We have had to get used to the direction in some commodities prices being governed by demand from China. A fast-growing emerging economy like that of the Chinese can have a massive effect upon demand for raw materials. Growth in the early stages tends to be very rapid, sucking in commodities and building a massive trade imbalance as a consequence.
But as an economy matures, it does not mean demand disappears. It is the growth rate that slows. Commodities, naturally, are notoriously vulnerable to supply and demand. In part this reflects the cost of extraction.
Just now oil is also languishing at the bottom of its trading range. This is more a reflection on short selling than a sudden evaporation of demand, or knowledge that Iraqi oil will once again flood on to the market. The same can be said of copper.
It is too early for the real effects of the turmoil in the Far East to be reflected on the commodity exchanges. Indeed, the London Metal Exchange inventory numbers suggest demand is stable, so it has to be speculation a crisis will develop that accounts for the current malaise. If the effect on world trade is not as great as is feared, we might see a sharp recovery in commodity prices as production fails to keep up with demand.
This is certainly what Mercury's World Mining Trust is betting upon. They recently requested shareholder permission to buy back their shares, believing a 15 per cent discount to net assets is too great.
I am still concerned thatthe problems in the Far East are too little appreciated here, but one area where there may have been a over-reaction is commodities. Longer term, demand must grow.
Zinc had a sharp bounce last year as China adjusted its position, having misread the situation earlier. Some of the gain has been handed back but that is because traders are back in control. We also saw how iron ore surged as China restructured its steel industry, switching to higher quality imported ore.
With a whole raft of companies, led by mining giant RTZ, announcing share buy-back programmes and little new equity being raised at present, the mining market looks near the nadir of its fortunes. Things may still get worse, but this is one area where the reaction has already taken place. If a trade war does not erupt as a consequence of cheap imports from the Far East, now could be the bargain basement buying opportunity.
Brian Tora is chairman of the Greig Middleton Investment Strategy Committee. Greig Middleton is a member of the London Stock Exchange and regulated by the Securities and Futures Authority.Reuse content