Market observers believe 2012 will be a year for the large commodity and base miners rather than their small and medium-sized counterparts.
China remains crucial to commodity and base metal demand and traders say the more basic the material the more demand is dominated by China and its rapid urbanisation programme.
Worries about the health of the Chinese economy have hit prices across the board, but few expect to see China’s growth stall severely and if the US’s recovery does gather momentum, upward pressure on prices could again start to build.
Citi analyst Heath Jansen expects a busy year for miners on the capital markets, but sees the focus on minority buy-outs and non-core asset sales.
This activity will be dominated by streamlining from the majors AngloAmerican (LON:AAL), BHP Billiton (LON:BLT, ASX:BHP), Glencore (LON:GLEN), Rio Tinto (LON:RIO, ASX:RIO) and ArcelorMittal (NYSE:MT).
Major M&A deals and IPOs are seen as being limited to the gold sector only.
Jansen recommends sticking with companies that are efficiently deploying capital or are giving it back to shareholders.
Glencore, Rio and Anglo are among analyst Jansen’s key stock picks for next year.
“We see Rio Tinto, Anglo and Glencore as the standouts in our universe.”
“We believe the market is not expecting and certainly not positioned for a broader recovery in economic conditions.
“We think a policy response in Europe, the US and China could provide significant upside for metals and mining equities. An end to the ongoing destocking in China could act as a catalyst for outperformance by mining equities in the first half of 2012, in our view,” said Jansen.
Switzerland-headquartered Glencore is also broker Liberum Capital’s top pick of the five mining majors.
Heyhoe considers Rio Tinto the best positioned to capture market share given its asset and infrastructure base.
It also has the best relationship with China, he says. Key will be shareholder Chinalco, which is its joint venture partner both in China and globally.
Heyhoe believes peak profitability in the iron ore sector has now passed, and that over the next few years there is a strong risk that smaller producers become collateral damage unless they can come to market quickly, control costs and build strong links with Chinese customers.
Liberum has just reduced its forecast for iron ore fines (63 percent Fe) by 4 percent for the first half of 2012 to US$125/t and left the forecast for H2 2012 unchanged at 130/t.
Thermal coal prices have held up reasonably well in 2011, as emerging markets’ hunger for energy from coal-fired plants has propped up prices.
The International Energy Agency recently painted a positive outlook for thermal coal demand and prices over the next five years forecasting continuing strong demand in China and India.
In a recent note, broker Liberum estimated that Xstrata’s coal division will account for 43 percent of the company’s EBITDA next year, compared to 32 percent in 2011.
Liberum’s price forecasts for thermal coal remain unchanged for both halves in 2012, and the broker expects an average price of US$115/t throughout the year.
Liberum has reduced its estimate for the average price per pound over the first half of 2012 by 15 percent to US$3.50 and by 9 percent for the second half to US$3.75.