Concerns over the extent of the Chinese economic cooldown has, needless to say, had a catastrophic effect on investor appetite for natural resources stocks.
Combined with signs of fiscal and political deterioration across import-hungry eurozone markets, shares in diversified miners BHP Billiton (LSE: BLT), Rio Tinto (LSE: RIO) and Vedanta Resources (LSE: VED) have rattled steadily lower since the summer, while copper play Antofagasta (LSE: ANTO) has also suffered extreme weakness.
So latest Chinese HSBC/Markit manufacturing PMI numbers released this week should come as further concern for these companies. The index in at just 49.7 for January, just above the seven-month nadir printed the previous month and underlining fears that factory activity remains in a state of contraction.
How far will Chinese efforts boost markets?
Confidence in Chinese metals demand was given a shot in the arm late last year after the People’s Bank of China ploughed $1.1bn into the economy by bringing forward scores of construction projects.
This is unlikely to provide a game-changing fillip to metals demand, however, even though many analysts expect Beijing to keep the money printers switched on to prevent the country suffering a ‘hard landing’ as economic rebalancing occurs. The central bank’s firepower is without question, but just how far lawmakers may be willing to go to flush the system with cheap money remains to be seen.
While this uncertainty in itself is enough to destabilise commodity markets, the relentless drive of the world’s major mining companies to ramp up their operations across key commodity markets is doing nothing to improve worsening market imbalances and boost prices.
Poor commodity forecasts bode ill for earnings
As a consequence City brokers do not expect commodity prices to make a meaningful rebound any time soon.
Indeed, Bank of America-Merrill Lynch expects slowing Chinese steel production to push iron ore prices — a market from which BHP Billiton and Rio Tinto source 50% and 75% of total earnings respectively — to keep prices hemmed in at an average of $70 per tonne this year and $65 in 2016. Iron ore fell to fresh lows since 2009 below $63 just last week.
As for Vedanta, which generates almost half of the bottom line from the oil and gas sectors, the revenues outlook is equally poor and Bank of America expects Brent to average $44.50 per barrel this year and $57 in 2016, still some way below last year’s peak of $115.
And copper giant Antofagasta will be perturbed by average price forecasts of $6,425 and $5,864 per tonne for 2015 and 2016 correspondingly — the red metal dived to further five-year lows below £5,400 last week.
And I believe that even these projections could be deemed a tad optimistic, given that forecasters continue to take the red marker to global growth estimates and producers continue to dig and pump at unprecedented levels. I reckon that earnings across the mining sector are likely to keep rattling lower well into the future.
