Shares in the UK’s two biggest miners, BHP Group PLC and Rio Tinto PLC (LSE:RIO) both hit 12-month highs at the end of last week, even as the outlook for the global economy remains mixed.
Many pundits are still forecasting that Europe and the US will go into recession this year, as higher inflation and interest rates continue to put the squeeze on economic activity.
That’s the downside.
But as far as mining is concerned, there are several pluses too.
The first is that the oncoming recessions have been widely predicted, and thus are likely priced into almost everything already. The broadest view is that some pain is inevitable as the forty-year-long Great Moderation – in which interest rates and inflation were simultaneously very low – comes to an end.
More immediately, though, several factors relating to Covid and to China, in particular, have played into the recovery in mining company shares.
Among these are the resolution of most of the supply-chain difficulties that occurred during and in the aftermath of the Covid crisis, and what looks to be the beginning of the end of China’s hardline stance on Covid.
China has been the driving force behind commodity prices for the better part of two decades now, but Xi Jinping’s hardline stance on Covid lockdowns had threatened to take the shine off that in 2022.
Internal dissent, combined with significant negative economic impact appears to have driven the Chinese to take a more relaxed view towards Covid in the past few weeks, and share prices in the mining sector have not been slow to respond.
One noticeable effect of this change of heart has been the movement in iron ore prices. Despite lower levels of imports into China in recent months, iron ore prices remain buoyant at $120 per tonne, up over 50% since November. The iron ore price is currently hovering at a 17-month high.
“The short-term positives for miners are perhaps becoming clearer,” analysts at broker Ambrian wrote in a missive to investors on Monday morning.
“With hints of economic stimulus as China emerges from its Covid isolation and an early Lunar new year (in January rather than February), prospects of a weakening US dollar and global base metal inventories at extreme lows, expectations of a restocking cycle and prospective growth recovery are helping underpin commodity price expectations," they said.
The Ambrian analysts also talked of an expectation that inflation would peak this year, and that the US Federal Reserve would ease off on its’ rate rises during the second quarter.
In addition to that, there is also the ongoing factor of the need for the global economy to go green.
“Back in November, S&P Global Market intelligence’s 2023 Metals and Mining Outlook suggested that supply constraints across commodities deemed critical to the energy transition effort are forecast to emerge as early as 2024,” the Ambrian analysts continued. “We, amongst many others, have made a similar case for copper from 2026.”
And Ambrian isn’t the only experienced market participant harping on such themes.
The specialist mining investment fund managers at Baker Steel also recently put out a market commentary that sounded an upbeat note, at least as far as commodities are concerned.
“The cycle is turning,” wrote the Baker Steel analysts. “Commodities are starting to outperform broader financial assets, amid persistent inflation, confrontational geopolitics, and supply chain reorganisation. A range of metals form the critical building blocks for green technology. With governments globally committed to Net Zero, surging demand stands to transform the mining industry.”
The Baker Steel analysts also pointed out that if the Fed presses pause on interest rate rises that is likely to be positive for gold.