Regular readers will know about the chronic bearishness which I harbour over BHP Group and Rio Tinto.
What is the one significant thing that connects these FTSE 100 miners, aside from their gigantic forward dividend yields (of 8.2% and 6%)? Their colossal exposure to the iron ore market, and the prospect of sinking earnings as supply ramps up and demand indicators steadily worsen.
For this reason I’d also be happy to give Anglo American (LSE: AAL) a wide berth right now. Forget about its low valuation, a forward P/E ratio of 9.8 times and its big corresponding dividend yield of 4.3%; I fear that the dirt digger’s share price is in severe danger of collapsing in 2019, particularly so following its stunning 20%+ share price ascent during the past four months.
Breaking China
Anglo American has clearly benefitted from the rush of risk appetite across financial markets since the turn of the year. And there’s certainly been some good news for the London-based miner in recent months, namely Federal Reserve back-pedalling on the speed of interest rate rises that we can expect, a promising signal for the US steelmaking industry, as well as cheery signals from America and China on the progress of trade talks.
There’s also a lot of reason to be scared for this Footsie-listed firm, though. Most chillingly, manufacturing data from commodities glutton China continues to go from bad to worse, prompting lawmakers to embark on a variety of new measures, like introducing new tax cuts to support industry to paving the way for fresh monetary easing by the People’s Bank of China.
For now, the jury remains out on whether such action will have the required effect to prevent the Asian powerhouse’s economy from sinking sharply. Whilst providing some support, surely, previous measures from Beijing haven’t stopped economic indicators in the country from tanking. Shattering new loans data released over the weekend provides perfect evidence of this.
Auto sales in reverse
Concerns over construction and manufacturing in China aren’t the only reason to fear for the likes of Anglo American either.
Let’s have a quick look at Germany, for instance, the world’s second-biggest steel importer on account of its titanic car industry. The dangers to Central Europe’s automakers because of President Trump’s tariff wars are colossal, of course, and lawmakers in Berlin are desperately scrambling to prevent a plunge in car sales to the US.
The pressure on vehicle production — and by extension, steel demand — is already immense as sales dive across the globe, and there’s little signs of recovery in consumer appetite either. New registrations in Europe fell almost 5% in January; sales in China dropped for a seventh straight month in February; and manufacturers across the board are reporting collapsing demand in the US.
There are clearly a lot of demand worries for Anglo American to digest right now, adding to the strain that surging iron ore production is creating. The stock’s cheap, sure, but this reflects its very high risk profile. I for one plan to keep avoiding it like the plague.
