Suffering from a big hit at the start of the pandemic, how have commodities and mining stocks faired in the year.
Investment check-up: Commodities & Mining
At the time when the pandemic first began to look serious in China, it was the commodities as well as the Chinese markets that took the biggest hit. Key industrial metals such as iron ore, copper, aluminium and nickel plunged by roughly 20% between the January 2020 highs and the trough in April. But this is very tame for the commodity markets which should be reeling from the cataclysmic impact of the pandemic on the global economy and the demand for commodities. In past crisis’s such as in 2008, most of these commodity’s had a peak to trough decline of between 50-80%, so it would be understandable to ask why have these markets fared so much better this time around?
One key reason would be that the demand for commodities is dominated by China, and if we believe the government data, then it has managed the crisis exceptionally well. While there was the initial damage to demand from the lockdown of Wuhan, the rest of the country seemed well protected from this and the country’s economic activity has bounced back from the poor Q1, leaving it as the only major economy to actually grow in 2020.
Commodities have also done well during the pandemic as manufacturing has not taken as big a hit from lockdowns as the services sector globally, evidenced by China, but also in Europe where the services-dominated UK economy has been a major loser compared to say Germany. Other factors also include the fact that there is stronger support from central banks to keep economies afloat while government have also been spending, much of which is going towards commodities intensive infrastructure spending.
Meanwhile commodities such as copper are in ever more demand from the ongoing structural shift to communications technologies that has also been spurred on by lockdowns. It is also a major resource for wind and solar plants which use so much more of this metal than traditional fossil fuel power plants.
Since the April lows, industrial metals prices have soared, copper is up by 70%, aluminium up by 40% and nickel up by 62%, all of these though have been outshone by iron ore which has more than doubled; owing to prior supply shortages due to major accidents in Brazil several years ago and also supply constraints brought on by productions stoppages at mines due to Covid-19.
The surge in commodity prices is no doubt good news for several of the major miners listed in London. Over the years we have long favoured both Rio Tinto and BHP Group, both of whom have roughly doubled since the April lows and ended 2020 in the green. I argued that both of these companies are well positioned, over the last decade after the financial crisis, Eurozone crisis and a moderation of Chinese growth, they had to adjust to a lower price environment. They cut back on expansion projects, wrote off huge amounts of investments, cut costs, cut debt hitting dividends and investors. Since then, they have been more measured in capital spending, have tidied up their portfolios which left healthy balanced sheets and solid dividends. Those measures left these two well positioned at the start of the global pandemic. They continued paying hefty cash returns to investors when other income stalwarts such as oil, banks and insurance companies retrenched. Their shares prices today are a reflection of their strong standing.
The other London-listed mining groups have recovered too, but I continue to take the view that they are not as well positioned. They either still have too much debt, and are still rationalising their portfolios, having to contend with large coal mining operations in a world stepping away from carbon fuels or have questionable practices in third world countries and face regulatory probes and are exposed to too much political risk. These include the likes of Glencore, Anglo American and Antofagasta, none of which seem as compelling on valuation grounds and shareholder pay-outs as the big two.
Investors looking for a long term investment into this sector, the direct equity approach would be; consider Rio Tinto and BHP, or amongst collectives they could look at the BlackRock World Mining Trust or the Ninety One Enhanced Natural Resources Fund.
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