Hedge Funds Return to Market

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As BHP calls off its attempts to take over Rio Tinto on the grounds that the decline in metals and minerals prices makes the price and likely regulatory requirements no longer attractive, it raises the question at what point will consolidation in the mining sector resume? For the time being, the availability of finance is probably the major obstacle but valuation is also an issue as miners and consumers struggle to judge where the markets will end up. Today’s valuation may look expensive tomorrow.

For those with deep pockets and a view of the long game however current valuations are clearly low enough to encourage buyers to return. George Soros and a number of the larger hedge funds notably BlackRock and Citadel have been on a buying spree among coal miners accumulating coal stocks on the rationale that coal is a lot less sensitive to downturns because it is needed for basic power generation, and demand is growing world wide even if industrial output is not.

Metals stocks may still be some way from generating buyers interests though. Evy Hambro of BlackRock is reported by Reuters as saying the total and utter collapse in commodities demand currently underway is likely to last for the next three to five years at least. Production cutbacks by suppliers are so far insufficient to combat the oversupply he said.

Our feeling is some sense of direction and a gradual recovery in prices will occur long before 3-5 years, but it could be into 2010 before most metal markets achieve some form of supply/demand balance and sufficient confidence returns for consumers to begin rebuilding stocks.

–Stuart Burns

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