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Commodities Briefing 17.Dec 2008

Posted on 17 December 2008 by VRS |  Email |Print

Benedicte Gravrand, Opalesque London: Duncan Letchford, lead-portfolio manager at the London commodity funds house Galena, talks about the metals market status quo and his metals fund.

Commodities funds win and lose

Trading remains high in the commodities – especially long/short trading - despite prices generally sliding down since this summer. But some investors have been pulling out of this sector because, as a hedge to stocks, it is no longer viable – commodities and stocks have become more correlated of late.

In the last month, a number funds such as Beach Horizon, Global Advisors, SVM, Merchant, Krom River, Mulvaney, Sextant, Tiberius and Sprott, gained on the back of falling commodity prices, especially CTAs/managed futures funds and some long/short funds. Some fund have been hurt too, especially those that bet on rising energy prices and agriculture: RAB Capital, Deephaven Global, Diapason L/S, for example.

Hedge funds are still dynamically invested in the commodities market: the FT reported last month that they were finding volatility trading too expensive and were turning to commodities trading instead, as derivatives based on commodity indices provided cheaper access to the “long volatility” trades, a successful strategy (coverage).

The Reuters-Jefferies CRB Index, a global commodities benchmark, today ended 0.5% down after last week’s record gain of nearly 9% that marked its biggest rebound since a slump in commodities that began August. (Source).

Letchford: near-term metals prices will remain under pressure
Falling prices for metals will most probably affect producers significantly as they will have to reduce output, endure losses, and some will go bankrupt. It is believed however that production cuts serve to bring the market back into equilibrium.

Duncan Letchford, lead portfolio manager of the Galena Metals Fund, believes that the metals markets has moved from structural supply deficits in a number of traded metals to concerns over surpluses, as the world becomes pre-occupied with a global recession and a period of lower demand. Some metals have seen significant production cutbacks already as producers respond quickly to significantly lower metal prices.

“The credit crisis has affected base metal prices more in terms of contangos than absolute price levels,” he added. Contago happens when the futures price is above the expected future spot price, leading the price to decline to the spot price before the delivery date.

According to Letchford, with money hard to obtain, the cost of carry has proved detrimental to all holders of metals, speculators, producers and consumers alike. Inventories on all major base metal contracts have risen as cash has become king and stock deliveries to the LME have accelerated. Precious metals with the honourable exception of gold have performed in exactly the same way, with only gold’s safe haven status keeping it relatively buoyant although still significantly off its highs.

Letchford expects near-term metals prices will remain under pressure as demand continues to weaken and the macro-economic situation worsens. In the longer term, historically low interest rates and producer cutbacks will fuel another rally as emerging market demand picks up and commodities are once again seen as a finite resource and an investable asset class.

Galena’s metals fund
The Galena Fund Ltd is a metals-focused hedge fund investing in base and precious metals, with a discretionary approach, and using a variety of trading strategies. It takes positions on non-ferrous metals (metals other than iron, and alloys that contain very little iron) and precious metal derivatives through a combination of futures, options and calendar spreads.

The fund takes on opportunistic positions based on information flow about the physical markets from the Trafigura Group (Galena is a subsidiary of Trafigura.) It was incepted in June 2004, has annualised +14.10% since, returned 5.25% in November and +16.17% YTD, managing $475m.

Selective re-opening
The Galena managers believe they can efficiently run the Metal flagship programme with $500m to $600m of AUM. For that very reason, the flagship programme has been soft-closed for quite some time.

Today, in the light of investors’ interest in alpha generating funds, they are proceeding with a selective re-opening for $100m to $150m.

“We are happy to carefully replace some of the capital leaving the Fund,” Letchford said. “Most of the few redemptions we experience - they represent less than 10% - are motivated by the need to keep multi-managers portfolios truly diversified. In a way, our YTD performance penalises us, since the allocation to our Metals Fund becomes proportionally (much) larger versus other funds that are flat or down.”

