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Commodity Correction Continues

I thought you might like to read some comments from various analysts relative to the current commodity correction.

My thoughts on this are that we have a massive overreaction by the hedge funds that moving from overweight long positions to overweight short positions. This is coupled with a hiatus by China of buying oil and commodities during the Olympics in order to stop factories from producing pollution – there have already been a significant number of stories on air quality in Beijing, and the government wants to put the best face on things that they can.

July has been a painful month, but it is just temporary.

Enjoy the following articles…

Stop worrying, learn to love mining
That’s the advice this morning from Lehman Brothers analyst Christopher LaFemina, who writes in a note to clients that his travels in Australia, Europe, the UK and the U.S. over the course of the last couple months have revealed plenty of “outright negative sentiment” regarding mining companies such as British mining firm Rio Tinto Plc (RTP), and its peers. “The bulls have all but disappeared,” writes LaFemina, but he thinks the skeptics are wrong. “Based on our analysis of copper and coal fundamentals in particular,” argues LaFemina, “as well as the history of mining sector corrections and subsequent rebounds over the past two years, we believe the recent selloff has created yet another exceptional buying opportunity.” Looking at mining sector corrections going back to 2006, he thinks there’s evidence the stocks will rebound over the next three to six months “significantly.” LaFemina rates Xstrata (XTR.SG), listed in Stuttgart and London, and Rio Tinto, and BHP Billiton (BHP) as his favorites. And he recommends Companhia Vale do Rio Doce (RIO) as a pick for “long-term” investors. Today, none of them are doing so well. BHP is down 5% at $70.85, Vale is off 6% at $28.32, Xstrata closed down 2.38% at $45.13 in Stuttgart, and Rio Tinto is off 5% at $397.44.

China and India Battle for Imperial Oil
8/4/2008 3:02 PM EDT
By: Patrick Schultz

As oil prices drop, China and India are still aggressively pursuing their energy security. The two energy-starved economies are now targeting London-listed Imperial Energy because of its large production in Russia. Through Sinopec, China is entering the due diligence process for a possible bid to counter India’s state-owned Oil & Natural Gas recent offer.

Prices may have recently corrected for energy assets, but this bidding goes to show that emerging market demand for energy is strong and long-term in nature.

Steel Output Remains High
By Tony Crescenzi
8/1/2008 2:12 PM EDT

Despite continued weakness in the automobile sector, steel output in the United States remained high in the week ended July 26, rising to 2.142 million tons from 2.114 million the previous week, according to data from the American Iron and Steel Institute. That’s not far from the seven-and-a-half-year high posted in the week ended Feb. 25 when 2.158 million tons were produced. Production levels are running much better than in the 2001 recession when it fell to a low of 1.37 million tons in December 2001.

The sturdiness of steel output underscores a few major points regarding the current economic cycle:

  1. The relatively strong, albeit waning pace of global economic activity continues to underpin demand for industrial materials
  2. The weak U.S. dollar is helping U.S. industries to grow their sales abroad
  3. Exceptional inventory controls in the U.S. factory sector are buffering the U.S. against deeper economic weakness

Each of the above factors has strong underpinnings of a secular nature, which means that they are likely to hold up well against cyclical pressures and therefore help buffer the U.S. economy against the possibility of even deeper economic weakness. As for steel scrap prices, they have moved sharply higher since December, rising to $635 per metric ton from an average of $304 in December. The five-year average is $227.03. The current level is just off the five-year high of $648.5 set in May.

These days, commodity prices speak more to global economic conditions than to conditions domestically and are therefore relatively more useful in gauging the global economic situation.