Fund Team: Metals & Mining Update

Harry Jones, Metals & Mining Sector Leader 2015-16

2015 has been a troubling year for industrial metals and consequently, the Metals & Mining industry has suffered, with big miners such as Glencore, Rio Tinto, Anglo American, Antofagasta and BHP Billiton all seeing their share price tumble. The S&P Metals & Mining Index is down 55.75% on the year, with no significant drivers for a rebound in sight. Much of this is due to bearish views on China’s economy, which has slashed commodity prices. According to Barclays, US commodity futures are currently positioned at a net short ten times greater than in the midst of the 2007-9 financial crisis. In addition, 6% of Glencore shares are out on loan, up from 1.5% in September. Likewise, Anglo American shares out on loan totalled 8.1% in the run up to Christmas, from 1.97% in July (FT and Markit data). Bearish indeed.

China’s recent stock market troubles haven’t helped, compounding weak commodity demand following restructuring towards a service-based economy, shaky export figures and renmimbi devaluation. These factors have diminished Chinese appetite for commodities. The start of the US interest rate raising cycle has seen an appreciation in the greenback, affecting dollar-denominated debt.

As such, the Metals & Mining team have felt it imprudent to invest at this time in the sector, whilst share and commodity prices are seemingly still on a downward trajectory. Whether the market will bottom out in the wake of the ‘supercycle’ of the last few years remains to be seen.

Iron ore prices hovering around $36 will impact many of the big miners, particularly Rio, BHP and Vale, reducing the prospect of dividend payouts. Citi analysts have predicted it to fall beneath $30 in 201

Copper is a metal to look out for in 2016, with mixed market sentiments. Some analysts believe it is grossly undervalued at $4,500 a ton, especially as supply has been cut, whereas others see it as in line with weak emerging market demand.

On a more positive note, rare earths, especially cerium, could increase in price in 2016. A stable cerium price enables other, scarcer rare earths to be mined more profitably. Capital Economics forecast a 6% rise in demand for rare earths in 2016, and the Metals & Mining team will be analysing rare earth miners’ prospects. Another area we have been looking at is lithium, which could become an interesting market over the next few years, especially with the rise of electric cars.

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