EDITORIAL: Oil, metals and Russia’s triumph

Despite political upheaval in the world, the broad decline in oil and mineral prices picked up steam during the week ended Aug. 9, the 32nd trading week of 2008, much to the detriment of resource companies’ share prices.

• To the delight of oil users, a stronger U. S. dollar combined with slumping global oil demand pushed sweet crude down sharply to three-month lows around US$113 per barrel at presstime, compared with oil’s July 11 high of US$147.27. While China is reporting that its oil imports were down 7% in July compared with a year ago, the International Energy Agency has chopped its forecast for oil-product demand from 30 developed countries to 48.6 million barrels per day, or a deterioration of 1.3% from last year.

• The geopolitical scene was dominated by the hot war that erupted between Georgia and Russia, which has delivered victories to the Great Bear on so many levels.

In just a few days of intense combat, the Russian government has shown sinister virtuosity in simultaneously: stoking long-ached-for nationalist pride in Russians; crushing Georgia’s military capacity and keeping it from joining NATO; putting a higher risk premium on non-Russian pipelines in the Caucasus; deeply intimidating Russia’s other West-leaning, ex-Soviet-block neighbours; revealing America’s tired political will; and exposing the moral bankruptcy of liberal institutions like the European Union, whose members value energy imports from Russia over the hard-won new freedoms of its smaller neighbours.

Plus, with exquisite theatricality, Russian Prime Minister Vladimir Putin’s “Joker-like” timing in launching the devastating assault on Georgia at the exact moment world leaders gathered for the rice-and- circuses of the Beijing Olympics has shown for all who care to see the relative merits of “hard” and “soft” power.

Gold responded to the war in the Caucasus with its vaunted “safe-haven” behaviour. It jumped about US$50 per oz. on news that the Russian military was pouring into Georgia’s South Ossetia region and bombing military installations throughout Georgia, and then gave back those gains a few days later as the situation stabilized with Russia consolidating its territorial and political gains.

BP has shut down its 90,000-barrel-a-day oil pipeline running from Baku on the Caspian Sea to Supsa on Georgia’s Black Sea coast, describing the move as “precautionary.” The larger BPoperated pipeline stretching from near Baku to Tiblisi to Ceyhan on Turkey’s Mediterranean coast near Syria was already out of commission after an attack on its Turkish section by the Kurdistan Workers’ Party (PKK) just three days before the Russian assault on Georgia. A third BP oil-export pipeline in Georgia is still open.

• Base metal prices continued to slide across the board on widening expectations that the global economy will slow, especially in China after the Olympics. (Still, China’s economy is now showing a none-too- shabby growth rate of around 4% annually.)

Short positions are growing on base metals, particularly for zinc, which has seen its spot price fall to around US75 per lb.

Noting that the leading economic indicators of the OECD countries “currently point to rapid cooling,” Canada’s National Bank says that “the world is headed for a significant, synchronized global slowdown, the first in seven years.” It adds that not only is global growth slowing, but inflation has become a “major worry for many central banks, especially in emerging countries.”

On the other hand, National Bank reckons that much of this bad news has already been priced into the markets, and now may be a good to time to build up equity positions.

• Almost overlooked was a coup in Mauritania on Aug. 6, which saw the overthrow of the civilian President Sidi Mohamed Ould Cheikh Abdallahi by a military junta led by General Mohamed Ould Abdelaziz. Foreign resource companies in the country say the coup had little direct effect on their activities. The foreign miners there include First Quantum Minerals, Red Back Mining, ArcelorMittal, Sphere Investments, Shield Mining, Industries Qatar, Alba Mineral Resources and Rio Tinto.

• The biggest M&A news of the week was Xstrata’s US$10-billion hostile bid for platinum major Lonmin, offering 33 per share, or a 42% premium. The deal would essentially see Xstrata acquire a platinum division in one fell swoop.

Send your Letters-to-the-Editor and other op-ed submissions to the Editor at: tnm@northernminer.com, fax: (416) 510-5137, or 12 Concorde Pl., Suite 800, Toronto, ON M3C 4J2.