Dear CIGAs,

Market corrections are never painless but this particular one seems more like a flesh-eating disease, consuming a little bit of the patient (and impatient) every day.

My sense of things is that if we haven’t found a bottom in metal markets yet, we are very close. Supply-demand fundamentals are bound to work their way back into the marketplace and prices for key industrial commodities will begin to reflect that fact. Most of the carnage inflicted on commodities in my view has come from an appreciating dollar; and when demand for U.S. treasuries starts to wane, the dollar will weaken and commodities will begin to rise. (We saw the early signs of this in the last trading days of October).

In the past week, I’ve read about several metal producers shutting down operations while others have put new projects on the back burner. In the former camp is Brazil’s Vale do Rio Doce (RIO), the world’s largest iron ore producer. RIO recently confirmed it would substantially cut iron ore production as demand for steel slumps because of the global economic downturn. Steel companies across the globe have cut production by 20-40% and until demand stabilizes and begins to recover, iron ore companies will continue to feel the pinch.

Investors in commodities associated with steel production (metallurgical coal, nickel, zinc, molybdenum and chromium) face significant investment risk in such an environment unless companies are selling under long term contracts. Once the panic selling of commodities abates, it will be much easier to determine which commodities present the best investment opportunities. My bet is that it will happen soon. What people tend to forget is the fact that fiscal and monetary reflation on a global scale never seen before is only just beginning. With all this money being pumped into the global financial system, commodities will get their fair share.

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