Trafigura and Galena
The Trafigura Group, the second largest independent non-ferrous trading company in the world and the third largest independent oil trader in the world, was established in 1993. It had a turnover of $51bln in 2007.

Galena Asset Management, a wholly owned subsidiary of the Trafigura Group, was established 10 years later. Galena has offices in London and Geneva, and manages around $655m in four funds: Galena Fund Ltd; Special Situations Fund Ltd; and the co-managed Malachite Fund LP and Azurite Fund Ltd.

Galena’s corporate website:
Article Source:

Posted on 17 December 2008 by VRS |  Email |Print

From ETF Securities has had over $400 million added to net long positions across its agricultural exchange-traded commodity products since the beginning of the year, said William Rhind, head of U.K. and Ireland sales Tuesday.

Corn has been the best performer in recent weeks, as expectations of decreased plantings for the coming crop have fueled supply concerns. …. Full Article: Source

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From Just a few months ago, the topics of global warming and emission of greenhouse gases lead to many heated discussion. But as the price of crude oil dropped by over 70%, interest in alternative energy investing cooled off as well.

The idea of carbon emission credits seems to have gathered more steam in Europe than the United States. Nevertheless, there are two U.S. listed exchange-traded products that track this new market….. Full Article: Source

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From Exchange traded commodities (ETCs) group ETF Securities Ltd will offer a range of precious metals securities on the Australian Securities Exchange.

The four new metals securities to be quoted are ETFS Physical Platinum, ETFS Physical Palladium, ETFS Physical Silver, and ETFS Physical PM Basket which will consist of platinum, palladium, silver and gold….. Full Article: Source

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From Reuters: The California Public Employee Retirement System has hired consultants to help boost returns from commodities investments, and may consider investment strategies beyond sticking to the S&P GSCI Index .SPGSCITR, a spokesman for the largest U.S. pension fund said on Tuesday.

CalPERS reported a net loss of 2.9 percent for the first year of its inflation-linked asset class which includes commodities. …. Full Article: Source

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From Goldman Sachs reports earnings this morning with Morgan Stanley due on Wednesday. The Fed should cut the funds rate later today to .25% which will mark the lows for U.S. short-term interest rates for the cycle. OPEC meets on Wednesday and will undoubtedly announce further reductions in oil quotas that may or may not be adhered to.

If all goes according to plan- which would make for a pleasant change- the U.S. dollar should be at a correction bottom this week, gold will be making a price top, and the equity markets will continue the slow process of shifting over to a more positive health care/biotech theme….. Full Article: Source

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From After a bright start, crude oil futures closed down on the day following a gloomy assessment on the state of the US economy from the Federal Reserve.

The downbeat statement accompanied the Federal Reserve’s decision to cut its key interest rate to a range of between zero percent and 0.25%….. Full Article: Source

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From Battling the worst financial crisis in nearly 70 years, the world economy will brake sharply in 2009, with the United States, Western Europe and Japan in recession.

Developing economies in Asia, Africa and the Middle East will experience curtailed growth due to plunging commodity prices and a world trade contraction, but likely will escape the red ink….. Full Article: Source

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From Commodity export volumes in the dairy sector have already fallen more than 10 percent because of weak international demand, some market participants say.

While a fall in export prices for milk and some meat exports has already been widely reported, now volumes leaving New Zealand shores for foreign markets are reducing, adding to pressure on New Zealand’s terms of trade….. Full Article: Source

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From Reuters: Goldman Sachs Group, which on Tuesday posted its first quarterly loss in nine years, said it cut its commodities exposure during the fourth quarter, although it called its commodities trading performance “solid.”

It said the risk it assumed for trading commodities was down 25 percent from the third quarter….. Full Article: Source

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From I’d call what’s happening in the equity market in the third and fourth quarter of 2008 the “fear factor,” and a lot of that has spilled over into commodities. As we succumbed to recession, the U.S. dollar’s rally has contributed to commodities’ demise.

