Mining and metals stocks fell Wednesday on concerns the pace of
China's economic recovery, fears that Greece's debt woes will
spread and worries about Australia's proposed tax on miners will
take their toll.
Many of these factors have coalesced to cause concern in
investors' minds that the global economic recovery is still fragile
and may be vulnerable to a "double dip," something that seemed a
distant concern in the wake of surging commodity prices earlier
this year.
"There's certainly a higher expectation of a double dip
happening," said Charles Kernot of Evolution Securities. "The
market is pricing in a higher risk of a double dip in the global
economy due to uncertainty over what will happen with Chinese
growth, over what will happen with European growth, currencies and
taxes going forward," he added.
Prices for key commodities such as copper, aluminum and nickel,
a key ingredient used in making stainless steel, have fallen by 14%
or more after hitting 2010 highs in April. The value of mining
stocks has meanwhile fallen, also partly due to lower commodity
prices.
London's FTSE miner index has fallen 19% since peaking in April
when China and the emerging markets seemed to be fueling a global
economic recovery and industrialized nations showed signs of a
gradual recovery.
Shares of BHP Billiton Ltd (BHP, BHP.AU), the world's largest
diversified miner by market capitalization, is down 19% since
hitting this year's peak in April and 5% below its share price at
the beginning of the year. At this year's peak in April, BHP shares
were up 17% since the beginning of the year.
Anglo-Australian mining titan Rio Tinto PLC (RTP, RIO.LN) is
down 21% from this year's peak in April and 6% down since the
beginning of the year. At this year's peak in April, Rio Tinto
shares were up 20% compared with prices at the start of 2010.
Analysts and investors said the mining stocks were falling due
to three key concerns:
Doubt About Chinese Growth
China, the world's largest consumer of many raw materials
including copper and steel, on Monday ordered banks to raise the
amount of money they hold in reserve, sparking fears that banks
would have less money to lend and therefore people would have fewer
funds to buy commodities.
China increased the money reserve level for a third time this
year in order to curb inflation and ensure sustainable growth after
the Chinese economy grew 11.9% in the first quarter. China is
aiming for 8% growth this year although the International Monetary
Fund forecasts 10% growth.
"No one expected China to do 12% for the rest of year, so the
growth will have to be slower" in coming quarters, said mining
analyst Nik Stanojevic at Brewin Dolphin, an independent UK private
wealth manager with GBP21 billion in assets.
Slower growth has already been evidenced by HSBC's release of
its China's Purchasing Managers Index on Monday. While it indicated
that manufacturing activity continued to expand in April, the
expansion was much slower. The HSBC China Purchasing Managers Index
touched a six-month low of 55.4 in April against a reading of 57.0
in March, though the reading remained above the expansionary
threshold of 50 for the 13th straight month.
Potential Taxes On Miners
Mining shares in London also slumped over the past two days due
to concerns that other countries might follow the example set by
Australia this week and propose additional taxes on miners.
"Mining is arguably enjoying a period of 'super-profits,'
government budget deficits are large and mining is a soft target
(you cannot move your mine), therefore there can only be downside
risks for the industry," mining analyst Paul Galloway of Bernstein
Research said.
The Australian government unveiled plans to levy a tax on
resource companies that would increase BHP's effective tax rate,
for instance, from 43% to 57% from 2013, the company said.
"If implemented, these proposals seriously threaten Australia's
competitiveness, jeopardize future investments and will adversely
impact the future wealth and standard of living of all
Australians," BHP Billiton Chief Executive Marius Kloppers said.
Cape Lambert Resources Ltd. (CFE.AU) already cancelled an iron ore
project and Rio Tinto suspended all new iron ore projects due to
uncertainty about the proposed tax changes, the companies said.
The Fear Greece Could Unravel The EU's Recovery
Tax issues aside, mining stocks were also hit by a third
factor--concerns over whether a debt default in Greece could cause
problems for other debt laden EU countries such as Portugal, Spain
and Italy. If several European countries default, European banks
could once again find their balance sheets strained, Stanojevic
said. The EU and its member states might also have to raise
interest rates and taxes in order to attract new funds, Kernot
said, thereby putting a nascent EU economic recovery at risk.
Ultimately, analysts and investors said there may still be
lingering concerns about an economic double dip but the recent
share and commodity price drop is more a reflection that investors
may be seeking to move their money into other asset classes (with
greater upside potential) than concerns about global economic
growth.
"I think that the rate of [commodity price and economic]
forecast upgrades have slowed, which is one reason why the mining
sector might have" sold off, Stanojevic said.
"It's not because there's going to be a huge [shortfall] in
supply or a cataclysmic fall in demand" that share prices are
falling, said Bradley Mitchell, senior fund manager at Royal London
Asset Management which invests in mining stocks. The fundamentals
haven't changed and no one is talking about reevaluating companies,
he added.
-By Alex MacDonald, Dow Jones Newswires; 44-20-7842-9328;
alex.macdonald@dowjones.com
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