SA mining stocks have fallen by as much as a fifth in the past month in response to fears about the US slipping into a recession on the back of high inflation, tougher interest rates and weakening demand out of China, the world’s largest buyer of iron ore and copper.
But when prices peak before long slides it does not mean metal prices have reached the top of the commodity cycle. Sentiment could change quickly if the war in Ukraine ends or China relaxes its lockdowns and factory closures, and if US and UK interest rates hikes bring inflation under control, say analysts.
In the month to Friday, platinum group metals miner Tharisa was down 15.06%, diversified miner African Rainbow Minerals dropped 8.33% and diversified miner and commodity trader Glencore was 7.52% lower. Tin miner Alphamin Resources is down 24.12% in the past 30 days.
SA stock prices may also reflect challenges that local miners face, including an erratic electricity supply, red tape stifling exploration and a dysfunctional rail and port system limiting exports. These are all front of investors mind after being highlighted at last week’s Mining Indaba.
But for the most part, SA miners cannot escape global issues weighing on metal prices.
In a research note, SP Angel says concerns over US monetary tightening, sluggish European economic data and China’s Covid-19 policy are proving formidable headwinds to industrial metals.
In response to stubborn inflation, the US Federal Reserve lifted interest rates by 50 basis points recently, with the Bank of England enacting a third consecutive interest rate hike.
Worldwide
Senior market analyst at IG Shaun Murison said “persistently high inflation is being met with the prospect of tighter monetary policy. This is equating to a stronger dollar, which is weighing on commodity prices.”
As stock prices weakened worldwide, mining sector stocks in SA are among the worst hit locally.
There is concern that the US could slip into a recession: a fall in GDP for two consecutive quarters. This would weaken demand for platinum group metals, which are used in vehicles, as well as copper and iron ore used in steel and construction.
Inflation has remained persistent in the US, and a contraction in economic output has started conversations about stagflation, said Murison.
“Stagflation is a precursor to recession, and fears thereof suggest waning demand, which is further dampening commodity prices.”
However this does not mean that mining prices are set for a long-term fall. “I am very cautious in not using the words ‘top of the cycle’ because things can change very quickly,” Murison said.
US haven
Changes could be sparked if the Chinese economy reopens, or if inflation starts to cool and the pace of monetary policy starts to slow, reducing future interest rate hikes, he said.
In recent weeks US tech stocks have plummeted. Despite gold previously being used as a safe haven when stock prices fall, investors are buying up US dollars and US bonds rather than gold.
Jeffrey Halley, Oanda’s senior market analyst, Asia Pacific, said “investors appear to prefer the haven of the US dollar and US bonds, with their appealing yields rather than gold or precious metals”.
DRD Gold’s share was down 19.85% in the 30 days to Friday, with AngloGold Ashanti down 15.87%. Platinum and gold miner Sibanye-Stillwater, whose gold production is impeded by a strike, dropped 16.62% in the same period.
While markets are plummeting, Russia’s invasion of Ukraine has prompted unprecedented volatility in commodity markets as mining houses exit contracts with Russian firms in response to sanctions from the West.
Despite SA mining stocks’ recent fall, metals are likely to see longer-term demand and shortages as the world moves towards greener energy and electric vehicles.
SP Angel said in a note that in the longer term, buoyant copper prices are expected as it is so widely used in infrastructure, housing, water pipes and renewable energy including wind, solar and hydrogen. Platinum group metals are also expected to face long-term demand due to their use in electric car batteries.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.