Mining stocks are up sharply in a struggling UK market – and still have 2 tailwinds

The sector is benefiting from a surge in the value of the metals they excavate. Front month copper HG00,
+ 0.02%
futures are up 62% in the last 12 months, silver SI00,
+ 0.10%
51% won, and platinum PL00,
+ 0.93%
added 32%.

And there are two major trends that should further stimulate the sector.

The first is the decline of the dollar DXY,
-0.11%
A weak dollar environment boosts the purchasing power of major commodity-consuming markets, especially China, emphasizes Ephrem Ravi, an analyst at Citigroup. A lower dollar also helps to ease global monetary conditions as much of global corporate debt is denominated in the dollar.

As the chart shows, there is usually a strong correlation between mining sector stocks and the change in the dollar.

Another boost comes from the rise in copper versus gold. The copper / gold ratio has risen slightly over the past year, implying optimism about global growth, says Citi’s Ravi. Copper is needed for production and construction, while gold is often used as a safe haven in financial situations.

Jeffrey Gundlach, the CEO of DoubleLine Capital and the so-called bond king, has said the copper to gold ratio closely follows yields on US Treasuries, which tend to rise as the economy improves.

According to Ned Davis Research, citing data dating back to 1995, the European metals and mining industry has outpaced the market with an average annual profit of 9.7% as the economic outlook improves, but at 7.4% per year as the economic outlook. outlook deteriorate.

Mark Phillips, European equity analyst at Ned Davis Research, says it makes sense for miners to go through booms and busts. “A boom will start when an increase in demand for raw materials drives up prices while supply remains relatively stable in the short term. As prices persist, this encourages companies to invest in new projects that were previously unprofitable, ”says Phillips.

“However, long lead times usually mean that many companies are investing in new projects at the same time, resulting in cost pressures and an abundance of supply, which can occur at a time when demand starts to decline. This results in a price drop and metal and mining companies that are high on the cost curve go bankrupt, ”he adds.

Supercycle talking

Also behind the profits are talked about by some super cycle of raw materials. That basically means a cycle that lasts for decades, moving goods as a whole. “The commitment of many countries to be climate neutral and less energy intensive by 2050-2060 will require significant investment in infrastructure that will be resource intensive. Structural modeling of commodity prices has shown that at every key stage of economic development – agriculture, industry and services – the use of commodities can change, increasing the likelihood of a super cycle in the early stages of development, ”said Daniel Jerrett, Chief Investment Officer at Stategy Capital, which launched a global macro fund last month.

There is talk in the market of inflation fueled by lax monetary policy and aggressive fiscal spending. Analysts from Variant Perception, a research firm, have argued that increasing inflation risks, the need to hedge them and “generically cheap” prices will lead to a super cycle of commodities. Among the major banks, JPMorgan has also endorsed the vision of the commodities super cycle.

It is currently lonely betting against miners. According to the daily updates from the Financial Conduct Authority, there are no short positions against the large miners large enough to be reported.

But there are a few with different opinions. Ben Davis, an analyst at Liberum Capital, has a sales rating on Rio Tinto and a hold on BHP. The dollar’s weakness, he acknowledges, could help continue the rally, “but that feels like a lot of that in the price.” And Davis doesn’t believe that resources are in a super cycle.

But Davis expects a slowdown in Chinese lending, which will soon have an impact. Credit growth has gradually slowed from 13.2% year-on-year in June to 12.7% in January.

“Chinese credit run-off will become noticeable in the demand for commodities and while replenishment is a very strong force in the rest of the world, it is unlikely to last beyond the middle of the year. The first and biggest beneficiary of this cycle is iron ore, which is why we believe BHP and Rio Tinto have the biggest downside in the short term, ”he says.