get ready for the upswing

One sparrow doesn’t make it spring, but spring will come: Stock Resource
Monday, 15 September 2008
Kate Haycock

WHILE glimmers of a market resurgence or a slowdown in the falls in metal prices are yet to turn into a fully-fledged recovery, Stock Resource managing director Steve Bartrop says the upturn is a matter of when, not if.


With August thus far the worst performing month for the market and resources, Batrop admitted now did not seem a good time to be in the sector.

However, he said Stock Resource – a research group based in Sydney – believed both markets and commodity prices could be nearing a bottom.

“Despite the recent pain, now could be the time to reposition for recovering markets. A recovery is a matter of when, not if,� he told investors and mining delegates to the 2008 Excellence in Mining and Exploration forum in Sydney on Sunday.

The evidence for a resurgence being around the corner came down to fundamentals – a familiar cry, but Bartrop said continued growth in commodities would still come from industrialisation in countries like China.

Investors and companies alike had, however, over-estimated the extent to which commodities and equities would be de-coupled from the wider financial impact of the sub-prime crisis and resultant credit crunch.

And this impact was not actually coming from massively reduced demand for commodities but was instead at least partially due to the winding back of speculative investments made in commodities, especially by hedge funds.

Bartrop said in particular, base metal price declines since earlier this year were driven by investors and hedge funds selling out, and not a slowing of the Brazil-Russia-India-China story.

“There is no reason why urbanisation should slow,� Bartrop said.

“But we’ve just [had] a big unwind of hedge fund positions and we’re seeing the last part of the collapse there.

“You have to look at the fundamentals and look at the demand – people have underestimated demand which drove prices higher, but part of that demand was due to stocking from hedge funds. And I think we’ll look at this period now and say prices came back to supply-demand fundamentals.�

Also impacting the fundamentals was margin squeeze, which when combined with the plummet in metal prices, meant new supply was also being constrained – meaning if demand continues, prices should stop falling and potentially recover.

Bartrop used the example of zinc as a commodity where supply was under threat. He said 15% of zinc mines were estimated to be operating at a loss, and high-profile project closures like AIM Resources’ Perkoa and Teck Cominco’s Lennard Shelf meant future supply was actually lower than forecast, which could force the price higher eventually.

As for whether the market bottomed, Bartrop said the feeling was that it “must be close�.

“If you look on Friday you are starting to see a turning – but one sparrow doesn’t mean it’s spring,� he said.

Instead, Bartrop said a company like OZ Minerals could be a good barometer of a recovery.

“It has fallen to $1.30 – it is just starting to turn which suggests investors may be thinking about returning … OZ [is] a good company, investors have no reason to sell at $1.30, it has good long-term assets,� he added.

Another sign would be corporate activity with mergers and acquisitions set to get things moving on the markets again.

And with the panic selling of the past few weeks causing investors to hold onto stocks and look longer-term, Bartrop said bottom-fishing should start to emerge – another sign a recovery could be on its way.