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.”