I feel may be somewhat artificial, as markets tend to overshoot in both directions. In my opinion, the dollar is showing signs of decline, and early 2009 is likely to see commodities start to make a comeback. …. Full Article: Source

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From There’s been so much bad news about commodities and equities recently that commodity stocks have taken double gut punches. That’s certainly been reflected in the charts of some of the hard asset portfolios in the Market Vectors exchange-traded fund lineup.

The Market Vectors Steel ETF tracks the AMEX Steel Index and has dipped 64% year-to-date. After sinking to $20 a share late last month, though, the fund’s now holding at $30….. Full Article: Source

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From Guardian: Gold rallied above $850 an ounce on Tuesday after the Federal Reserve slashed U.S. interest rates to fight a global economic slowdown, bolstering bullion’s appeal as a hedge against inflation.

The U.S. Federal Reserve cut its target for overnight rates to a record low zero to 0.25 percent, and said it would employ “all available tools” to dispel a year-long recession….. Full Article: Source

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From Hard Metals, or cemented carbides, which are nearly as hard as diamonds and used in a wide range of applications from carpentry tools to hot rolls for rolling mills in the steel industry; and dies, punches and cutting tools for stone, cast iron, nonferrous alloys and steel.

Tiny hard metal “microdrills” are even used in machine-printed circuit boards….. Full Article: Source

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From Guardian: Aluminium hit a 5-year low on sluggish demand from the car industry and copper fell 4.3 percent as markets awaited the U.S. Federal Reserve’s interest rate decision on Tuesday.

“There is a lot of doom and gloom, everyone is selling on the anticipation the economy is going to continue to be weak,” Randy North, a trader at RBC Capital Markets, said….. Full Article: Source

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From Among the commodities, there’s a tacit recognition that bulk minerals like potash are different from metals and fuels. Indeed, one could say that, with lower cost agricultural inputs (steel, copper etc. for machinery and oil for fuel), farmers’ margins are somewhat enhanced by the world financial-sector downturn.

So they can more readily afford greater outlays for fertiliser to enhance crop yields….. Full Article: Source

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Agora-X, LLC today announced that The NASDAQ OMX Group, Inc. has completed its equity investment following launch of the new Agora-X electronic communications network for institutional trading in over-the-counter (OTC) commodity contracts. The transaction gives NASDAQ OMX a 20 percent equity interest in Agora-X.

“We are delighted with the deepening relationship between Agora-X and NASDAQ OMX, the global leader in exchanges and technology….. Full Press Release: Source

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From Intercontinental Exchange (ICE) has announced that ICE Clear US will clear sugar, coffee and cocoa swap contracts on ICE Futures US from late January 2009.

The Commodity Futures Trading Commission (CFTC) approved its September 2007 application to clear swaps in these products on 12 December 2008. The three new cleared contracts will be the first such contracts offered by the exchange and are specifically designed to target the needs of over-the-counter (OTC) market participants….. Full Article: Source

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From Government officials are considering stimulus packages as a way to put more money in consumer pockets. But if commodity prices continue their decline, consumers may not need the extra boost quite so much.

Prices of commodities, which are the raw materials that go into the goods consumers use, have fallen precipitously over the past three months….. Full Article: Source

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From Fresh targets for the stale price of crude oil keep rolling in – and yes, they are lower. The latest comes from Royal Bank of Canada, where analysts lowered their 2009 crude oil forecast to $55 (U.S.) a barrel from $80.

While that’s a big cut, it doesn’t come close to Toronto-Dominion Bank’s latest take on oil….. Full Article: Source

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From Guardian: The 13-nation Opec cartel signalled its intention last night to cut oil output by up to 2m barrels a day in an effort to halt a plunge of more than $100 (£65) a barrel in the price of crude since the summer.

Faced with the biggest drop in global demand since the early 1990s, the oil producers’ organisation hopes more stringent quotas will spare its most vulnerable members from economic calamity by pushing prices back up to $75 a barrel next year….. Full Article: Source

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From FT: Saudi Arabia today called on Tuesday for the biggest production cut in the history of the Opec oil cartel in an effort to counter collapsing oil prices that have plunged more than $100 in the past six months.

