Ground Breakers: Just like the Backstreet Boys, miners are back (ALRIGHT!) on China stimulus news
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You may be surprised to recall the Backstreet Boys’ album Backstreet’s Back was only their the second LP and far from coming off a long and painful break headlined by sex scandals and other public shames was released just 15 months after their eponymous debut.
No time really for anyone to feel a sense of longing for their absence, but Tween fandom was a different beast in the 90s…
Like the life cycle of those 90s boy bands the mining cycle is a volatile shapeshifter.
Everything looked great 15 months ago, miners were pumping out record profits, commodities were heading up to all time highs and analysts with rose coloured glasses were talking of a boom to beat and outlive all previous booms.
A lot has changed since then, a deadly cocktail of inflation, rising interest rates, war and Chinese economic rumblings are tanking commodity prices and killing investor interest in mining stocks.
We’re down 16.43% over the past month in the ASX 200 Resources index.
At least for today, after news China is ‘considering’ a major infrastructure splash underpinned by US$220 billion in special bonds.
That sent metals on a run overnight. Nickel and gold were outliers, with small slips.
But copper soared 4% to US$7823/t, zinc rose 3.7% to US$3110/t, palladium flirted with US$2000/oz, aluminium was up 1.4% to US$2443t and iron ore rose US$2.50 to US$113.70/t.
Queue a run on resources, including a 2% lift across the materials sector and 2.62% lift in energy.
Lithium and rare earths stocks ruled the roost, with Pilbara Minerals (ASX:PLS), Allkem (ASX:AKE), Mineral Resources (ASX:MIN), Lynas (ASX:LYC) and IGO (ASX:IGO) head and shoulder above the other large caps.
Liontown (ASX:LTR) repeated the theme in the mid-tier, with Alumina (ASX:AWC), Champion Iron (ASX:CIA), uranium miner Paladin (ASX:PDN), Whitehaven Coal (ASX:WHC) and Capricorn Metals (ASX:CMM) all looking healthy.
With China’s stimulus impulse back on the agenda after months in the Covid mire, is their now upside for base metals after the pasting they have taken since the start of June.
ANZ’s commodity strategists Daniel Hynes and Soni Kumari have spent plenty of time racking their brains about the fundamentals here. They say upside remains despite investors getting bearish on metals like copper.
“China remains the wildcard, due to its COVID-zero policy. Overall, though, we expect fiscal and monetary policies to support metals demand through to the end of 2022,” they wrote in a note to clients.
“Supply side issues can’t be ignored.
Mining headwinds associated with environmental, social and governance (ESG) requirements are exacerbating labour shortages and high energy costs, stalling plans to boost the output of copper, aluminium and nickel.
This is on top of the disruptions caused by Russia’s invasion of Ukraine.
Metal exchange inventories of aluminium, zinc and nickel are at multi-year lows, and markets are vulnerable to further tightness. For copper, such levels indicate prices in the range of USD9,000−10,000/t.
We have lowered our short-term targets following the sell-off, but see upside risks for most metals.”
Hynes and Kumari say China’s investment in green sectors and technological upgrades mean copper will see structural increases in demand from the infrastructure required to support the shift to renewable energy.
Other banks are less certain of the impact of China’s stimulus sugar hit, with ING’s Robert Carnell and Iris Pang warning ‘considering’ does not mean the bonds will be pushed forward this year.
“Let’s assume that CNY 1.5 trillion issuance amount stated by the media is the amount to be pre-approved for 2023, it is not a big jump from the CNY 1.46 trillion pre-approved quota set in 4Q21 for the issuance in 2022,” Carnell and Pang wrote.
“In other words, this should not be considered an aggressive fiscal stimulus.”