Bumpy week but early glimpses of light at end of the tunnel

14th July 2022
Tim Treadgold

It might be a train steaming down the track but there are a number of experts, including those at Goldman Sachs and ANZ Bank, who this week saw the first flickers of light at the end of a tunnel lined with fear of ever-higher interest rates leading to a global recession.

Most asset values fell over the past five trading days, but it wasn’t the collapse expected by pessimists as U.S. inflation hit a 41-year high and central banks in Canada and New Zealand led what is expected to be a fresh round of rate rises.

The Australian stock market, as measured by the all-ordinaries index, was down a relatively painless 0.5% for the week trending up on Thursday after the release of the latest U.S. inflation data which confirmed that prices are rising at their fastest in 41 years.

Copper, the bellwether commodity and reliable forecaster of economic trends, also managed a modest uptick after the release of the June consumer price index, which came in at what looked like an alarming, annualised inflation rate of 9.1%.

From a low of US$3.18 a pound, copper moved back to around US$3.32/lb, a profitable price for most producers, with the prospect of higher prices ahead as Chile’s government presses ahead with tax and royalty increases which will make miners in other countries more attractive.

The performance of OZ Minerals is a guide to what can be expected of copper miners, though down $1.23 (6.7%) over the week, the stock staged a promising 46c recovery on Thursday as the news from Chile filtered through.

The big boys of mining, BHP and Rio Tinto, which have heavy copper exposure as well as their hugely profitable iron ore operations, mimicked OZ, down over the week (BHP by $2.55, Rio by $4.67), but up yesterday, BHP by 47c and Rio by $1.47.

Those price rises, which could easily be extinguished if the gloom returns next week, sit alongside the point made earlier that some seasoned observers of financial markets are starting to sense an approaching bottom.

Goldman Sachs published a surprisingly upbeat view of the months ahead as the bad news about inflation and interest rates is absorbed, with the copper price returning to US$3.83/lb later this year and then back to US$4/lb next year.

ANZ, in this week’s edition of its regular Commodity Update, singled out signs of improving industrial activity in China as a key reason for seeing a more buoyant outlook for the resources sector.

“In a sign of improving industrial activity, China increased imports of key industrial commodities in June,” ANZ said.

“Despite ongoing outbreaks of Covid, the easing of mobility restrictions has boosted buyers’ confidence to restock. A plethora of supportive economic measures should bode well for metals and bulks demand despite the governments zero-Covid approach.”

A personal note of optimism came from local billionaire investor Alex Waislitz who reversed a negative forecast made last year (which proved to be correct) to say midweek that equity markets were nearing a bottom and there were early signs of inflation easing.

“While it is very early days, we are starting to see initial signs that the worst of the global declines may be over,” Waislitz said.

The keys to what happens next are the obvious need for Europe to successfully manage its economic growth-stifling energy crisis, for the U.S. to dodge a severe downturn, for the Ukraine war to be contained and for China to successfully re-stimulate its economy.

Of those factors, the only one which seems likely to be achieved in the short term is for China to return to its high-growth track, a possibility singled out in a mid-week report by Morgan Stanley which welcomed reports that the Chinese Government is considering a plan to allow local authorities to raise US$220 billion in special bonds to fund infrastructure projects.

A time lag between raising the funds and committing to construction could mean that the benefits of increased demand for minerals and metals might not be felt until early next year – but even if that’s six months away, it is still another hint of light in the tunnel.

Wilsons, a local investment bank, hedged its view of the future with a midweek observation that inflation and growth could both be slowing, meaning the economy had reached “an interesting juncture”.

“The more bearish interpretation is that the global economy is set to slide into recession with a stubbornly high inflation backdrop (stagflation),” Wilsons said.

“The optimistic interpretation is that growth is slowing but not collapsing, while the stubborn inflation pressures of the past 12-months are finally showing signs of meaningful deceleration.”

If correct, and Wilsons is not alone in seeing the economic glass being half full rather than half empty, it is possible that Australia and the U.S. have a better than 50% chance of dodging a genuine recession.

RBC Capital Markets, another investment bank, took an unusual a look at the annual profit reporting season, saying that expectations were so low that there could be some genuine surprises.

“We think the bar is set low for possible positive operational and cost surprises and find decent value in the (mining) sector,” RBC said.

“Our top picks for non-gold stocks are IGO, South32, Mincor, Sandfire, and BHP. The top gold picks are Northern Star, Regis Resources and St Barbara.”

The inclusion of St Barbara by RBC on its best bets list can be seen as a comment on growing interest in consolidation of the gold sector, especially where there are regional synergies such as the Leonora and Pilbara regions of WA.

St Barbara and Genesis, leaders of Leonora consolidation, attracted growing support this week with St Barbara reversing a period of heavy selling to adding 6c to 91c. Genesis was up 1c to $1.20.

Lithium was the metal in greatest demand this week, if another successful online auction by Pilbara Minerals is a guide, with a wall of bids hitting the auction site, helping Pilbara shift 5000 tonnes of 5.5% spodumene at a price of US$6188/t, down slightly on the US$6350/t in the June auction but an excellent result nevertheless and a factor in Pilbara adding 10c to $2.44.

Tianqi Lithium, recently listed in Hong Kong, started to recover after a poor start which saw the HK$82 shares open at HK$72.65. By yesterday, the stock, which has heavy exposure to Australian lithium production, had crept up to HK$78.90.

Neometals, which made a publicity splash with a deal to work with Germany’s Mercedes Benz on lithium recycling, slipped 6c over the week to 95c, taking its loss since the start of the year to 72c (43%).

Other news events and market moves this week included:

  • Arafura Resources delivering the best performance of rare earth stocks with a rise of 1.7c to 31c thanks to a memorandum of understanding with General Electric Renewables. Bell Potter reckons Arafura is heading up to a target price of 60c.
  • Boss Energy and Okapi Resources being best of the emerging uranium stocks, adding half-a-cent each in a tough market to $1.91 and 18c respectively, with Okapi also raising $2.5 million in a sell-supported share issue.
  • Champion Iron was the pick of the iron ore miners even with an 18c slide over the week to $4.87, a loss lessened by a 12c recovery on Thursday thanks to the improving economic outlook in China. Citi reckons Champion is heading up to $9, and
  • New World Resources adding 0.1c to 3.5c after reporting fresh deep drilling success at its Antler project in the U.S. with a best hit of 2% copper over 18.2 metres, plus 3.4% zinc and useful grades of lead, silver and gold from a depth of 987.8m. Shaw and Partners reckons New World is heading up to 15c.

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