Biggest mining equity rally in years built on shaky foundations

  • Reuters
  • Stock Market News
Biggest mining equity rally in years built on shaky foundations
Credit: © Reuters.

By Clara Denina
LONDON, March 18 (Reuters) - The biggest rally for mining
company shares since 2009 risks fizzling out as gains have
largely been driven by funds reversing bets on lower prices
rather than long-term investors looking for value.
The benchmark FTSE 350 mining index .FTNMX1770 , which
tracks the performance of the UK's 11 biggest listed miners, is
up 26 percent this year, the biggest quarterly gain since
September 2009, and marking a revival after three years of
losses.
Sentiment in the sector has been helped by a weaker U.S.
currency, which makes dollar-denominated commodities cheaper for
non-U.S. consumers and expectations that top consumer China will
use further stimulus to boost its flagging economic growth.
As a result prices of commodities such as copper CMCU3 ,
used widely in power and construction, have risen 7 percent this
year, while iron ore .IO62-CNI=SI is up 29 percent.
Equity investors have jumped on the bandwagon and miners
such as Anglo American AAL.L and Glencore GLEN.L have
recovered from last year's losses of more than 70 percent. Both
are up around 80 percent so far this year.
Data from the Financial Conduct Authority (FCA) shows funds'
net short positions in Anglo American are now at 4.5 percent
from a record high of 5.7 percent on Feb. 9, Glencore's dropped
to 2.5 percent from 5.6 percent in January and Rio Tinto's
RIO.L hit the lowest since August 2015 at 0.7 percent.
Short positions, essentially bets on lower prices, aimed to
profit from slowing economic and demand growth in China.
However, fund managers doubt the rally can be sustained as
demand in China, which accounts for nearly half of global use
of most industrial metals, remains weak and surpluses are
weighing on the market.
"It is difficult to see where you are going to get real
demand growth in China," said Malcolm McPartlin, UK equities
investment manager at Kames Capital.
"Only better supply and demand dynamics across markets like
iron ore and copper and also confidence in Chinese demand would
change our underweight position in the mining shares sector."
China, aiming to shift its economy away from manufacturing
towards consumption, has been behind the recent rout in metals
prices, which saw copper fall to 6-1/2 year lows of $4,318 in
January.
It is also one of the main reasons why mining majors such as
BHP Billiton BLT.L , Rio, Glencore and Anglo American have had
to take tough decisions to slash capital expenditure, dividends
and sell assets.
According to data provider Preqin, 62 percent of
institutional investors said that natural resources funds had
not met their performance expectations over the past year and 41
percent plan to allocate less capital to the sector in 2016.
THS Partners fund manager Ali Miremadi said nothing has
changed fundamentally. THS, which has a 5-10 year view, holds an
underweight position in the mining sector.
"To go further from here one will want to see fundamental
recovery and realistically these are very long cycles," he said,
adding that the cycle will be dictated by the pace at which
miners cut output to offset weak demand growth from China.

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Graphs on mining index vs copper price: http://reut.rs/1UCQIqe
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(Editing by Pratima Desai and Keith Weir)

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