The Current View
A lengthy downtrend in sector prices had given way to a relatively stable trajectory after mid 2013 similar to that experienced in the latter part of the 1990s and first few years of the 2000s.
The late 1990s and early 2000s was a period of macroeconomic upheaval during which time sector pricing nonetheless proved relatively stable.
Relative stability suggests a chance for companies genuinely adding value through development success to see their share prices move higher. This was the experience in the late 1990s and early 2000s.
Still vulnerable cyclical conditions were aggravated in the second half of 2015 by a push from investors worldwide to reduce risk. Sector prices were pushed to a new cyclical low. These conditions were reversed through 2016 and 2017 although sector prices have done little more than revert to the 2013 levels which had once been regarded as cyclically weak.
With a median decline in prices of ASX-listed resources companies through the cycle of 89%(and 30% of companies suffering a decline of more then 95%), the majority of stocks remain prone to strong 'bottom of the cycle' leverage in response to even slight improvements in conditions.
Has Anything Changed?
The strength of the US dollar exchange rate since mid 2014 had added an unusual weight to US dollar prices. Reversal of some of the currency gains has been adding to commodity price strength through 2017.
Signs of cyclical stabilisation in sector equity prices has meant some very strong ‘bottom of the cycle’ gains.
Funding for project development has passed its most difficult phase with the appearance of a stronger risk appetite.
Resource Sector Weekly Returns
Market Breadth Statistics
52 Week Price Ranges
Equity Markets
The succession of large intra-day and day-to-day swings in equity prices remained a feature of markets for another week.
The week finished with a downswing after the US government reported a weaker-than-expected employment gain for November and negative revisions to reported outcomes for the previous two months. While the number of jobs rose in November by less than in previous months during 2018, the lower rate of expansion, consistent with the longer term growth potential, is more likely to persist than earlier higher levels.
Sino-US trade friction remained an important background factor with competing messages coming from the Chinese and US sides about the likelihood of a rapprochement and from within the US administration itself. Donald Trump’s own favourable comments about tariffs made markets fearful that a negotiated settlement was not a sufficiently high priority.
Complicating the trade tensions was the arrest in Canada of the chief financial officer of Huawei after she allegedly broke US laws relating to sanctions against Iran. The arrest was criticised by the Chinese government, raising the prospect of retaliatory measures and a breakdown in talks which had been anticipated after the Trump administration postponed the next round of planned tariff rises aimed at Chinese goods.
US Federal Reserve policy was also an ongoing destabilising influence as debate raged about how aggressively the Fed would pursue further interest rate rises. Market surveys suggested a lowered likelihood of a December rate rise despite, until very recently, such a rise being thought a near certainty. Complicating the policy positioning of the Fed has been criticism from Donald Trump about the trajectory of interest rates, leaving the Fed open to accusations of losing its independence if it balked at a rise before the end of the year.
Related to prospective Fed moves, concerns about bond yield inversion also destabilised equity prices although the principal manifestation occurred over the two to five year maturities. Even among those most convinced that an inversion is underway, the implication for equity prices is less clear-cut that the nervousness might suggest. The empirical evidence about the timing of the connection between a yield inversion and recession is highly ambiguous with instances of more than a year between movement in yields and a contraction in activity.
All the major industry sectors lost ground during the week, including energy despite an agreement by members of OPEC and Russia to trim production.
Resource Sector Equities
Mining sector equity prices were turning lower at the end of the week but, for the week as a whole, the leaders produced a positive outcome. The remainder of the sector fared less well with established second-tier stocks pushing lower and the exploration end of the market displaying additional weakness, as the performance gap between the market leaders and smallest stocks in the sector widened further.
Reflecting bullion market conditions, prices of gold-related equities were higher over the week.
Interest Rates
US government bond yields moved lower as expectations of future policy adjustments were modified and economists began to revise up the likelihood of a US recession in the year ahead.
Yield pressures in Europe eased as some budgetary accommodation between Italy and the European Commission appeared more likely.
Low grade corporate debt moves continued to indicate deteriorating conditions for funding mining industry projects.
Exchange Rates
Exchange rates have passed the point of their most dramatic shifts despite the range of political and economic events potentially affecting markets during the week but the upward bias in the US dollar remained a market feature.
Expectations about Brexit continued to dominate movements in sterling. Day-to-day and large intraday movements have reflected the political drama playing out in the House of Commons where Prime Minister Theresa May’s exit agreement with the European Union looks set for defeat as her tenure is threatened by dissenters in the Conservative Party as well as the Jeremy Corbyn led opposition.
Commodity Prices
The general upswing in commodity prices since mid 2017 had been given added impetus by stronger crude oil prices which have, more recently, underpinned a reversal in the trend.
The cost pressures which had been reported by many companies as a result of higher commodity prices should be easing and removing a source of upward pressure on selling prices which would, in turn, reduce the potential impact on inflation and on interest rates.
