a london view

From this weekend's London press - a good overview - chart refered to showned mining shares rising way above the bank sector and then crashing down to the same level as the banks .... the article ends on a nice positive note

Mining in a hole

COVER UP the share-price chart on the right before you answer this question. Which sector has done worse this year, mining or banks? Most people would answer banks. I did when someone asked me last week. But I was wrong. Over the past year the miners have actually suffered a bigger fall.

This piece of counter-intuitive City trivia is evidence, if more were needed, of the current extreme volatility of markets. Investors had piled into commodity stocks since 2005, lured by the seemingly copper-bottomed reasoning behind the “stronger-for-longer” argument. Its proponents said the emergence of China, India and Brazil onto the world stage, and the investment needed to bring their enormous populations first-world standards of living, meant companies producing essential raw materials such as iron ore and aluminium were sure-fire winners. Now as fast as they rushed in, investors are rushing out.

There are two causes for the exodus, one related to the demand for commodities, one not. The first is a slowdown in China, which has dented for the moment the stronger-for-longer thesis. The second is to do with the credit crisis. Hedge funds that have borrowed heavily to play the markets are now facing cash calls that they are struggling to meet. The liquid stocks they can sell — like the big mining companies — they are dumping as quickly as they can.

Like the bank debacle, the mining sell-off is not a victimless game. Many mining entrepreneurs — particularly those from the former Soviet Union — are likely to have used their inflated share prices as collateral for personal loans. Now the shares are looking decidedly deflated, they, and the banks that lent them money, will be feeling the pinch. What has compounded the problem is that a number of oligarchs used their shares as collateral to play on the Russian stock market. The result has been carnage. We now know that a lot of the planes and yachts they bought on the back of the commodities boom were paid for with borrowed money.

As for the mining companies, the 64,000-carat question is whether the bursting of the commodities bubble has returned share prices to a more rational level, or whether they have fallen too far. Call me a hopeless optimist, but I think the latter. The China story is so powerful — and its reserves of cash so great — that it’s hard to see the likes of BHP Billiton, Rio Tinto, Anglo American and Xstrata being anything but long-term buys.