Mining shares surged in struggling UK market – and have two more favorable winds

The sector is benefiting from a surge in the value of the metals they unearth. HG00 copper pre-month,
+ 0.01%
futures have jumped 62% in the past 12 months, SI00 silver,
+ 0.62%
won 51%, and platinum PL00,
+ 1.84%
added 32%.

And there are two major trends that should further boost the industry.

The first is the falling dollar DXY,
-0.17%.
A weak dollar environment increases the purchasing power of the main commodity consuming markets, especially China, underlines Ephrem Ravi, analyst at Citigroup. A lower dollar also helps ease global monetary conditions, as much of global corporate debt is denominated in greenbacks.

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

Another boost comes from the rise of copper against gold. The copper-to-gold ratio has increased slightly over the past year, implying optimism about global growth, says Ravi of Citi. Copper is needed for manufacturing and construction, while gold is often used as a safe haven in times of financial strain.

Jeffrey Gundlach, Managing Director of DoubleLine Capital and so-called King of Bonds, said the copper-to-gold ratio closely tracks US government bond yields, which tend to rise as the economy improves. .

According to Ned Davis Research, citing data going back to 1995, the European metals and mining industry outperformed the market by an average annual gain of 9.7% when the economic outlook improves, but underperformed by 7%. , 4% per year when the economic outlook deteriorates. .

Mark Phillips, European equities analyst at Ned Davis Research, says it makes sense for miners to go through booms and busts. “A boom will begin when an increase in demand for commodities pushes up prices while short-term supply remains relatively fixed. As high prices persist, this prompts 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, leading to cost pressures and a glut of supply, which can occur at a time when demand begins to decline. This results in lower prices and the metallurgical and mining companies at the top of the cost curve go bankrupt, ”he adds.

Supercycle Speech

Behind the gains, some also speak of a commodities supercycle. This essentially means a cycle that lasts for decades and the movement of products as a whole. “The commitment of many countries to be carbon neutral and less energy intensive by 2050-2060 requires significant investments in infrastructure that will be commodity intensive. Structural models of raw material prices have shown that at each major stage of economic development: agricultural, industrial and service, the use of raw materials can change, increasing the likelihood of a supercycle in the early stages of development ”, says Daniel Jerrett, chief investment officer at Stategy Capital, which launched a global macro-fund last month.

The market talk is about inflation, fueled by lax monetary policy and aggressive budget spending. Analysts at Variant Perception, a research firm, have argued that increased inflation risks, the need to hedge, and “brilliantly low” prices will lead to a commodity supercycle. Among the big banks, JPMorgan also endorsed the Commodities Supercycle Vision.

This is a lone bet against minors for now. According to the daily updates from the Financial Conduct Authority, there are no short positions against large miners large enough to report.

But there are a few with dissenting opinions. Ben Davis, an analyst at Liberum Capital, has a sell quote on Rio Tinto and hold on BHP. The weak dollar, he admits, may help the rally continue, “but a lot of that is reflected in the price.” And Davis doesn’t believe commodities are in a supercycle.

But Davis anticipates a slowdown in Chinese credit, which will soon have an impact. Loan growth gradually slowed, from 13.2% year-on-year in June to 12.7% in January.

“The reduction in Chinese credit will start to be felt in the demand for commodities and although restocking in the rest of the world is a very powerful force, it is unlikely to last beyond mid-year. . The first and biggest beneficiary of this cycle has been iron ore, and for this reason, BHP and Rio Tinto have in our view the biggest drawback in the short term, ”he says.