commodities and treasury division

Had a ripper this quarter or what?

http://www.heraldsun.news.com.au/common/story_page/0,5478,18928249%255E664,00.html

Flavour of the decade
Luke Collins
New York
26apr06

TOWARDS the end of last year Macquarie Bank held a coal conference in New York featuring a number of Australian companies.

The event had been put together at short notice and organisers figured that 50 to 70 US fund managers would attend.

More than 150 turned up.

"The interest was just enormous," said Macquarie executive director and senior commodities strategist Jim Lennon.

The reason? "The outlook for commodities now looks better than it has for decades," he said.

US fund managers might be tight-lipped about exactly where, when and why they invest their money, but one thing is known -- Australia's natural resources sector has been a huge beneficiary of the global minerals boom sparked by China's ravenous appetite for everything from aluminum to zinc.

"The interest in our energy and resources sectors is massive," said Lincoln Parker, a North American director of the Federal Government's Invest Australia. "I think the outlook for us is pretty rosy for the next five to 10 years."

It wasn't always this way. For the two decades until 2001, the resources sector globally bumbled along amid doom-and-gloom predictions that its only future was bleak.

And for a long time, even if US fund managers had wanted to invest in Australian resource stocks -- a big "if" -- they faced restrictive foreign investment policies.

Creative thinking resolved that problem. Vehicles such as Goldman Sachs' Commodity Index, tracking 24 futures contracts, offered fund managers an avenue into formerly taboo markets. Still, resources companies weren't exactly knocked over by a rush of money.

Then China's economy shrugged off the impact of the Asian financial crisis of the late 1990s. Its renewed appetite for resources was stunning.

You've seen this phenomenal increase in demand and China now comprises 25 to 30 per cent of global demand for things like steel and copper and zinc and aluminium and nickel," Mr Lennon said.

"If you go back to 1990, China was only about 10 per cent of the market."

"The big difference in the past couple of years seems to be a growing market belief that China's demand is not temporary. That has provided some confidence that prices can be sustained despite, in the case of commodities such as nickel and aluminium, having tripled in the past five years.

"The investment community has woken up to the fact that this sector should be growing sustainably for the next 10 or 20 years," Mr Lennon said. "You've seen a tremendous flow of investment monies into the commodities sector and you've seen US hedge funds and pension funds come in and just buy and buy and buy. They now believe that as an asset class, commodities have got a future."

The flow of funds has been staggering, albeit off a low base by comparison with other market sectors. According to industry estimates, about $US80 billion was invested in US commodity funds at the end of 2005, up from $US55 billion a year earlier. In the four months since, another $US20 billion has poured in.

"The money coming through for Australian companies has been absolutely incredible. The numbers are really staggering," Mr Lennon said.