There’s been an important shift in the underlying demand for copper that could be regarded as an indication that
Metorex [JSE:MTX] shareholders would be wise to accept the offer from China’s Jinchuan group, even though some analysts feel Metorex is worth more. Jinchuan’s offer is 890c/share, which represents a 21,1% premium above the 735c offered earlier by Brazil’s Vale. Metorex’s board is in favour of Jinchuan’s offer.
The copper price has been very volatile for quite some time and it now appears that this can be attributed to a large extent to heavyweight hedge funds that have built up large positions in the copper market. Copper is renowned as an important barometer tracking the health of the global economy. It’s an industrial metal widely used in the development of infrastructure, in the vehicle manufacturing industry, in electrical appliances and so on. If the copper price rises, it usually means the global economy is doing well, while negative price trends point to the opposite.
But now there’s been artificial interference, in that the hedge funds helped to push up the copper price – but with an entirely different agenda than represented by true economic growth. A question being asked is how far the strong demand from China will be sustained, given its government’s efforts to cool down the economy. At the same time the United States and the European Union have so many problems that if demand from China were to weaken, there’s little likelihood of demand from both those quarters making up for it.
Hedge funds are known to be able to move quickly to lock in profits or avoid losses when they change their mind. Hedge Fund Research in Chicago – regarded as the world’s leading source of information on the sector – reports that the industry currently has almost US$2,2 trillion in assets. Its research – based in part on the large number of indices it publishes – also shows hedge funds can send a market swiftly and comprehensively in a specific direction. It must always be remembered they don’t want to hold the physical asset but are simply interested in making a profit out of price movements.
Currently hedge funds largely hold bull positions and are therefore focused on further increases in the copper price. They look mainly at price patterns technically but also conduct research on the many factors that influence the copper price, including the strength of underlying industrial demand (over which there are currently so many question marks), the building up of stockpiles in China, general economic prospects, exchange rates and the presence of speculators. It’s also well known that hedge funds watch each other and if a major player starts to liquidate its position, the other funds can easily follow its lead, which leads to sharp falls.
As a small player, Metorex is powerless if the market moves against it in such a case. However, Jinchuan is a powerful group with more on its agenda than just making a profit for its shareholders. As a state-controlled group it forms part of China’s policy to ensure it has access to raw materials worldwide to support its rapid industrialisation. Jinchuan has already indicated that it will delist Metorex. That probably plays an important role in the enthusiasm shown for the offer by the experienced
Terence Goodlace, CEO of Metorex.
Jinchuan makes no secret of the fact that it wants to gain a foothold in SA and elsewhere in Africa. It and the China-Africa Development Fund already control Wesizwe Platinum and there’s speculation it will play a major role in the restructuring of SA’s platinum industry – for example, through takeovers. Royal Bafokeng and the Canadian-controlled Platinum Group Metals (PTM) have been mentioned as possible candidates.
Texas buys gold
FOR QUITE some time financial advisers in the United States have increasingly been telling clients to invest in gold, given the unstable global situation and especially the view that the US dollar is going to experience a lengthy period of weakening.
That this opinion is also shared by informed people is confirmed by the fact that the University of Texas has reportedly bought gold to the value of around US$1bn. Since this large (and rich) university enjoys a high status, it caused quite a stir. It’s seen as a vote of no confidence in the greenback.