Monsters of Rock: Big miners ejected from ASX winners’ club as China, commodity prices hit
The big miners have been left off the winners’ list today, with the materials sector falling 1.06% to drag on the ASX.
Fortescue Metals Group (ASX:FMG), Rio Tinto (ASX:RIO) and BHP (ASX:BHP) all fell more than 1% with Rio unable to buck the trend despite hitting the lower end of guidance in its iron ore division in its quarterly production results today.
It came despite a stabilising 0.34% lift in Singapore’s 62% Fe iron ore price to US$119.80/t.
The spot price fell overnight as reports of moves from China’s National Development and Reform Commission to jawbone down prices emerged.
There are fears in the Middle Kingdom they have run too high, despite the establishment of a State-owned buyer to control volatility in iron ore prices and lead procurement negotiations with miners, after the country’s reopening from Covid-19 lockdowns spurred investor enthusiasm in commodity markets.
The Chinese economy grew at 3% in 2022, its slowest rate since the 1970s, according to official figures released by the National Bureau of Statistics, though economists are hopeful of a 2023 rebound as its Covid controls dissipate.
Copper prices also fell around 1% overnight, remaining above US$9000/t, while Pilbara Minerals (ASX:PLS) shares lifted 0.74% despite some reports of lower lithium prices, with Fastmarkets reporting 20,000RMB drops in lithium hydroxide and carbonate yesterday to 485,000RMB, around US$72,000/t.
Gold miners, especially mid-caps, were hit hard as well after bullion’s 2023 momentum halted on a strong US dollar, dropping 0.4% to US$1915/oz.
ANZ’s Soni Kumari and Daniel Hynes said in a note this week that after a 3.5% rise in gold prices in early 2023 they hold a “constructive view” on gold over the next 12 months “but a short-term correction looks likely if a hawkish Fed surprises the market.”
“Investment and physical demand are supportive for 2023. China’s reopening sets the stage for resilience in the buying of physical gold,” they said.
“Technically, bullish momentum is still intact, with prices breaking USD1,878/oz. Nevertheless, a rising wedge formation signals a trend reversal, and if that materialises prices could fall back to USD1,730/oz.”
Heading into reporting season RBC’s Australian analysts Kaan Peker, Alex Barkley and Paul Wiggers de Vries say they are positive on the Aussie mining sector, but cautious that equity valuation appeal has diminished after a recent run in share prices.
“The DecQ should be earmarked by higher QoQ production post a seasonal maintenance and wet weather in SeptQ’22, and higher YoY costs, but declining/plateauing inflation,” they said in a note today.
“FY23 production and cost guidance was set conservatively, and hence we see limited changes to guidance this quarter.”
The analysts rank BHP as their top large cap pick and also like diversified miner South32 (ASX:S32), nickel producer Mincor Resources (ASX:MCR), lithium plays IGO (ASX:IGO) and Mineral Resources (ASX:MIN) and copper miner Sandfire Resources (ASX:SFR).
Meanwhile, they think higher production costs will remain difficult to shake, particularly against the backdrop of a tight WA labour market.
“On costs, miners appear to have hit an inflection point in cost inflation. While companies will report higher YoY costs, we expect cost guidance remains unchanged for most, and operational issues, rather than inflation, the driver for most revisions,” they said.
“Nevertheless, we also don’t expect a fast reversal in costs either with labour-wage stickiness particularly in WA. To counter, for DecQ, we forecast large QP adjustments for base metals/by-product, and continued weak producer currencies will help cash generation.”