Norilsk Nickel buy-back oversubscribed

In research published Tuesday, Scotiabank economist Patricia Mohr noted that the commodity price decline "has been heightened by a massive unwinding of futures and commodity-index investment positions by hedge funds, shifting out of commodity investments deemed too risky in a global ‘deflationary' economic environment." "Base metals have moved from ‘boom' to ‘bust' since mid-July, as investment funds massively exited their position," Mohr said. "In some cases, disinvestment has been forced by the withdrawal of credit or to cover losses elsewhere (e.g. in equity markets)." "While prices are very ‘over-sold', uncertainty over global economic prospects and selling by some funds into rallies are likely to keep prices at a low ebb over the balance of the year," Mohr advised. "Investment in commodity index-linked securities-e.g. derivatives based on the AIG-Dow Jones Commodity Index-fell from about US$200 billion at the end of June to no more than US$150 bn in September and will plunge in October," she added. In her analysis, Mohr forecast that Scotiabank's Metal and Mineral Index "will plunge in October," having lost 9.7% since the July 2008 peak. As LME copper prices declined to US$1.67-the lowest level since July 2005, Mohr suggested the prices "are still lucrative for many mining companies (well above average world breakeven costs including depreciation, high-cost producers at the 90th centile are not covering cash costs)." Meanwhile, significant copper mine supply disruptions continue. Mohr also predicted that China will "step up its buying again in 2009. China's copper consumption should expand by at least 6% in 2009, given the need to expand its power infrastructure and railway system." She suggested that the recent slowdown in China's GDP "appears to reflect temporary inventory liquidation by manufacturers, with business investment and exports holding up well. Retail sales were also strong in September (+235 y/y) pointing to a gradual broadening in the base of China's growth." Meanwhile, Mohr noted that LME nickel and zinc prices have retreated even more than copper, failing below average breakeven costs including depreciation and interest expense. "While we expect nickel prices to rally back in 2009:H1, as Asian stainless steel production ramps up again, new mine expansion...together with a global slowdown in capital spending in many industries, will likely keep costs low," she predicted. Scotiabank also found that spot uranium prices have also been hurt by "investors selling inventory at distressed prices to cover margin calls or losses elsewhere. ...A significant rally in prices would put new mine expansion on a firmer footing." As metal prices were suffering, Mohr noted that potash prices climbed to a new record of US$862.50 per tonne in September and are stable this month, though DAP [di-ammonium phosphate] and urea fertilizer prices are under pressure. Meanwhile a strike at three Potash Corp mines in Saskatchewan, record low North American inventories and ‘sold-out' contract volumes at major potash producers continue to underpin prices. Scotiabank suggests that China needs to restock potash in 2009, after a 50% y/y plunge in China's 2008YTD imports. "A small number of producers control world supplies," Mohr said. "The net result, while potash prices could ease moderately in 2009, this market will be relatively resilient." In the meantime, Mohr acknowledged that the Scotiabank Commodity Price Index "lost significant ground in September, declining 6.8% m/m. " "While still 24.5% above a year earlier in September, commodity prices will retreat further in October alongside faltering global economic prospects-ushered in by a U.S. & European banking crisis, deleveraging by financial institutions and sharply tighter global credit conditions," Mohr predicted. Nevertheless, Mohr suggested that the silver lining in the commodities price decline is that the likely global slowdown in capital spending in 2009 will cut steel prices and eventually lower capital costs for oil sands and other new project development. ---mineweb