Gold & Precious Metals
Higher bond prices supported stronger gold prices during the week. This technical connection should persist but the likelihood of a large upward movement in bond prices appears low presently. Gold had also been overpriced relative to bond prices, limiting the leverage of the precious metal price to a change in financial market conditions.
Gold and silver prices moved higher but platinum and palladium prices were little changed to slightly lower. Uniquely among the precious metals, palladium prices have resumed the upward trend evident in price movements since early 2016.
Nonferrous Metals
Daily traded nonferrous metal prices were generally higher although copper and nickel prices fell slightly over the week.
All the main London traded prices are now below the levels at which they started in 2018 with tin, for so long the laggard, now showing the best relative performance over the year to date.
Copper price movements had been at odds with higher bond yields which would normally signal strengthening inflation and growth, both good signs for the metal markets. The divergence had intimated the possibility of a future resolution of the implied difference in opinion as the global growth trajectory became clearer. In the past week, the verdict appears to have favoured weaker growth and lower bond yields with, at best, stable copper prices.
Bulk Commodities
Chinese economic growth reports show the national economy meeting its targets, as one would expect for a centrally planned economy, but without any overt signs of upside risk. The tariff fight with the USA is beginning to take a toll on activity rates in an economy with a bias toward less strong growth in the years ahead.
Reported GDP growth in the September quarter was consistent with official forecasts although hitting the targets is becoming more challenging by the year.
The latest manufacturers purchasing managers index for China, measuring conditions in October, implied continuing slowing in momentum.
The weakening growth picture and the impact of US trade policies had put a dent in Chinese steel prices which had fallen dramatically in the past two weeks. Faced with this change in conditions, and the implied reduction in steel industry profitability, iron ore prices lost nearly 8% during the week.
Coal prices slipped further during the week, albeit after some strong gains. China reported growth in coal output between September and August and over the year to September with plans to open new capacity proceeding as the country switches to larger more efficient sources of coal production.
Oil and Gas
Crude oil prices stabilised and then rose slightly after reports that a deal would be done to cut back production. The WTI price finished the week 22% lower than three months earlier after a 3% rise.
Energy-related equities did not derive any obvious benefit from the change in oil market sentiment after the broader equity market swings obliterated any potentially favourable reaction.
OPEC has had to enlist the help of Russia to put a break on recent price weakness but higher prices will underpin continued production growth in the USA, now one of the three major global producers along with Saudi Arabia and Russia. Texas alone is positioned to be the third largest producer after Russia and Saudi Arabia. Export infrastructure limitations may be the greatest impediment to US production having a greater effect on international energy prices.
OPEC has been losing its market impact and, in battling to manage price outcomes, may be adding to volatility by encouraging traders to anticipate its next move and react to news which might affect future decisions by the cartel.
Battery Metals
Eighteen months of rising lithium-related stock prices have given way to a prolonged period of market reassessment as a lengthy pipeline of potential new projects has raised the prospect of ongoing supplies better matching expected needs.
Potential lithium producers have been able to respond far more quickly to market signals than has been the case in other segments of the mining industry where development prospects have been slowed by reticence among financiers to back development.
Movements in lithium related equity prices had been aligned more closely with overall sector equity prices in recent weeks.
Battery metals remain a focal point for investors with recent attention moving to cobalt and vanadium.
Doubts about political conditions in the Democratic Republic of the Congo (and instances of Ebola) have added a dimension to cobalt prices lacking in other metals caught up in the excitement over the longer term impact of transport electrification. Short term market tightness relating to non-battery demand is easing.
In the longer term, cobalt is the most vulnerable of the battery related metals to substitution with high prices likely to stimulate research in that direction.
A spokesperson for Panasonic, manufacturer of batteries for Tesla motor vehicles, has been quoted as saying that the company intends to halve the cobalt content of its batteries because of uncertainties over supply although, offsetting such a move, will be the rapid increase in the number of units produced.
Uranium
The uranium sector is in the midst of forming a prolonged cyclical trough as market balances slowly improve. Power utilities have been reluctant to re-enter the market for contracted amounts of metal to meet longer term needs although an upward bias in prices is now evident.
The effect of an announcement by Canadian producer Cameco to extend the duration of its previously implemented production cut gave the market a very slight but quickly lost lift.
Slightly higher equity prices from time to time, in the hope of improved conditions, have not been sustained but could be repeated as speculation about improved future demand ebbs and flows.
News that the Kazakhstan government intends to list its state owned uranium producer, also the world's largest producer, may suggest greater responsiveness to market conditions and less emphasis on production to maximise government revenue.
The Steak or Sizzle? blog LINK contains additional commentary on the best performed stocks in the sector and the extent to which their investment outcomes are underpinned by a strong enough value proposition to sustain the gains.
