Dubai : For a high-risk business and is often fraught with project, profitability and political risk, the metals and minerals sector has been surprisingly resilient over the past 12 months and continues to attract cross-border investor interest.
Some sovereign wealth funds (SWFs) that have not traditionally taken positions in this sector have been drawn to it by the prospect of continuing demand growth.
Oil-based sovereign funds from countries like the UAE, Kuwait and Libya traditionally invest in mining, but "we have seen non-commodity SWFs enter into the mix", the California-based Sovereign Wealth Funds Institute said in a research note.
"Our hypothesis is that several non-commodity SWFs come from countries that are growing and need access to commodities to further their expansion and achieve economic objectives. In addition, many non-commodity SWFs want to diversify, just like any other institutional investor," it said.
Mining and resource firms accept sovereign funds, since they see them as a stable and strategic source of capital with longer investment horizons. The funds see a sector that, despite the risks associated with it, has the potential to ride an economic recovery as well as provide the state that owns the fund with enhanced access to the resources it needs.
Singapore's Temasek Holdings, for instance, invested in Inmet Minings and Platmin, both Canadian mining firms, with operations worldwide. Platmin has extensive operations in the Bushveld complex in South Africa.
China Investment Corporation (CIC) invested in Teck Resources, another Canadian mining firm, as well as similar firms in Mongolia. Teck Resources perceived the China Investment Corporation as a strategic investor, since China is the largest consumer of Teck's coking coal.
Commodity and resource prices rebounded relatively quickly after the global slump in 2008 and staged a strong rally from the second quarter of 2009. This is in spite of generally high inventories after the weakening of demand during the recession.
"Looking ahead, prices of many commodities are likely to increase further. The demand side should generally be the main source of upward pressure, as global activity is widely expected to expand at a faster pace," said Thomas Helbling, an analyst at IMF's research department.
"With inventories remaining above average for many commodities and substantial spare capacity in many commodity sectors, the upward pressure is likely to remain moderate for some time, unless much stronger-than-expected global growth or other surprises lead to a rapid drawdown of these buffers."
The IMF's commodity price index, for example, rose by over 40 per cent in the eight months since global industrial production reached a trough in February 2009. In contrast, after earlier downturns, it rose by only 5 per cent on average over a similar trough
The initial impetus came from the perception that the worst of the global recession was over and that the wide-ranging public intervention had succeeded in lowering uncertainty and systemic risks in the financial sector.
Additional impetus came from the buoyant recovery in emerging Asia and, as the year progressed, stronger-than-expected global activity more generally.
A massive demand growth from India, China and other rapidly developing economies has created the stage for more commodity consumption. Zinc, platinum, iron and gold have been in demand over the past five months, especially with the onset of commodity based exchange traded funds (ETFs) and more institutional investors playing in the commodity space.
Improving financial conditions have provided for increased credit availability for inventory financing at more normal costs while rising inflows into commodity funds have facilitated the hedging of inventory positions.
The magnitude of price increases has varied across commodities. Fuel and metals prices rose by much more than the prices of food or agricultural raw material.
For instance, oil prices were not only supported by recovery expectations, but also by the supply cuts imposed by the Organisation of Petroleum Exporting Countries. Metals prices have been buoyed by restocking in China as well as some supply restraint.
In contrast, favourable harvest outcomes led to a weakening of the prices of some major food crops.
"We believe that the economic expansion will ensue even after monetary and fiscal stimulus programmes are removed in many countries. The historic positive relationship between policy rates and metal prices remains in place, in our view," said Francisco Blanch, commodity strategist at Bank of America Merrill Lynch.
"The Fed will have the additional task of draining reserves and will use a set of instruments to accomplish this. Any tightening of monetary policy will in our view be done with an eye on economic growth."
Is China bubble waiting to burst?
Dubai: Multiple analysts have warned over the past two months that the real estate-driven Chinese economy is on the cusp of meltdown. They point to unbridled credit growth — a lot like the situation that the US faced in the years running up to 2006 when the property market fell off a cliff — as a pointer in that direction.
Any turnaround in China's economic growth story could spell trouble for metals and minerals demand from that country.
"Our findings do point to a bubble-like scenario, and may explain China's new regulation to restrict pre-sales by property developers," said Radhika Kamath, analyst at Thomson Reuters.
According to Thomson Reuters data, China's fixed investment as a percentage of GDP has rapidly increased over the last decade and is currently at a historic high of 44 per cent. Money supply growth has also remained very robust, revisiting its 2009 historic high of 28 per cent.
These high-water marks were far lower in the 1985-91 Japan and 2001-06 US real estate bubbles, at 32 and 17 per cent, respectively.