How bad is the sell-off in UK mining stocks? The FTSE 350 metals and mining index is clear – down 56% since the start of the year.
Much of the anxiety is China-based: COVID-19 restrictions and fears of a global recession are all doing their bit to dull sentiment but the signals are frustratingly uneven.
Even positive, in parts. China manufacturing PMI for June should have helped restore some confidence – the Caixin China General Manufacturing PMI soared to 51.7 in June 2022 from 48.1 in May.
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Miners on shale
That’s the fastest pace for more than a year. Given mining stocks are still selling at a 55% discount to six months ago, is it time to buy some rock?
Last week Jefferies analyst C. Lafemina estimated Anglo American would post fewer earnings, from $2.95 a share to $2.84, but the Buy rating did not change.
In the last few days the volatility has been intense. Glencore is down 7% in the last five days while Rio is down more than 5%.
Meanwhile cities in eastern China are again tightening COVID-19 restrictions as new virus clusters emerge.
It is impossible to take the China anxiety out of mining worry. The sector is hugely economically sensitive to the world’s second-biggest economy.
The world's most important industrial metal is copper which dropped below $8,000 a tonne for the first time in nearly 18 months last week having hit more than $10,500 earlier this year.
Chinese real estate developers are now accepting garlic and peaches as down payments for properties – it’s got that bad – in order to keep sales up. Live pigs are also a sweetner, claims CNN.
Miner, major worry
There’s other warnings for mining stocks, like the BlackRock World Mining Trust (BRWM), down 25% in the last month.
Some of the downturn looks a natural ‘washing out’ but hope looks still hollow as recession risk for developing markets in 2022 and 2023 rise.
Then there’s the recession sentiment from the Russian-Ukrainian war. While some metals prices have done well, the broader mood is very dour as consumers budget for – and pay down in advance, in many cases – a ferociously hard 2022/23 winter to come.
As all these pressures mount, so does inflation and central banks must respond.
Metal producers aren’t just super-susceptible to electricity costs. They’re also navigating a greener decarbonisation path plus handling on-going supply chain bottlenecks.
In other words, there’s a lot of different macro and micro pressures hitting the commodities market simultaneously. An increase in shorting in some sections of the commodities and metals market also suggests a lack of longer term confidence.
Ironically the International Energy Agency says a world climate trajectory aligned with the Paris Agreement “will require almost twice the volume of metals by 2050 as a world continuing with its current climate policies”.
High volume metals like aluminium and copper dominate in clean tech it goes on “but several lower volume metals such as lithium, cobalt, and rare earth elements will have an extremely high demand pull from the transition [too]”.
Pig out with care
In all this, are mining stocks a buy? If miners aren’t over-dependent on power price pressures they still have to buy fuel for heavy, diesel-powered truck fleets.
Frankly, there’s no escape from the global inflationary crisis, not to mention meeting demand for labour and skill resources. Central bank interest rates are rising everywhere and recession fear is deepening.
With the exception of free pigs, stimulus packages are the past. More remote miners fare particularly badly in this space and while shares are a great deal cheaper, the outlook appears weak.