Ali al-Naimi, Saudi Arabia’s powerful oil minister, called for output cuts of about 2m barrels a day, on top of the 2m cuts already pledged over the past two months, to offset the effect of the global slowdown on demand for oil….. Full Article: Source

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From Guardian: Oil companies and traders are creating huge floating stockpiles on board supertankers in the hope of a Christmas bonus if expected cuts in output from Opec drive up the price of crude again.

National state oil companies from countries such as Iran are believed to be behind some of the storage activity….. Full Article: Source

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From Expectations that OPEC will slash oil production by as much as two million barrels a day firmed on Tuesday after Saudi Arabia suggested a reduction of that magnitude is likely.

Such a cut, while not unprecedented, would be considerable given that OPEC has already taken that much oil off the market since September in an attempt to stem crude’s slide….. Full Article: Source

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From Oil prices, which rocketed to record highs above 147 dollars a barrel in 2008 before plunging to 40 dollars, risk slumping further in 2009 as commodity demand softens amid recession, analysts say.

“Heading into 2009, we believe many commodity prices are set to overshoot to the downside in response to the worst downturn in economic activity since the Great Depression,” said Deutsche Bank analyst Michael Lewis….. Full Article: Source

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From The accompanying table [click to enlarge] includes 19 companies in the ETF Innovators [ETFI] Global Carbon Trading Index along with the prices of seven benchmark commodities and funds. Most of the pure plays on carbon credits are very small, with 12 of the 19 companies having market caps below $100M.

As I wrote yesterday, Climate Exchange (CXCHF) represents the most established company poised to benefit from the global expansion of the exchange-based trading of carbon credits, with a market cap of $620M….. Full Article: Source

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From For the past couple of weeks, the European Union has been putting the finishing touches on vast swath of eco-laws that cap greenhouse gases, mandate new efficiency standards and require more renewable energy.

While there have been moves to significantly tighten rules and improve standards, I would wager that three of the most ferocious arguments over how to make European economies fit for a low-carbon future are set to continue. …. Full Article: Source

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From Dubai-based Millennium Finance Corporation is raising a $200 million clean energy fund and opening an office in India.

The firm expects to close the first $150 million of the cleantech fund by March 2009. Millenium plans to partner on the fund with Silicon Valley venture capital investment bank Advanced Equities, which specializes in late-stage private equity finance for technology companies. …. Full Article: Source

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From IHT: ArcelorMittal and other steel makers are not discriminated against under European Union air-pollution rules that exempt industries with similar greenhouse-gas emissions, the European Union’s highest court said Tuesday.

ArcelorMittal, the world’s biggest steel maker, asserts that EU lawmakers unfairly excluded the aluminum and chemical industries from 2003 legislation that capped emissions of carbon dioxide in line with the Kyoto Protocol, the international global-warming treaty. …. Full Article: Source

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From Ukpress: The pound slumped to fresh lows against the euro as the two currencies edged closer to parity. At its low, one pound bought just 1.1102 euros - its latest in a series of record plunges against the single European currency in recent days.

Some holidaymakers travelling to Europe are reportedly already receiving less than one euro for their pound at bureaux de change, where commission is charged….. Full Article: Source

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From World prices for agricultural commodities fell a further 2.2pc in November, according to the latest Westpac-NFF Commodity Index report, and follows on from a 1.3pc drop in October as the global economy continues its slump.

But the Westpac-National Farmers’ Federation report says agricultural commodities are still buoyant; it is the credit squeeze which is precipitating major declines in world trade. …. Full Article: Source

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From Mining’s ‘haves’ and ‘have nots’ are beginning to get together as predators with cash sense market has bottomed and big bargains to be picked up.

Two recent mining M&A deals suggest that acquisition-hungry players are starting to come off the sidelines looking for smaller competitors made vulnerable by volatile metals prices and tight credit markets….. Full Article: Source

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