While hopes that the resources sector will keep the Australian economy, at least, from slowing and the Australian share market from tumbling are long gone, there are some bright spots in the sector to maintain investor interest.

Taking the sector as a whole, the fall in commodity prices since June has led to a big cutback in planed mine development, such that markets will tighten quickly once demand improves.

According to Chris Butler, the co-head of resources and head of sector research for Martin Currie Investment Management in Edinburgh, it would have been “disastrous” if the big miners had built everything that they had planned until a few months ago.

“It would have impacted on prices for decades,” he said on a visit to Australia last week. “We had a boom from about 2000 to early in 2008 because of decades of underinvestment. But we were moving towards surpluses in most commodities.”

What has been unusual about the supply adjustment, however, is the speed with which it has occurred.

“The supply response has been to cut it off, very unusually and in an extreme way,” Butler said. “Normally you go through an extended process of eroding returns but the credit crunch, and the lack of capital coupled with the steep fall in prices means we’re back to capital starvation.”

Nevertheless, the slump in demand, especially from steel producers – 30 per cent down in China – means supply still outstrips demand.

“Whenever we come out of this though,” Butler said, “there’s a good chance that conditions will be tighter than they were before. There are now more extreme outcomes for companies than ever before.”

Martin Currie’s flagship resources fund is a long/short strategy, so it is less affected by the industry’s direction than long-only funds. This fund, launched in October 2003, has about US$600 million invested. The firm’s long-only resources fund, launched in 2006, has about US$100 million.