Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Value returns to Australian miners as commodities slump

Nicola Chand  |  07 Jul 2022Text size  Decrease  Increase  |  
Email to Friend

Major resource players are sliding into undervalued territory for the first time in months as commodity prices tumble on fears a global recession could slash demand for metals and fuel.

Iron ore heavy hitters BHP (ASX: BHP) and Rio Tinto (ASX: RIO) are fairly valued after a 18% drop since June in line with iron ore prices. This is the first time since November 2021 Rio has traded in this range. Copper prices hit a 19-month record low this week with local copper miner Oz Minerals (ASX: OZL) undervalued for the first time since 2020. Diversified miners Mineral Resources (ASX: MIN) and South32 (ASX: S32) are also lower.

Commodity prices are retreating sharply from recent highs as investors worry rapidly rising interest rates from the US to the Eurozone risk tipping the global economy into recession, says Morningstar equity analyst Jon Mills. Renewed lockdowns in China this week further weighed on demand, he adds.

“[China] were supposedly reopening but now they're cracking down again, so that's one major reason,” he says. The other major reason it's like all the Western world's central banks are raising interest rates very quickly, because they think they've lost control of inflation. And so, they've sort of gone from not worrying about inflation to projecting the idea that they're really worried about inflation,” he adds.

Commodities tightly linked to economic activity such as oil and copper are losing ground rapidly as traders bet on slower growth. Brent crude oil, the global benchmark, briefly dipped below US$100 on Wednesday, down 9% since June. Copper notched its worst quarter since January 2021 in June. Iron ore prices are down 43% since the April peak, battling concerns over slowing demand in China, the world’s largest importer.

The Bloomberg Commodity Index, which tracks 23 commodities, is down 18% in the past month.

Traders are reacting to fresh data showing leading parts of the global economy appear to be slowing even as China reimposes lockdowns in major cities.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

US retail sales slipped 0.3% in May compared to a month earlier. A measure of US manufacturing activity declined for June, although it remained expansionary. Meanwhile the euro hit a two-decade low against the US dollar on Thursday as the continent’s energy crisis threatens to derail the economy.

“A barrage of weaker data from the US is vindicating growth bears,” said Morningstar head of equity research Peter Warnes in a note to clients.

Deutsche Bank’s latest client survey revealed 90% of respondents expect a US recession by the end of 2023, up from 35% from their December survey.

On Monday, Chinese province Anhui announced lockdowns after nearly 300 cases of covid-19 were reported. Xi’an city following on Wednesday, announcing businesses, schools, and restaurants would close for one week after the city of 13 million reported covid-19 cases.

Commodities like oil and copper hit multi year highs following the invasion of Russia. Concerns about underinvestment and lack of supply kept prices high. Energy and resources outperformed as broader markets endured savage selloffs. 

Oil fundamentals remain strong

The underlying supply and demand imbalances helped drive the 18-month rally in oil prices remain and any price correction is likely to be temporary, says Lazard Portfolio manager Aaron Binsted.

“I suspect that even if we do have a demand hit, yes, oil prices may fall a bit and yes, oil equities may fall a little bit, but it's likely to be shallower than people think,” he says.

“As soon as you get an economic recovery, we're going to come back to the constraints of limited energy supply. To say that, yes, there'll be an impact, but it's probably going to be far shallower and far shorter than people suspect,” added Binsted.

is a wealth and finance journalist with Morningstar

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend