News

December 01, 2008

Cutbacks And Contango: There Could Be Money To Be Made Being A Contrarian Investor Right Now

By Rob Davies

Somebody somewhere will like as not be keeping a detailed record of all the production cutbacks that have been announced. In fact there will probably be lots of analysts tracking that data. But whether all the announcements will be matched by actual physical curtailment is another matter. Think of OPEC, where members have traditionally been very enthusiastic in announcing reductions and then blithely ignoring them in their own self-interest. The mining world tends to be more straightforward about these matters, partly because the industry doesn’t like doing it, and will only makeannouncements when it absolutely has to. But right now production of every commodity is being cut back, from aluminium to zinc. In most cases it is voluntary, in some cases it is due to plain financial pressures, and in others it is company failure.

What Minews finds most perplexing is that the largest reported fall in output seems to be coming from the metal that has suffered the least in the downturn. Gold is still trading at over US$800 an ounce, only 20 per cent below its peak, yet South African production of the metal was down 16 per cent in the third quarter. Contrast that with nickel where the price is down 80 per cent from its peak, but where producers have only recently started to put a red-line through some operations. BHP’s...