THE traditional argument for investing in commodities is as a hedge against inflation, the theory being that the forces that drive commodity prices higher and contribute to inflation will be good for the commodity producing companies.
But Mark Latham, institutional group director at Baring International Investment Management and manager of its Global Resources Fund, says his fund is structured to do well even in a 'zero inflation environment'.
The fund, launched in December 1994, has about US$57 million under management. It invests in companies around the world and is the only Baring fund not confined to any borders.
Mr Latham says the 'capital intensity' commodity producing companies are decreasing with the introduction of better technology. For many commodity producers from oil to steel this means that for a given unit of capital the companies can produce more product, bringing down their costs and increasing profits.
As an example, Mr Latham says oil companies used to be happy to be able to extract about 10 per cent of the oil geologists knew was in a well, but now it is possible to extract about 40 per cent.
He says this applies to the steel industry where mini-mills, less capital intensive than the behemoths of the past, are producing steel at a lower cost using newer technology being pioneered in countries such as Mexico.
