drive down the price these last two months and

b) if the lack of mine closures and refining capacity we have seen so far is partly a reflection that the industry is to some extent hedged for the coming year and not in any hurry to cut their own production.

If that is the case, we can expect prices to continue to fall.  There will be less of an incentive for producers to cut production to bring the markets into supply/demand balance.

Certainly one canny mine in Africa, African Copper, recently exercised its put options and raised $4.75m. The hedges were taken out at $3/lb in May 2007. If African Copper took that step we expect many larger producers may also have protected their forward revenue in the same way. Unfortunately for some producers one of the largest market makers was Lehman Brothers so any company holding positions with them may have to wait to find out how they unravel.

–Stuart Burns

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