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Experts call 'time' on mining boom

By Nick Gardner

Article from: The Daily Telegraph /

August 08, 2008 03:48am

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THE commodities boom is over. Experts say that the super-high prices that commodities have attracted in the past five years are falling and are unlikely to return to peak levels for the forseeable future.

Slowing demand in China and a bleak outlook for the global economy has seen the price of many base metals fall - some to three-year lows.

The CRB commodity index fell 10 per cent last month, the steepest one-month drop since 1980.

Most raw materials have been slipping for months. Oil has dropped to a three-month low after peaking at $147 early last month.

The chain of events has led to Deutsche Bank calling the top of the commodity cycle and advising clients to take profits before the economic downturn casts its spell on the sector.

It warned that oil will slide back towards its "marginal production cost" of $60 to $80 a barrel, gold will slump to $650 an ounce as the US dollar recovers, copper, lead and tin will slowly halve in price and grains will calm down as harvests in Australia and the Eurasian Steppe return to normal.

"Demand from China is softening, so the oil price is coming down as the government in China and other emerging economies lift their subsidies and the high prices lead to lower consumption," Fat Prophets commodities specialist Greg Canavan said.

"Once commodities go through that kind of a bubble - and all of them have - then the market pulls back and it returns to fundamentals. Now we have zinc and nickel prices hitting levels where mines have to close."

Nickel miner Minara revealed an 80 per cent fall in net profits yesterday.

Its shares closed unchanged, but they are down from $7.26 at Christmas to just $1.49.

"There has been huge amount of speculative money going into oil and that was the reason for the sharp spike," Commsec analyst Pieter Bruinstroop said.

An increase in supply of various commodities is also having an effect.

"Remember, when the China growth phenomenon first took off, the whole commodities industry was geared to handle world demand growth of 1-2 per cent a year, but then China came along and that increased to 3-4 per cent a year - virtually doubling demand. And we weren't ready for it, and couldn't handle it, so prices rose," he said.

Now the supply side is responding, and many think there will be a surplus of iron ore at some point in 2009.

"I've never known a commodity to be in surplus and still see its price rise," Mr Bruinstroop said.

Mr Canavan is advising caution on commodity stocks, but said: "If you are in BHP or Rio, investors might have to deal with no share price growth for a year or so. It will probably trade within a certain range but let's face it they've had a good run for the past few years."