#Commodities: Global recovery injects life back into #MiningStocks - Telegraph

Mining companies and most raw commodities are now seeing either sustained year-on-year gains in price, or have cut their losses after last year’s rout.

Commodities: Global recovery injects life back into mining stocks

Commodities were beginning to look like a graveyard for investors last year but the first half of 2014 has seen the sector recover some of its allure. The broadening global economic recovery now spreading from North America through to the UK, Europe and into Asia is underpinning a revival in resources as an asset class even if the boom years of the last decade may never return.

Mining companies and most raw commodities are now seeing either sustained year-on-year gains in price, or have cut their losses after last year’s rout. Although some concern remains over major consumer China suffering its own debt crisis, resources are once again offering investors a low-risk option to gain exposure to rising global consumption and the return of sustained economic growth.

Here is a review of the first half of industrial commodities; and the hot areas for investors to look out for in the next six months:

Although investors remain cautious the big four mining groups listed in London, BHP Billiton, Rio Tinto, Anglo American and Glencore have performed better over the last year. Year-on-year these four - accounting for about 8pc combined of the FTSE-100 - have gained an average of 5.64pc, which is still underperformng the overall gains on the main market over the same period. The overarching theme for the four bellwether mining stocks has been cost cutting and their individual ability to rein in overheads, while selling non-performing assets.

BHP Billiton and Rio Tinto are the two standouts in terms of gains in value up 11.9pc at 1,947.40p and 13.62pc to 3,257.50p respecively since last May. Their performance is reflected in the ability to strip costs quicker than their major rivals and focus on key bulk industrial raw materials such as iron ore and copper. In the second half of this year investors should look out for BHP Billiton making a further $5.5bn (£3.2bn) of savings and a possible $20bn demerger of its nickel, manganese and aluminium interests as the company continues to sharpen its focus on what it defines as its “four pillars” of iron ore, copper, coal and energy.

Rio Tinto, which has a narrower portfolio, may struggle to gain traction due to the current weakness in iron ore prices. The company is seen to be vulnerable to fluctations in demand for the steel-making commodity. Analysts at RBC Capital Markets believe the stock needs to fall to around £31 per share, from which point it could see a 25pc upside. However, the broker warns: “Rio’s exposure to aluminium, iron ore, base metals and coal in particular is vulnerable should world growth, especially China’s growth, be slower than we expect.”

Base metals

Industrial commodity prices such as iron ore have continued to be restrained by lingering uncertainty over the demand outlook from the world’s major consumer China. Iron ore prices have fallen to around $95 per tonne after starting the year comfortably at $135 per tonne amid concern that production increases in Western Australia’s Pilbara have outstripped demand amongst Chinese smelters. Australian ore-focused miners have so far born the brunt of these demand wobbles. Fortsecue Metals is down 22pc, Atlas Iron 37pc and BC Iron 30pc all since the beginning of the year.

Of all the industrial commodities, copper may benefit the most from a broad-based global economic recovery. However, broker Macquarie warns that the the market will continue to focus on a rush of new supply coming on stream through the opening of new mega-mines. The broker expects prices to level at $6,500 per tonne by the end of the year. Long-term, Macquarie says: “On the positive side, it is important to remember that the softening in the market is primarily a supply story. Demand is seen as robust and improving in the key consuming regions outside China, namely East Asia, West Europe and North America.

Farm it out

Agricultural commodities have become one of the most lucrative areas for investors to dabble into. In 2014, weather and politcal risk events have surprised investors, wreaking havoc in some of the world’s most productive regions.

“There are a few key events that have led to the appreciation of agricultural commodities through the last couple of months. We have seen drought spread through the Southern regions of Brazil and the US, cold and wet conditions for US spring crop plantings and tensions building up between Ukraine and Russia,” said analysts at Macquarie on review of the sector’s performance so far in 2014.

Coffee has been the commodity most affected by droughts, which had pushed prices of Arabica beans up by 80pc at one point. However, sugar, wheat and cocoa have all been hit by factors beyond the control of either the farmer or trader this year. This trend is expected to continue into the second half of the year as a new El- Nino weather cycle takes hold across the Southern Hemisphere.

“The major risk to our outlook for next season’s prices remains the vagaries of weather later this year. We do though feel that given the inventories that have been built through the last season around the world, a level of yield deficit can be absorbed without requiring a substantial change in the pricing outlook for the major grains and oilseeds,” said analysts at Macquarie.

Gold

Russia is stocking up on gold as the Kremlin continues to lock horns with the US and its allies over the political status of Eastern Ukraine and Crimea. Russia’s central bank has quietly been stockpiling bullion, it has emerged, as fears over the country’s ability to finance itself because of sanctions have intensified. According to the latest market report by Commerzbank, the Moscow-based central bank has added 28 tonnes of gold to its vaults. Overall, gold is up almost 8pc year-to-date, trading at around $1,300 (£771) per ounce. Signs that the Kremlin is turning to the yellow metal as a form of financial insurance will certainly add to the mood amongst many speculators that prices are destined to climb.

Commodities: Global recovery injects life back into mining stocks - Telegraph