Commodities face 'seven thin years'
By James Mackintosh and Javier Blas
Published: February 4 2009 02:00 | Last updated: February 4 2009 02:00
Commodities prices could remain at their current depressed levels for up to seven years as the global recession hits demand, according to Michael Farmer, founder of hedge fund Red Kite, one of the most closely watched figures in the base metals market.
Mr Farmer, who used to run MG, then the world's biggest copper trader, runs Red Kite, which consists of five hedge funds with $1bn under management that are among the biggest investors in metals.
"If one believes the recession's going to last for some time, then I think commodity prices will remain low for quite a long time, it might be five, six, seven years," he told the Financial Times in rare public comments.
"We have gone from boom to bust and I think we [the markets] are going to be bust for a little while."
This marks a sharp reversal from his views a year ago, at a time when Red Kite was riding booming prices in industrial metals and when he told Bloomberg that a new "industrial revolution" meant "the world has to learn to value [raw materials] more highly".
Mr Farmer and David Lilley, co-founders of Red Kite manager RK Capital, are known as the "God squad" in metals markets for their evangelical Christianity, although their religious fervour has not damped their trading success.
Last year Red Kite Metals, the main fund, was up almost 20 per cent, investors said, while two smaller funds were up 64 and just over 30 per cent.
Two funds launched in the summer, one investing in China and the other providing mezzanine finance to miners, rose 6-7 per cent, while another fund is planned. Red Kite is closely followed by metals investors as it often takes big bets, including a highly geared position in copper which helped its main fund make 188 per cent in 2006 - before falling by half as the copper price tumbled the following year.
Mr Farmer said investors should expect both the commodities markets and Red Kite's funds to be far less volatile in the future, as "warehouses full of metal" damp price moves. Base metals inventories at London Metals Exchange warehouses have soared in the last three months as demand, particularly in Europe and the US but lately also in Asia, has plunged far faster than producers have cut supply.
Aluminium stocks are at a record high of 2.84m tonnes while copper stocks have zoomed to 495,000 tonnes, the highest level since late 2003. Nickel stocks are the highest since at least 1998.